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Mumbai: The Tapti gas field, part of the Panna-Mukta-Tapti asset in the west coast of India, has started showing signs of a rapid early decline in output.
According to the latest estimates, the field, which was earlier expected to produce till the end of the next financial year, might see production end by June, according to three people who are a part of the joint venture companies who hold stake in the asset.
The Panna-Mukta-Tapti fields, commonly called the PMT asset, are owned by a consortium of three companies—state-owned Oil and Natural Gas Corp. Ltd (ONGC), Reliance Industries Ltd (RIL) and British oil and gas company BG India. ONGC owns 40%, while RIL and BG India own 30% each. BG India is the operator of the asset.
The Panna and Mukta fields, primarily oil-bearing, are located 90km north-west of Mumbai in the Arabian Sea and the gas-bearing Tapti field is located 160km north-west of Mumbai. The Panna-Mukta fields are expected to stay in production till fiscal 2019.
Tapti also produced a small volume of crude oil.
“We are seeing an early rapid decline trend in production from the Tapti field and our understanding is that the production might come down to zero by June or at most might extend for another two months,” said the first executive from one of the joint venture companies.
Officially both RIL and ONGC declined to comment as BG India is the operator of the block and is the only company authorized to comment on the field.
A detailed questionnaire sent to BG India on Tuesday remained unanswered.
“The rate of decline in the last quarter had been above the 50% mark for the first time and this confirms the concern that production from Tapti will be down to zero in three months from now,” said the second executive from one of the joint venture companies.
RIL, which gives quarterly updates on the PMT asset, mentioned in its third-quarter financial statement that while Panna-Mukta fields had produced 18.5 billion cu. ft (bcf) of natural gas, a growth of 8% on a year-on-year basis, in the third quarter, the Tapti field had produced 3 bcf of natural gas, a fall of 53% year-on-year.
This fall was preceded by a drop in production of 42% and 45% in the first quarter and the second quarter of the current financial year, respectively, according to RIL’s quarterly statement.
In the third quarter ended 31 December, the Panna and Mukta fields produced 1.8 million barrels, or 20,000 barrels of crude oil per day, just about 10% of the volume produced by the biggest private crude oil-producing field—Cairn India Ltd’s Barmer basin.
The gas production at the Panna and Mukta fields stood at 18.5 bcf or 6.16 million metric standard cu. m per day (mmscmd) of gas, 50% of India’s biggest private sector gas field—RIL’s Krishna-Godavari D6 block.
As against this, the Tapti field produced 50,000 barrels in the third quarter, or 555 barrels of crude oil per day, and its natural gas production averaged at 3 bcf, or merely one mmscmd of gas, according to RIL’s presentation.
The second executive said the early abandonment of the Tapti field might be a blessing in disguise for ONGC, which had been eyeing the Tapti assets for development of its Daman field—a new field currently under development by ONGC in the western offshore.
“We are very bullish on Daman as it can add to our massive western offshore gas production. Once we take over the infrastructure at Tapti, we will save substantial capex (capital expenditure),” said an ONGC executive, who requested anonymity as BG India was the operator and authorized to speak on the issue.
He confirmed that Tapti is likely to be abandoned in the next three months and said that ONGC has received an approval from the government to take over the Tapti asset free of cost from BG India to use for the development of Daman. However, he declined to share how much capex ONGC will save in the process.
These assets largely comprise the Tapti processing platform—an offshore platform where the gas reaches after being drilled from the seabed, which is then dispatched to the onshore terminals through a 70km pipeline connecting the platform with ONGC’s facility at Hazira.
The use of these assets will also help advance production from the Daman offshore fields. The fields, which entail a cost of production of `5,000 crore, will produce 7 mmscmd of gas starting 2018 and will be further augmented to 13 mmscmd by 2021, said the executive from ONGC.
