Random Thoughts

Jim Brown
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There is so much news today and so many topics that need discussing. Nothing earth shaking but quite a few items enquiring minds will find interesting.

I wrote several weeks ago about floating oil storage and the dozens of tankers chartered to load up and wait, sometimes for many months before heading to a port. According to ship broker ICAP the amount of oil currently stored on ships has fallen by more than half to around 45 million barrels and it is expected to fall even further.

Is it because we are suddenly using more oil? Not hardly, demand in the USA declined every week in January to end at -2% below January-2008 levels. However, demand in China and India increased in January. The problem is falling prices rather than rising demand.

As demand continues to decline the weakening fundamentals are pushing the price of oil back to support around $70 and this is a problem for those storing oil. If they bought it back in Dec-March in the $40 range and they have been paying tanker storage rates for nine months now they are starting to near the breakeven point somewhere in the mid $60s. With falling prices they don't want to get caught holding crude in an expensive tanker and be forced to dump it to the first buyer in a panic. To avoid this problem they are taking profits now and moving on to other projects. JP Morgan warned that oil futures could go into backwardation by the end of Q2, where spot prices are higher than forward futures prices.

ICAP said there were 21 VLCCs offshore with 43 million barrels of crude. Seven are expected to offload in February and one more in March. If these don't take on new cargoes the level of floating storage could decline to 27 mb and the lowest since late 2008 when this trade began.

Saudi Arabia is planning on spending $120 billion over the next 5-6 years to develop some additional projects in the oil and petrochemical area. $60 billion will be spent on the oil sector and the rest for petrochemical and investments.

Saudi completed a five-year program to upgrade its output capacity in 2009 to 12.5 mbpd. (At least they claim it was completed but several analysts believe some of it was delayed due to the global recession.) Saudi did make quite a few new developments but some of the announced projects included in the 12.5 mbpd plan are still underway. Saudi pumped 8.18 mbpd in January.

Saudi needed to create some new capacity because their personal oil consumption is spiking. Saudi currently uses 1.5 mbpd of crude oil in the water desalination plants. That is a huge financial commitment to drinkable water of more than $100 million per day in crude being consumed to feed the process. They are currently working on some solar projects to replace some of the crude being used but the progress is slow.

OPEC crude output fell by 45,000 bpd in January and the first decline in five months. OPEC averaged 28.955 million barrels per day for the month.

Venezuela completed its first major oil rights auction in more than a decade last week. There were two bids for the three blocks up for auction. The results will not be known until February 10th but sources claim Chevron and Spain's Repsol were the two bidders. Both bid in partnership with some other firms.

The area up for bid is now thought to contain 573 billion barrels of oil. Unfortunately it is in the Orinoco belt and the oil is very heavy. The oil must be upgraded before it can be sold and is similar to the Canadian oil sands.

The winners of the bids must make investments of $10-$20 billion on roads, pipelines, ports and upgraders to turn the oil into a marketable commodity. The areas up for bid were well east of existing projects so it will require a lot of infrastructure investment before a single barrel of oil appears on the market.

So why would Chevron and Repsol want to risk tens of billions of dollars in Venezuela and only get a 40% stake in the projects? A stake that can be canceled at any time by the whim of a dictator. Analysts believe because of the long lead time, up to a decade, that these firms are hoping Chavez will disappear from power and they can strike a better deal with his successor.

That makes more sense to me than the deal struck by Exxon and Shell to develop Iraq's West Qurna phase 1 oil field in southern Iraq. The deal finalized on Monday gives Iraq 99% of the revenue with Exxon and Shell getting $1.50 per barrel produced. Analysts claim the major are doing these deals on existing fields where the oil is clearly mapped in order to get better deals in the future on tracts that actually require exploration.

Nigerian rebels forced Shell to shutdown oil pipelines after they attacked several pumping stations. This is only going to get worse before it gets better. Shell has already asked to be released from its contracts so it can exit Nigeria and avoid the violence.

The rig count in North America rose again last week. Crude oil rigs in the U.S. increased by 7 to 444 and the highest level in 16 years. This is more than twice the 179 at the bottom back in June. The Bakken added three rigs to total 75 and it has more than doubled in activity since May. Gas rigs saw a sharp increase by +35 to 1,317 and an 11-month high.

Royal Dutch Shell is spending $18 billion on developing a gas to liquids plant in Qatar to produce 120,000 bpd of NGLs and 140,000 bpd of GTL products. Using Shell's technology the "Pearl" GTL plant will convert 1.6 BCF of gas per day into clean burning oil products like gasoil and chemical feedstocks. Shell is partnering with Qatargas for the project. In addition to the Pearl GTL the Qatargas 4 plant will produce another 1.4 bcf per day into LNG. Once the projects come on stream in late 2010 and early 2011 Qatar has the potential to contrimute 350,000 boe/d of upstream production for Shell. That will significantly increase Shell's cash flows and they will need it after spending more than 10% of their market cap to develop the project.

Last but not least President Obama pulled out another populist plank on Monday and proposed raising taxes on "big oil" in order to decrease the deficit. I am not going into the details here because this proposal is about as substantial as his freeze on spending announced last week. The amount of money raised from the new oil taxes is inconsequential to the amount of new spending in the budget. The announcement was structured to distract attention away from the $1.6 trillion deficit in the budget. While taxpayers are getting heated up over making big oil pay $36 billion over the next ten years the deficit is increasing by trillions.

Jim Brown