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Just to recap on a couple of posts I made a while back.


Why 2015 is different to 1986
http://boards.fool.co.uk/a-couple-of-seldom-mentioned-things...

The super J theory
http://boards.fool.co.uk/ghh-personally-i-think-we-are-sleep...

In spite of the supply glut, the supply is extremely tight
http://boards.fool.co.uk/1986-global-production-58-million-1...


IEA starting to see the supply of oil tightening (long before the market tightens).
http://www.bloomberg.com/news/articles/2015-09-11/oil-supply...



This situation is extremely fragile, there is now very little spare capacity in the world. We now have a 24 month capex hiatus baked in meaning from 2017-2018 there is going to be scant new oil coming to market. The compound annual decline rate (CADR) continues is gradually and relentless acceleration.

This current oil glut is superficial. The supply of oil is now more marginal than it has been since the Iran/Iraq war.



On top of this market climate we have a military build up underway around Syria and the pipeline corridor from ME to Europe. In this market climate certain OPEC members and FSR countries would stand to benefit enormously from a flash conflict. There is clearly dialogue between these parties.

Now with a full 12 months of low oil prices feeding through commodity and manufacturing input costs any increase in oil price from here will register as inflation and will give some central banks the data they need to tighten monetary policy. That in turn will ripple through FX and commodity markets.

There are a lot of coiled springs out there and on this current IEA trajectory the world is going to run out of spare capacity in 2016 and slam into a supply crunch where demand exceeds supply and endure a period with limited new oil to market until 2018.

Therefore I think this is as near the nadir as we are ever likely to be able to gauge. Brent is currently $47.81, without another 9/11 type first-world demand destruction event it is difficult to see how the price will weaken further from here. There are too many vested interests with too many levers to hand in the event that oil breaks below $40.


This is one of those rare opportunities where the technicals and the fundamentals are both on the contrarian side of mainstream opinion. I think the POO chart is now developed enough that we can begin to push some boats out.


Thoughts?
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Now with a full 12 months of low oil prices feeding through commodity and manufacturing input costs any increase in oil price from here will register as inflation and will give some central banks the data they need to tighten monetary policy. That in turn will ripple through FX and commodity markets.

The trouble with that view is with pretty lax, to put it mildly, fiscal & monetary policy in the West for the best part of a decade, we've not seen a lot of growth. Let's see what happens with both fiscal & monetary policy tightening. In the east, Japan is looking wobbly (again) & maybe we can't rely on China as much going forward as we have in the past......
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My thoughts :

I hope the moderators do not shut this thread down, like many others.


The Oil Price is very relevant to Oil and Gas Companies and I do not want to be finding some other thread buried somewhere to discuss things like this. Leave on here please and do not shut it down.............


:)
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Goldman Sachs think exactly opposite to you and say there is a massive glut with US inventories still going up. They predict $20 oil is on the Horizon when Iran's oil hit's the market.

I think the low prices have a little longer to run yet but mid 2016 should see a pick up
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As Log said they did rather spoil their copybook in 2008.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a...

It wouldn't surprise me to see them playing both sides at some point or am I being too cynical.?
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Goldman Sachs think exactly opposite to you.......

I suspect there is always money to be made taking a contrary view to what GS say publicly. Just my opinion......
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I think the low prices have a little longer to run yet but mid 2016 should see a pick up

That's what larger oil cos think as well at the moment I suggest. There appears to be a few projects kicking off at the design stage at the turn of the year in London contractors. I should point out though we have had false dawns in other oil crashes so not a sure fire tip. On the other side of the fence I am currently doing some part time inspection work at an oil equipment manufacturer in Germany, all I can get, and they are looking at having no orders in O&G to work on next year. This is one of the largest, if not the largest, manufacturers in the O&G world. Mind you I would expect that a little as they lag the design contractors for obvious reasons but they are not feeling positive going forward and are looking at other markets.
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I work on FPSO conversions in Brazil, The Client, Petrobras, normally have people pushing us to get these production vessels into the field as soon as possible, the wells are drilled ready to be hooked up to production facilities, for the last year there has been no pressure to complete.

The country is awash with half finished projects, drill ships which were ordered by the dozen are either standing unworked on or not started, tens of thousands of construction workers have been layed off, promised Letters of Intent have not been forthcoming.

I really can't see any swift return to oil companies having to ramp up production any time soon, if that were the case, we would see an increase in either new project awards or at least some pressure from clients to restart work on unfinished projects, this just isn't happening,

I understand Petrobras are a special case, with corruption proceedings ongoing and the country in dire straights economically, but if the Brazilians thought there was going to be a shortage coming soon, surely they would be realigning completion and hook up dates with the expected oil shortages to take advantage.

Lead times for equipment in the oil industry are usually long, you would expect to see equipment orders being placed now for project completions 2 years away and again, we don't see this, a competitor who usually has a float of two vessel orders in front of them have nothing pencilled in for 2016 at all, everyone is wondering where the next order is coming from.

Chisels
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I really can't see any swift return to oil companies having to ramp up production any time soon, if that were the case, we would see an increase in either new project awards or at least some pressure from clients to restart work on unfinished projects, this just isn't happening,

Brazil is not the only oil producing country in the world and certainly not the canary in the coal mine for oil price rises. Petrobas being mainly owned by the Brazilian government and the country just having his credit rating reduced to junk status makes it a later starter IMHO so I am not expecting much going on their till the price of oil really rises.

Here are the jobs I know of and am using as the canary

Aramco
Master Gas Expansion phase 1 already in detail in Dubai
Master Gas Expansion phase 2 (FEED is with AMECFosterwheeler, Reading)
Unconventional gas Project A and Project B ( FEED on going in AFw reading)

OTTCO tank farm Exxon_Russian Far East LNG_ Russia (at FEED with AFW Reading).