(Source: Mint March 13, 2015)
OIL MINISTRY TO GIVE CNG MARKETING LICENCE
NEW DELHI: Oil Ministry is looking to wrest powers to give CNG retailing licence from sectoral regulator PNGRB as it has issued draft guidelines detailing eligibility for rights to sell fuel to automobiles.
The Ministry on March 5 issued ‘Draft Guidelines for granting Marketing Rights for CNG as Transportation Fuel, including setting up CNG Stations’ wherein any entity that has invested Rs 500 crore in oil and gas infrastructure can get rights/license to retail the fuel to automobiles by setting up CNG stations.
While the Union government had authorised entities like Indraprastha Gas Ltd and Mahanagar Gas Ltd for retailing CNG to automobiles in Delhi and Mumbai respectively in early 2000, the Petroleum and Natural Gas Regulatory Board (PNGRB) has been doing so through bid rounds since its establishment in 2006.
In the draft guidelines, the ministry stated that like the companies which invested a minimum of Rs 2,000 crore in oil and gas infrastructure were granted marketing rights for petrol, diesel and ATF through the March 2002 notification, entities investing a minimum of Rs 500 crore will be eligible for marketing rights for CNG.
Also, entities authorised by PNGRB or Central Government would also be eligible.
“The eligible entities under these guidelines shall apply to the Government for issuance of ‘Grant of Marketing Rights for CNG as transportation fuel’,” the guideline says.
Since 2006, entities apply to PNGRB and not the government for rights to retail CNG alongside selling natural gas as fuel within city limits.
While PNGRB has been issuing the licence to retail CNG as well as piped cooking gas (PNG), the ministry guidelines pertain only to rights to sell CNG.
“The entities which have already been granted marketing rights for petrol, diesel and ATF as transportation fuel, under Resolution dated March 8, 2002 will be deemed to have such grants of marketing rights for CNG as transportation fuel,” it said.
In 2002, state-owned Oil and Natural Gas Corp (ONGC) besides Reliance Industries, Essar Oil, Royal Dutch Shell and Numaligarh Refineries had won authorisation to set up petrol pumps to sell petrol and diesel.
Besides these firms, fuel retailers Indian Oil Corp (IOC), Bharat Petroleum Corp Ltd ( BPCL) and Hindustan Petroleum Corp Ltd ( HPCL) as well as gas utility GAIL India Ltd will be eligible for CNG marketing rights.
Firms who get CNG marketing rights will get natural gas allocation and can book capacities in existing pipelines to transport the fuel, the guidelines said.
PNGRB recently opened fifth round of bidding for city gas distribution (CGD) licences even though it had issued license to entities for only first two rounds. Licences for the remainder are stuck over disputes.
(Source: The Economic Times, March 13, 2015)
CAIRN ENERGY CAN SEEK REVIEW OF DRAFT ORDER ON TAX: FINANCE MINISTRY OFFICIAL
NEW DELHI: Cairn Energy Plc, the Scottish energy exploration company that faces a $1.6 billion tax demand in India, can seek a review of the draft order before the final one is issued, a finance ministry official said, adding that the Indian government is clear the company has no case for arbitration because the bilateral treaty with the UK does not cover tax disputes.
“It’s a draft order…The company has the option to represent to the assessing officer and be heard before the final order is passed…It also has the option of approaching the dispute resolution panel if it’s not satisfied with the final order,” a finance ministry official told ET.
Cairn Energy invoked the India-UK Bilateral Investment Promotion and Protection Agreement and served notice of dispute soon after it was handed the draft order containing the tax demand. The government, which has 90 days to respond to the notice, is working out a strong rejoinder that will harp on the fact that the treaty does not cover taxation disputes. British foreign minister Philip Hammond on Thursday raised the issue with finance minister Arun Jaitley and expressed concern over the tax demand, calling for a stable tax regime and business environment to ensure the flow of foreign investments into India.
“It is not enough to say we are open to business, as Prime Minister Narendra Modi has done. The country also has to send out clear signals that the business climate and business environment is predictable, stable and attractive for international investments,” the British minister said in response to a question raised by ET during a select media gathering here.
