The CheekyFrenchy Blog: a Frenchman in Britain

Even the Oil and Gas industry is impacted...

The economical slowdown has certainly started to impact the Oil and Gas Industry. Some small companies have been through receivership, like OilExco, although their prospects and reserves look promising. They are just short of cash, for two reasons:
- Oil price has dropped minimising the revenues and the cash available to be injected in new projects
- Loan by banks are currently more difficult if not impossible to get. Those companies rely on the credit to almost entirely finance their projects
For OilExco more specifically, an unexpected long-term shut-down of one of their platform has contributed to severely impact their revenues

All other the places project budgets are cut, and studies are differed. "Small" players, like Talisman, have also started to get rid of some of their contractors because most of the projects have been suspended. Three months ago oil companies were starving for resources and prepared to pay silly money to get a contractors to do some few calks. This is one example among others.
Unfortunately for those companies that are cash constrained, it is probably a good time to invest now and the big players are doing so. Those large Oil Companies cut some projects but in average their investment spending in the current climate remain enormous. Probably because they have been through similar crisis in the past with low oil price and they have slashed recruitment and training of personals (which explains the current shortage of engineering skills). Apparently the lessons have been learnt, which is good.
Investments have to be made now because any new development that is being studied from scratch today will start to pay from 2013 onwards at the earliest. And 2014 is a more realistic target of when the fields could start to produce. By 2014 demand might laregly excceed the supply for ol and gas, hence pushing Oil price very high.
Rig rates will certainly drop in the next couple of weeks (keep in mind that drilling rig rates have been through the roof in the last couple of years because every oil companies had a field to explore or produce). Rig rates have jumped to 350 or even £450,000 per day. Now the drilling programs are reduced if not cut and this should significantly help reducing the overall drilling costs.

We still pay too much @ pump but nobody cares anymore...

The price of petrol at the pump was 88.9p/l this morning (1p less overnight, oil campanies are so genereous). Oil price this morning was 54.65 USD, the currency exchange £/$ was 1.543 making the oil price at 35.4 GBP and my favorite R factor at R=2.51. This is too high compared to previous figures. Remember in June it was 1.81 in mid october it was 2.37 (which was already high). On the 4th November it was 2.54. We continue to pay too much for the petrol @ pump but obviously you never hear about it in the media anymore. Credit Crunh, pre-sale Christmas, black Friday and Crazy Monday are under the spotlights. Those are the subjects people want to hear about.  Next month you will hear about Christmas sale performance, the VAT reduction effect, property price dropping, the weak pump...let scare people because the more you scare them the more they read the articles and generate profit to the media.

Price at pump is not a reason to be scared anymore, even if we hugely overpay at the end...that is why it is now omitted.

Oil price drop: other companies rip you off

Petrol price vs. oil price. This is of course a very sensitive subject and oil companies feel now obliged to pass on some the oil price drop in their petrol or diesel price at the pump. Public pressure effect. Some companies don't have the same pressure and take the opportunity to completely rip off their customers.
Those companies are Tires manufacturers.

I changed two tires last April on the Subaru and bought the same two this week. Last April the oil price was at $105/bbl, against around $60/bbl this week. However I haven't seen any difference in the price I paid for my tires, and believe me I have shopped around.
I remember well earlier in the year that tires manufacturers explained that their price depends so much on oil price that tires prices will now fluctuate laregely during the year. They haven't specified that it would only fluctuate in one direction.

Costco is currently offering 20% off when buying four tires. The manager of the tyre department in my local Costco explained to me that Michelin did not reduce their price despite of the oil price drop as it was expected but launched this offer to compensate partially for what they should have done.
 
But after all why would they reduce their price. People need tires, they don't want to compromise on safety and would go for a premium brand. If you want to fit tires, you would be explained that safety has a price and you would just buy it.

Petrol @ Pump: where is the drop?

What a surprise!! Oil companies do not reflect the oil price drop at the pump anymore. It might usually take days before seeing the impact of a sudden oil price change at the pump but the Brent Crude Oil has been around $60/bbl for weeks already. And the change has been kept to a minimum.
Let's consider again my post of the 18 October where I give my own method to link the petrol price at the pump and the oil price.