The case pertains to an amendment to the law in 2012 to retrospectively tax indirect transfers. Action was initiated under the previous government and the order was issued now as the case would have become time-barred.
The income-tax department has held that the Edinburgh-based company made capital gains ofRs 24,503.5 crore when it transferred its entire India business from subsidiaries incorporated in places such as Jersey, a tax haven, to the newly incorporated Cairn India in 2006. According to the department, Cairn Energy receivedRs 26,681.87 crore for the asset transfer against its entire investment of Rs 2,178.36 crore in the India business. Cairn India subsequently listed on the stock exchanges through an initial public offering in 2006 that raised Rs 8,616 crore. Cairn Energy CEO Simon Thomson said on Tuesday, “Cairn has consistently confirmed that it has been fully compliant with all relevant legislation and paid all applicable taxes in India and we are confident of our position under the UK-India Investment Treaty.
Cairn Energy sold a majority stake in the Indian unit to mining group Vedanta for $ 8.67 billion in 2011 and still holds a 9.8 % stake in Cairn India. Hammond met Jaitley on Thursday morning before the finance minister left for London to attend an investor conference. He said the Indian minister reiterated the government’s assurance that it will not issue any new notices for retrospective tax demands.
According to Hammond, Jaitley “explained that this particular tax demand is being sent out pursuant to a notice that was issued by the previous government.”
Hammond said Jaitley told him the Cairn tax case has to be resolved through the courts as the process has already started. The British minister also advocated scrapping of retrospective tax demands to make India an attractive investment destination.
(Source: The Economic Times, March 13, 2015)
OIL MINISTRY TO WREST CNG RETAIL LICENCE-ISSUING TASK?
New Delhi: Oil Ministry is looking to wrest powers to give CNG retailing licence from sectoral regulator PNGRB as it has issued draft guidelines detailing eligibility for rights to sell fuel to automobiles. The Ministry on March 5 issued ‘Draft Guidelines for granting Marketing Rights for CNG as Transportation Fuel, including setting up CNG Stations’ wherein any entity that has invested Rs 500 crore in oil and gas infrastructure can get rights/license to retail the fuel to automobiles by setting up CNG stations.
While the Union government had authorised entities like Indraprastha Gas Ltd and Mahanagar Gas Ltd for retailing CNG to automobiles in Delhi and Mumbai respectively in early 2000, the Petroleum and Natural Gas Regulatory Board (PNGRB) has been doing so through bid rounds since its establishment in 2006.
In the draft guidelines, the ministry stated that like the companies which invested a minimum of Rs 2,000 crore in oil and gas infrastructure were granted marketing rights for petrol, diesel and ATF through the March 2002 notification, entities investing a minimum of Rs 500 crore will be eligible for marketing rights for CNG. Also, entities authorised by PNGRB or Central Government would also be eligible. “The eligible entities under these guidelines shall apply to the Government for issuance of ‘Grant of Marketing Rights for CNG as transportation fuel’,” the guideline says.
Since 2006, entities apply to PNGRB and not the government for rights to retail CNG alongside selling natural gas as fuel within city limits. While PNGRB has been issuing the licence to retail CNG as well as piped cooking gas (PNG), the ministry guidelines pertain only to rights to sell CNG.
“The entities which have already been granted marketing rights for petrol, diesel and ATF as transportation fuel, under Resolution dated March 8, 2002 will be deemed to have such grants of marketing rights for CNG as transportation fuel,” it said.
In 2002, ONGC besides Reliance Industries, Essar Oil, Royal Dutch Shell and Numaligarh Refineries had won authorisation to set up petrol pumps to sell petrol and diesel. Besides these firms, fuel retailers IOCL, BPCL and Hindustan Petroleum Corp Ltd (HPCL) as well as gas utility GAIL India Ltd will be eligible for CNG marketing rights.
Firms who get CNG marketing rights will get natural gas allocation and can book capacities in existing pipelines to transport the fuel, the guidelines said. PNGRB recently opened fifth round of bidding for city gas distribution (CGD) licences even though it had issued license to entities for only first two rounds. Licences for the remainder are stuck over disputes.
(Source: Millennium Post March 13, 2015)
INDIA TO HELP FUND MAURITIAN PETROLEUM PROJECTS
India and Mauritius signed five pacts during Prime Minister Narendra Modi’s recent visit to the island nation. India has offered a US$500 million concessional line of credit to Mauritius to help fund key infrastructure projects, including a petroleum storage facility. In return, Mauritius offered cooperation on information exchange on taxation. The agreement follows an MoU between Indian Oil Corporation (IOC) and Mangalore Refinery and Petrochemicals Limited (MRPL) to set up oil storage terminals in Mauritius, which was signed last year. The terminals are expected to boost petroleum product trade in the region and improve the supply of oil. Furthermore, the project will also help increase exports to different islands across the Indian Ocean, as well as to Africa. The five pacts signed also included agreements for ocean economy, improvements to sea and air transportation facilities, cooperation in medicine and homoeopathy and a programme for cultural cooperation.
“I was pleased to offer a concessional line of credit of US$500 million for civil infrastructure projects for Mauritius. We intend to quickly build the petroleum storage and bunkering facility in Mauritius,” Prime Minister Modi said at the signing. “I consider our security cooperation to be a cornerstone of our strategic partnership. Our agreement on cooperation in ocean economy is an important step in deepening our scientific and economic partnership.”
(Sources: Economic Times, March 13, 2015)
RIL: HIGHER GRMS TO BOOST EARNINGS IN Q4
The sharp drop in oil prices has taken the shine off the oil & gas sector. Despite this, Reliance Industries (RIL) is in focus again, as refining margins have shot up in the March quarter. The Street expects lower earnings from its shale business to be offset by the sharp uptick in refining margins and the gradual improvement in petrochemical earnings. Though crude oil prices are down, gross refining margins (GRM) have firmed up in 2015. GRM is the difference between the price of crude oil and refined products processed by the refiners. The benchmark Singapore GRMs have risen sharply on lower utilisation levels in the US and refining outages in other parts of the world. In the March quarter, the benchmark Singapore GRMs improved to $8.7 a barrel from $6.3 a barrel in the December quarter. Analysts claim GRMs are close to a high of $10 a barrel, driven by a considerable uptick in gasoline, naphtha, and fuel oil spreads.
According to IDBI Capital, benchmark refinery margin averaged at $8.05 a barrel in the fourth quarter of FY15, compared to $6.2 a barrel last year. This is likely to benefit all the refineries, primarily RIL. The brokerage has done a sensitivity analysis of RIL’s earnings with respect to increase in GRMs. With every $1 increase in GRM, RIL’s operating income increases Rs 34 billion and post-tax profit by Rs 27 billion. Analysts expect higher GRMs to support RIL’s earnings in FY16, too. Antique Stock Broking believes higher GRMs in the fourth quarter of FY16 can easily add Rs 15-16 billion to RIL’s refining earnings.
It isn’t only rising GRMs that are expected to propel RIL’s earnings in the March quarter. Petrochemical margins, too, have remained stable during the quarter, while volumes might rise. The company’s first phase of PTA (purified terephthalic acid) and PET (polyethylene terephthalate) capacity expansion at Dahej is over. Over the past few years, RIL has defined refining and petrochemicals as its core business. The firm has also undertaken lined up capital expenditure of $15 billion, of which $10 billion has been invested. With the construction of the petcoke gasification and refinery off-gas cracker projects at advanced stages, Antique Stock Broking believes it is on track to complete its capacity expansion projects. The company has also commissioned 230 fuel retailing outlets and will open another 850 by mid-2015. Analysts believe the firm is well-placed to ride the turmoil in oil prices. The stock is currently trading at a price/earnings multiple of 10.8 times (FY16 earnings). The buoyancy in refining and petchem margins, coupled with completion of capacity expansion, analysts expect the stock to fare well in FY16.