This morning I paid 94.9p/l for my petrol. The exchange rate being 1.579$/£ and oil price $59/bbl the R factor is 2.54. As explained before: The higher the ratio, the more the customer pays at pump compared to what he/she should pay based exclusively on oil price fluctuation.
On the 18th October we determined that the ratio was 2.37, which was already high compared to the 1.81 ratio of july. If the orginally high ratio of 2.37 was maintained I should have paid 88.6p./l for my petrol and under the July ratio I should have paid 67.3 p/l.

We are clearly overpaying our petrol for the moment. But because it has reached an acceptable price again people, media, politicans and media do not really care anymore. Or they don't consider that it is worth to further save the money of British citizens in this difficult recession period ahead of us.

You will not hear about high petrol price until it reaches the 100p/llimit again. And don't worrry if you pay too much just now, it is not going to change soon.

Oil price: speculation, speculation and speculation

Oil price reached another limit below $59 /bbl this morning. Three months ago it was at its historical high above $140/bb. Recession, financial crises, credit crunch...with the current climate industries and households (both for heating and transportation) have all reduced their consumption by half !!! no let's be realistic, the demand has not dropped, the supply is probably the same if not higher, but oil has lost  50% of it value.
What does it mean?
- As I keep repeating Oil price has became entirely about speculation, speculation and speculation.... I keep laughing and laughing when seeing those experts debating about the oil price in the next 5 days, 5 weeks and 5 years, or even 50 years. They don't know, we just don't know. The only thing we can be sure of is that in the long term oil price will severally jump because the supply won't meet the demand.
- I don't think that oil should be a speculative product. It doesn't only impact the overall economy but also the households especially those with lower earnings, hit far more that everybody else to go to work to heat their home etc...This is the reason why France built its impressive nuclear plants network nearly 30 years ago after the oil crisis in the 70s, to reduce it dependence to oil but also to offer a more uniform price.
- Oil price has dropped but not petrol price, we are currently overpaying our petrol, but nobody cares anymore. I will expand tomorrow on this subject.

Are we really paying too much at pump? May be not...

Oil companies are frequently blamed for reflecting oil price increase at pumps but are reluctant to cut pump prices when the oil price goes down. In France this subject is even more sensitive than in the UK with big pressure on the government to create special taxes for oil companies. Are we really paying too much at pumps? Does petrol price at the pump really reflect the oil price? I have decided to gather the relevant data and make up my own mind. The results are quite surprising.

First of all let's have a look at the Petrol and Diesel price in the UK (pence) and France (cents) vs. Oil price in US$. Don't be confused by the different Y-axis units, it doesn't mean that petrol is more expensive in France at this stage. In average Petrol and Diesel prices follow the trend given by the oil price. From mid 2007 petrol price seems to raise less than oil price, which is of course due to the weakness of the US$.

 

How has oil price risen in France and in the UK in their own currency? The following graph is quite interesting as it shows the oil price in US$, in € and in £ assuming the same starting point in 2006 (i.e. 1€ equals 1£ equals 1US$). This shows that for the last two years the oil price increase has not been the same for everyone. Americans were hit more than British people, who themselves were hit more than the French. For example in April 2008 French people were hit 23% less than Americans because the € was strong, similarly in Nov 2007 the difference was 15% between the UK and the US. The US$ has recently been stronger: this is reflected in the graph for the months of August and September. Although oil price has dropped, the effect was less visible in the UK because the Pound has been weaker compared to the US$.
   

For the purpose of this article we now need to compare the petrol price vs. oil price in the same currency. The enclosed graph on the RHS shows oil price in US$, in € and in GBP for the same period.

 

But are Petrol and Diesel prices reflecting the oil price? To answer this question I have created a simple ratio R. R is the price at pump in a country  divided by the oil price in the currency of this country. The results are now very interesting.

I have assumed that no other parameters intervene massively in this ratio. In theory a refinery receives crude oil, processes it and distributes it. There is no particular reasons why the ratio shouldn't be more or less flat (few fluctuations might exist as refinery costs are flat and not linked to the oil price). Taxes variation might influence but this variation is still marginal compared to how much the ratio fluctuates (see later).