(Sources: Business Standard March 13, 2015)
RELIANCE INDUSTRIES LTD TO SHUT REFINERY UNITS FOR MAINTENANCE
MUMBAI: Reliance Industries will shut down one of its crude distillation unit and one fluidised catalytic cracking unit at Jamnagar Refinery Complex for four weeks beginning March 15 for routine maintenance and turnaround activities, the company said in a statement on Thursday.
The remaining three crude distillation units and all other secondary processing units will operate normally and all customer commitments will be met, RIL said.
“The maintenance and turnaround is also an opportunity to carry out necessary modifications to improve and enhance the reliability and performance of the units,” the company said.
(Source : The Economic Times, March 13, 2015)
MINOR FIRE AT HPCL REFINERY AT VIZAG, TWO INJURED
Visakhapatnam: Two contract employees sustained minor injuries in a fire at MS Block-Reformer Unit in Hindustan Petroleum Corporation Limited’s refinery here today.
According to a release from HPCL, the fire was caused by leak of hydrocarbon and was brought under control immediately by isolating the connected equipment.
It was extinguished within one hour. There was no damage to equipment and the two employees were provided medical aid, it said.
(Source: Business Standard March 13, 2015)
BRENT CRUDE OIL CLIMBS ABOVE $58/BARREL AS DOLLAR WEAKENS
London: Brent oil futures rose above $58 a barrel on Thursday as the dollar weakened and speculators covered their positions ahead of the April contract’s expiry, while a build in US crude stocks capped prices.
The dollar was down 0.4 per cent against a basket of currencies, making dollar-traded commodities such as crude oil more attractive to holders of other currencies.
“A slightly weaker dollar is helping crude prices today,” said Michael Hewson, chief markets analyst at CMC Markets.
“We’ve still got a significant supply glut. Overall I think the buyers are starting to shift a little bit lower.” Brent for April delivery was up 63 cents at $58.17 at 0910 GMT, after gaining $1.15 during the previous session in a rebound from a one-month low.
West Texas Intermediate climbed 33 cents to $48.50 a barrel, after closing the previous session down 12 cents.
The April contracts for Brent and WTI expire next week.
“When contracts expire there is more uncertainty and volatility associated with oil. For investors speculating, directionally WTI seems to be facing more pressure heading down. Brent will move upwards,” said Victor Shum, vice president of IHS Energy in Singapore.
Brent’s premium to US crude widened to almost $10 a barrel, after dropping below $8 on Tuesday, its narrowest in a month.
Bearish sentiment towards WTI caused by the build in US crude stocks helped to widen the spread, limiting the gains in WTI, said Yusuke Seta, a commodity sales manager at Tokyo’s Newedge Japan.
US crude inventories rose for the ninth straight week, gaining 4.5 million barrels last week to 448.9 million, US Department of Energy data showed. That was the highest level at this time of year in more than 80 years.
“Oil inventories are expected to increase further,” Seta said. Any price gains could be short-lived as oil stocks are forecast to rise further due to refinery maintenance, and the dollar could continue its recent strengthening against the euro, analysts said.
Potential supply disruptions, including escalating violence in Libya where Islamist militants kidnapped nine foreign oilfield workers on March 6, were the main bullish factors for Brent, Shum said.
(Source: Business Standard March 13, 2015)
BEARISH TREND LIKELY IN CRUDE OIL; NATURAL GAS POISED TO RISE
Crude futures on the Multi Commodity Exchange (MCX) are continuing to trade within the Rs. 3,000-3,350 range for the fifth consecutive week. The contract broke below Rs. 3,000 on Wednesday but has reversed higher immediately after recoding a low of Rs. 2,990. It is currently trading near Rs. 3,045.
Strong dollar keeps the WTI crude oil under pressure and a fall to $45 appears likely . This makes the bias bearish for the MCX crude oil futures, which move in tandem with the WTI crude. Having said this there is a strong likelihood of the contract breaking below Rs. 3,000 in the coming days. The ensuing target on such a break will be Rs. 2,780.
Traders can stay on the sidelines at the moment. However, if the contract breaks below Rs. 3,000, short positions can be initiated. Stop-loss can be placed at Rs. 3,075 for the target of Rs. 2,800.
On the other hand, if the crude oil manages to sustain above Rs. 3,000, then the sideways consolidation would continue for some more time.
MCX natural gas: Natural gas futures are trading in a broad range of Rs. 165-190 for about a month now. Within this range the contract is now moving higher and is currently poised at Rs. 176.5. Immediate support is at Rs. 173. Though there is resistance is at Rs. 180, the contract is likely to breach this level in the coming days and rise to Rs. 186. Short-term traders with high risk appetite can go long at current levels. Stop-loss can be placed at Rs. 171 for the target of Rs. 185.
The outlook will turn negative only on a strong break below Rs. 173. Such a break can take the contract lower to Rs. 168 and even Rs. 165.
(Source: Business Line March 13, 2015)
GLOBAL CRUDE OIL PRICE OF INDIAN BASKET WAS US$ 55.01 PER BBL ON 11TH MARCH, 2015
The international crude oil price of Indian Basket as computed/published today by Petroleum Planning and Analysis Cell (PPAC) under the Ministry of Petroleum and Natural Gas was US$ 55.01 per barrel (bbl) on 11th March, 2015. This was lower than the price of US$ 55.93 per bbl on previous publishing day of 10th March, 2015. In rupee terms, the price of Indian Basket decreased to Rs 3451.88 per bbl on 11th March, 2015 as compared to Rs 3506.81 per bbl on 10th March, 2015. Rupee closed weaker at Rs 62.75 per US$ on 11th March, 2015 as against Rs 62.70 per US$ on 10th March, 2015.
(Source: Indian Oil & Gas March 13, 2015)
PROS & CONS OF CHEAPER CRUDE OIL
Views differ on how much more crude oil prices will drop. But, there is no ambiguity that low rates are here to stay for some time.While some say a levelbelow $44 a barrel can drag the energy product to $35 and a further fall to $13.5. Others see prices plummeting to as low as $20 a barrel.
According to Raoul Pal of The Global Macro Investor newsletter, crude prices could crash to $20 due to a strong dollar and weak economy in Europe and China.
The commodity is currently down 51 per cent compared with the same period a year ago. Prices of Brent crude, which matters more for India, were quoted at $58.35 a barrel early on Thursday. Western Texas crude was ruling at $48.54 a barrel.
Prospects of recovery in crude oil prices look bleak since supplies in the US have increased to 80-year high of 448.8 million barrels. The US Energy Information Administration (EIA) says that a lot of the world’s oversupply is finding its way to storage in North America. Compared with the same period a year ago, inventories are up 20 per cent.
The situation is not conducive for producers since higher production and supply will result in pressure on prices continuing.
Not all producers will be able to run at these low costs. The average cost of producing shale oil in the US is $61 a barrel. While production costs are lower for some, they are in the high $80s for others.
US government data released on Tuesday showed that shale oil drillers have become vulnerable to lower prices. Drillers in the US have idled 653 rigs since the start of December.
The number of active machines seeking oil was 922 as of March 6, the lowest since April 2011, according to Baker Inc.
The problem of oversupply will continue since the Organisation of Petroleum Exporting Countries, which accounts for 40 per cent of the global production, and US shale oil producers are locked in a tussle to assert their supremacy.
Both fear that they may stand to lose market share by cutting production and thus push prices up.
For OPEC, Saudi Arabia has been the prime force in not agreeing to any production cut, which could boost prices psychologically.
The Gulf nation has also set aside $750 billion reserves to tackle any situation arising out of lower crude oil prices.