The ratio being flat means that when oil price goes up, price at pump reflects this. And vice versa. The higher the ratio, the more the customer pays at pump compared to what he/she should pay based exclusively on oil price fluctuation. If R increases, then the customer pays more than the oil price increase. If the ratio decreases, the customer pays actually less at pump compared to what he/she should pay. Of course the ratio doesn't mean anything by itself, only its variation or relative value is important.

Graph Above: Ratio R fluctuation over the last two years

The results are surprising. This ratio reached a peak in Jan 2007 in both France and the UK, with a particular peak for Diesel UK. It has then decreased severely until last month. In June 2008 it has reached its minimum, almost divided by 2 compared to Jan 2007. It clearly means that we are not overpaying the petrol at pump, or at least compared to what we paid in 2007.
In Feb 2007 Diesel price was 90.9p with a monthly average oil price of  52.6 USD. In June 2008 Diesel price was 131.6p for an oil price of 126.3 USD. During this period oil price has increased by 140% while diesel price has increased by only 45%. This is the strongest difference that appeared on this graph but it shows that it is rather difficult to blame oil companies for taking advantage of the situation today. However it seems fair to admit that they were abusive 18 months ago, largely overpricing the price at pump when the oil price was relatively low. At this time we were hearing a little bit about petrol price increase, but not as much as today.

Tax is a key role in determining the petrol price but it remained in the region of 55 to 65 % for diesel and 60 to 67 % for petrol in the UK during this period (small fluctuation wrt to the R ratio). Taxes do not explain the big fluctuation of Ratio R. Of course petrol price has an almost fixed element in it, the refinery cost. However this element is marginal given the large volumes treated and doesn't justify such a fluctuation in the R Ratio.

What about today?

I filled my car with petrol in the UK this morning and paid 99.9p/l. Oil price this morning was 72.8 USD, the currency exchange USD/GBP was 1.729 making the oil price at 42.1 GBP and R=2.37, which according to our graph is good but could be improved. If the ratio was 1.81 like in June 08 I would have paid 76p per liter. Oil price is very low for the moment and the response from the petrol stations is even lower. Oil companies suspect it will raise again soon, so they prefer to wait. However we can easily assume that today, even at 99.9p/l, petrol is too expensive.

 

Shouldn't oil price have risen again?

  $108/bbl. Oil price keeps dropping. Since his historic peak on the 11th July at 147.50 USD,  oil price has lost 40$, more than a quarter of its value. Now specialists are talking about 100$ limit being hit again soon, and why not 80$, why not 60$ or why not 180 next week? Once again, they don't know, nobody knows otherwise they wouldn't give “specialised” talks to the medias but quietly making considerable money based on their prediction.

Oil price had all the reasons to rise again recently: Hurricane Gustav, the war in Georgia last August, the continuation of Russian troops occupying Georgia without UN resolution, suspicions that North Korea has restarted its nuclear program...worldwide recession. Because ‘specialists’ can't predict oil price and would constantly go wrong, at least they can find explanations to justify why it hasn’t gone the way it should have. Today the explanations are: Worldwide recession, the dollar being stronger making oil less attractive for investors, new discoveries in Brazil...

I can personally see tow main reasons to explain that oil price could not be predicted easily: Saudi Arabia and main Oil producing countries seem to be relatively happy with a oil price around $100/bbl. The can adjust their production to maintain this artificial price that seems to be a win/win (or let be honest, a win/not loose to much) value. Furthermore opportunities probably now exist to invest elsewhere: major companies profits are rising and keep being strong every quarter although their share-value is dropping to almost an historical low. Time will be to reinvest in the stock market again and forgot about oil.

 

Even during the war in Georgia around the 8th August, oil price did not rise. Tbilisi is located right in the middle of the BTC pipeline though. BTC? Baku Tbilisi Ceyan, built especially to evacuate the Caspian sea oil and avoid the existing Russian installations. BTC is currently exporting between 800,000 and 1 millions barrel per day which is roughly 1% of worldwide production. For some reasons Exxon is relatively small in Azerbaijan and never supported the construction of the BTC pipeline and have now to find alternative routes to export their 8% share in the ACG field outside the Caspian sea. It did not prevent Dick Cheney to visit Azerbaijan, part of is tour in this now very sensitive region. Proof that this conflict has to be resolved ASAP for oil consuming countries.