However, the situation is precarious elsewhere with economies of Venezuela, Russia, Equador and Nigeria being affected by the crude oil plunge.
There are fears that a prolonged bearish trend will lead to serious economic and social problems in West Asia, which depends solely on earnings from crude oil. Job cuts and recession too are likely.
For India, the fourth largest crude oil importer, cheaper crude oil will help lower its current account deficit since 71 per cent of the total domestic demand is met through imports. Also, crude oil accounts for 34 per cent of the country’s total imports.
According to Government data, crude oil imports during January were valued at $8.25 billion, 37 per cent lower than that in January 2014. Shipments into the country during April-January in the current fiscal were 7.87 per cent lower at $124.75 billion ($135.40 billion in the same period a year ago).
A windfall from cheaper crude oil will result in drop in production costs for various industries. But there are other drawbacks from lower crude oil prices. The global market is already feeling the pinch of the plunge as prices of most commodities have sunk.
Ethanol, heating oil, natural gas, coal, copper, steel, corn, cotton, rice, rubber, soyabean, sugar, rice and wheat have all dropped by over 20 per cent in the last one year. This means returns to farmers will be lower, thus curbing their purchasing power.
Will that have an effect on consumer goods, electronics and other such products? We will have to wait and see, though it is most likely.
On Thursday, the issue of lower rubber prices figured in the Rajya Sabha. The reality is that with crude oil prices ruling low, natural rubber will be on leash since the user industry has the option to switch over to cheaper synthetic rubber. Corn and vegetable oils will also be under pressure in view of lower prices. Ethanol production at current crude oil level is unviable, while demand for vegetable oils for bio-diesel will be subdued.
There are other dangers too such as exports being affected. India depends on West Asia and Russia a lot for its exports. When these economies suffer from lower crude oil prices, they will tend to import less or ensure that their foreign exchange outgo is curbed. In turn, Indian shipments abroad could be hit.
(Source: Business Line March 13, 2015)
OIL GIANTS IN EUROPE USE TRADING PROWESS TO PROFIT FROM SLUMP
Europe’s largest oil companies are gaining support from an unlikely source as they confront the industry’s worst slump since the financial crisis: lower oil prices.
Although better known for their oil fields, refineries, and petrol stations, BP Plc, Royal Dutch Shell Plc and Total SA are also the world’s biggest oil traders, handling enough crude and refined products every day to meet the consumption of Japan, India, Germany, France, Italy, Spain and the Netherlands.
The trio’s sway in commodities trading, largely unknown outside the industry, is set to pay off in 2015 as the bear market allows traders to generate higher returns by storing cheap oil today to sell at higher prices later and using lower prices to make more bets with the same capital.
“Volatility has increased dramatically over the last three or four months,” said Mike Conway, the head of Shell’s trading and supply business. “Parts of your business that are volatility driven are probably doing pretty well.”
While companies are shy about revealing the financial results from their trading business, a look at the last major bear market provides clues to the opportunity they have today. In the first quarter of 2009, BP said it made $500 million above its normal level of profits from trading. That means that trading accounted for, at the very least, 20 percent of BP’s adjusted income of $2.38 billion that quarter.
From dealing floors that resemble the operations of Wall Street banks in cities including Geneva, London, Houston, Chicago and Singapore, oil trading could provide BP, Shell and Total with an edge over U.S. rivals Exxon Mobil Corp. and Chevron Corp., which sell their own production, but largely eschew pure trading as a means of generating profits.
Few other publicly-listed oil companies trade at the scale of the European trio, although Statoil ASA, Eni SpA and OAO Lukoil all have trading desks.
The amount of crude oil and fuel traded each day by the three European majors together dwarf the combined size of independent traders such as Vitol, Glencore, Trafigura, Mercuria, Gunvor, based on company statements and people familiar with the market.
“The trading arms of the oil producers have the opportunity to monetize significant opportunities this year,” said Roland Rechtsteiner, a partner at consultants Oliver Wyman, who specializes in advising commodity-trading businesses.
The last time that a European oil major disclosed the profitability of its trading operation was a decade ago, when BP said it made $2.97 billion in 2005, or about 10 percent of the company’s total earnings that year.
Without giving away concrete financial results, the companies have indicated income from trading already rose in the fourth quarter of 2014 as oil prices fell.
Brian Gilvary, BP Chief Financial Officer, said on Feb. 3 the group has benefited from an “improved result from supply and trading.” Gilvary ran BP’s trading arm from 2005 to 2009.
“We’re in a very strong commodity trading position,” Shell CFO Simon Henry said in a call with analysts on a Jan. 29. “Our ability to take advantage of volatility is some protection to mitigate the low price environment.”
BP and Shell declined to comment further. Total didn’t respond to requests for comment.
Although extra profits from trading won’t offset the much larger loss of revenue from lower oil prices, it could help the three companies to weather the crisis and, perhaps more importantly, beat analysts’ estimates.
Analysts estimate BP’s adjusted net income will drop to $6.2 billion in 2015, highlighting the impact a boost from trading could have in the final results.
Beyond the large oil producers, trading executives are optimistic they could reap strong profits in 2015.
Ivan Glasenberg, chief executive officer of Glencore, said on March 2 that if the market continues as in the first two months, oil trading “could have a blow-out year” in 2015.
In the past, oil trading houses have enjoyed stronger returns during bear markets. Vitol, the world’s largest independent oil trader, had record income of $2.28 billion in 2009, up from $1.36 billion in 2008, according to the company’s accounts.
Fitch Ratings anticipates that oil traders “are likely to report healthy earnings in 2015 as they benefit from volatile oil prices.”
Several factors explain the expected rise in income. First, after years of steady prices, volatility has surged, allowing traders to make more bets about the direction of the market. Second, oversupply has pushed oil prices into a structure called contango — a relatively rare situation where forward prices are higher than current prices, allowing traders to buy oil cheap, store the commodity and sell later. Third, lower prices mean it takes less capital to make trades.
The price difference between a Brent contract for immediate delivery and the one-year forward — a measure of the contango – – stood at minus $7.18 a barrel on Wednesday. The spread hit an all-time high of minus $17.93 in December 2008.
Brent for delivery in April traded at $58.09 a barrel on Thursday, 46 percent lower than a year ago.
In addition to crude oil, BP and its rivals trade almost every refined product, from gasoline to fuel oil, plus electricity, petrochemicals, natural gas, currencies and even metals. On top of their own production from oil fields and refineries, the trio buys commodities from third parties.
The three companies also make significant bets in the derivatives commodities markets. Such is the scale of BP and Shell in the financial market that both are registered swap dealers in the U.S. under the Dodd-Frank act. Together with agricultural trader Cargill Inc., they’re the only non-financial firms among nearly 50 banks, insurers, brokers and others registered as swap dealers.
BP said on its website that its global trading activity generates a huge amount of market intelligence that other companies do not have.
“This gives us a clear advantage in converting up-to-the-minute data into effective market calls,” it says.
The large trading businesses Europe’s oil majors have aren’t mirrored at rivals in the U.S.
That’s largely the result of mergers in the late 1990s and 2000s where the acquiring companies had a non-trading culture that prevailed. As such Mobil trading slowly disappeared when it combined with Exxon, while Texaco followed suit after merging with Chevron.
BP employs in its Integrated Supply and Trading business, as the trading arm is known, about 3,000 people in trading floors in London, Chicago, Singapore and several other cities. Total Oil Trading SA, or Totsa, employs 500 in hubs in Geneva, Houston and Singapore. Shell International Trading and Shipping Company, known in the industry as Stasco, does not disclose the number of employees.
The trio trades at least 15 million barrels a day of crude and oil refined products, according to estimates from industry executives compiled by Bloomberg News.
(Source: The Financial Express, March 13, 2015)