Oil Price prediction: "experts" are sheeps

Mid July Oil price set a new record at 147 $/bbl. At that time newspapers, journalists, experts predicted $200/bbl by the end of the year. Oil price is rising so it will rise again. Last night oil price was around 112$ in New York, which is around 25% less that the July peak. Surprinsly the same experts are now talking about worldwide recession, credit crunch and an oil price predicted to go further down. Back to $100? back to $80 or $60? Now that oil price is going down, they all follow the trend and predict another fall. At least they know the first golden rule when you start to invest in the stock market: Follow the market, don't go against (and i should add: tell what people want to hear).

 The point is: They don't know what the oil price will be and nobody knows. If they knew they wouldn't probably spend so much time building theories and explaining those to the media. They would spend their time investing at the right moment in the right place. Oil price is pretty much like the stock market, driven by a market that has an irrational behaviour. At least for the moment because the supply seems still to match the demand. A friend of mine, trader at bp, told me recently how important the part of speculation was in the oil price for the moment. Nothing (or just a little) to do with the Chinese or Indian demand, or the political instability in some oil producing countries...Money has to be invested somewhere and investors don't trust the stock market and the property market for the moment, oil (and raw materials) seems to be the perfect alternative because oil has a finite reserve, we will run out of oil eventually. That's a given. It can't dramatically go down. Oil is good place to invest hence the huge fluctuation in its price. We shoudl be prepared to have everything but stability in the price we will pay at the pump.

Oil companies profits: really shocking?

Last Week oil companies have revealed their second quarter results, reflecting obviously a stunning performance thanks to high energy prices. Shell's earning for the second quarter were $7.9 billions, BP's were $9.5 billions, Exxon's 11.7 billions and Total around €3.3 billions.

As always Total tried to be extremely discreet when communicating its quarterly results. And as always voices in France would claim that making so much profit is shocking, that Total should be subject to further taxations in order to help French people to pay for their fuel bill and petrol for their cars.
The worry is that the proposal is made constantly and repeatedly by leading politicians in the opposition party. This is such a populist, demagogic and unrealistic speech that I find it appalling from people who pretend to be in charge of the nation at every elections.

Why?

- 95% of the profits at Total are made outside France. Nothing would prevent Total from installing its head quarter in another European (or not) country with a more favorable tax regime. France would see immediately a comfortable income evaporating.

- Total is the easy target, but why are those people not similarly shocked by the profits made in other industries/services, for example banks.  Banks can make similar profits by speculation and charging huge bank account administration fees to private customers and not generating any value from producing goods or producing useful energy

- Some of the companies that benefit most of the high oil price are the services companies. I should investigate soon the annual accounting of a services companies like Schlumberger

This industry requires huge and increasing investments and companies need to secure enough cash to invest in major projects.

Some key facts:
- Oil and Gas are located in difficult regions to access and major oil companies will now be granted licenses to explore almost exclusively in the most difficult areas in the world. National oil companies have now the skills and competencies to develop or operate the "easier" fields. This forces to cost to increase further.
- Cost for developing  projects have probably doubled over the last four years. Materials and contracting cost have increased by 100% during this period.

- some interesting figures:
A well would now cost around $100mln to drill if no particular problem is anticipated
An engineer in the oil and gas industry will be billed around $200/hours (I said billed, not "earns")
A barge for lying a pipeline costs roughly £450,000 per day. This seems huge.  For information two or three years ago this cost was around £350,000. A drilling rig would be roughly of the same order or magnitude. 5 or 7 years ago a drilling rig was probably under £100k/day.
Installing a compressor offshore would cost between $60 and $120 mln
We are just talking about massive investments, huge risks and raising costs. Shell for example might doubled to $36billion this investment next year.

If no heavy investments are made, how are we going to secure the reserves for the next year to come? And if oil companies do not have the cash to spent on those projects how are they going to be financed?