Aker in Chiswick are ploughing away with the Johan Svedrup field expansion it was awarded earlier this year. The accommodation rig was started this month at KBR Leatherhead. BP are talking to KBR at starting the next rig in the East Azeri field at the turn off the year. I reckon they will goto competitive tender on that to keep KBR honest on the price though so may delay it.

CB&I Paddington have picked up two jobs.
1 Anardako Moazbique Park LNG South Africa. its a big one, they are just manning up and doing pre detail and expecting to be awarded the detail design later this year.
2 Next Decade Rio Grande LNG_Texas USA. This is At FEED stages. the word though Is Rio may be going back to Houston.

Bechtel Hammersmith are manning up with staffies so they have something coming not found out what yet.

Fluor are manning up for TCO project in Tengiz so looks like Chevron are confident as they stop work very quickly on that monster if oil price not looking good as it’s a money pit.

Positive noises from SNC Lavalin in Croydon not sure what though needs more investigation.

As I said though nothing is certain in an oil price slump and in previous low oil price cycles these type of projects can move out a few quarters.
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Its always difficult predict when a inflection point will occur likewise in oil pricing.

However Pistix - I think you are very correct in you thoughts, barring any of the caveats listed below – I think we will see the start of a “blood bath” in US shale in the 4th Qtr 2015 and 1st half 2016 & there is no doubt at the current US$40-50 price per barrel most US shale and many other oil projects are not profitable.

I am not a fan of GS they are in my opinion often wrong and I am often left wondering why – or is there is an alternative agenda. I personally think their forecast US$20 per barrel is off the mark.

The FT have run some great articles as usual the most recently this morning “US Shale Production Faces Sharpe Fall – Energy watchdog forecasts large drop in non-OPEC oil output”

A view of the continued investment –capital invested in Shale does make me wonder whether it is “Ponzi” like. Certainly looks capital destructive

As reported in other great FT articles.

“Capital spending by listed US independent oil and gas companies exceeded their cash from operations by about $32bn in the six months to June, approaching the deficit of $37.7bn reported for the whole of 2014, according to data from Factset, an information service.”

“Companies have sold shares and assets and borrowed cash to increase production and add to their reserves. The aggregate net debt of US oil and gas production companies more than doubled from $81bn at the end of 2010 to $169bn by this June, according to Factset”

Much of this has been partially hidden by very receptive new listing / rights issue and bond markets, previous high oil prices and incorrect “forecasts predicting US$200 price per barrel and the PR of “black gold” making capital raising relatively easy – but not so now

I suggest those that are interested read an article on shale oil by Art Berman for OiI Price.com in full it is one of the best articles I have read on Shale Oil and explains everything – it is available for free via available for free via Yahoo Finance.

http://finance.yahoo.com/news/biggest-red-herring-u-shale-20......

“Conclusions
The best way to understand the details and changes in the cost of producing oil and gas is by evaluating data in 10-Q and 10-K SEC filings. Costs have declined since oil prices collapsed and hard times hit the industry. Most of this decrease in cost is part of a larger deflationary trend in commodities and currencies and not because of rig productivity and drilling efficiency as many believe.
To some extent, lower costs compensate for the lower price of oil but none of the tight oil companies evaluated in this study are profitable in the $44-52 per barrel range of reported realized oil prices. They are all losing money.
Rig productivity and drilling efficiency measurements do not account for declining average well productivity. They will only become useful if they can be related to the marginal cost of producing a barrel of oil. For now, they are distractions from the more important subject of tight oil profitability.
*I own EOG stock.
By Art Berman for Oilprice.com

Hedging at higher pricing has undoubtedly helped these US shale and other E & P companies who were wise enough to employ them however after 12-24 months most hedges are ending and difficulty rising new capital and US bank ½ year reviews in October there will I think be significant blood letting and more significant reductions in production.

Elsewhere in the world – Many thanks from the coal face from Chisel and youwiseboy with 2 different experiences, I think much depends on the companies involved and how deep their pockets, individual project profitability, how far they are in the project implementation i.e cost of completion versus cancellation/moth balling, plus whether its Oil or LNG.
Clearly many other oil projects are not profitable at these prices particularly oil sands Canada, North Sea, GOM, Brazil and many will be looking to sell fields and projects to reduce debt levels and try to avoid highly dilutive rights issues. i.e Cobalt selling its crown jewels in Angola, Premier and Tullow debt levels look like they will be problematic, Even larger entities like Chevron Shell/BG look like debt levels could be a problem at current oil pricing and investment levels.

Until US / Canadian LNG hit the global markets in volume probably 2-4 years from now LNG pricing is probably less effected than oil – however once it does I am sure irrelevant to what contracts have been signed many Far East buyers will be looking to renegotiate their contract pricing lower.

Clearly much smarter minds than us are looking at the tea leaves – while this is very costly for the Saudis evidently needing US$105 for a balanced budget / though this is not the cost of their production which must be significantly lower. The Saudis could make relatively minor cuts in production and allowing pricing to rise and that would be more financially beneficial for them immediately. However while they appear to be talking to the rest of OPEC and Russia, they clearly think that continuing over production for the next 6-12 months will bring significantly more benefit in the long term oil supply reduction by increasing the demise of the shale industry, many other oil projects oil & LNG and alternative energy projects more than they have already done. “the nail in the coffin for many E&P companies and projects.

When we reach that inflection point pricing will turn and turn up sharply /with vengeance.

Caveats. – Murphy is always out there

- The Middle East is unfortunately very volatile there are any number of scenarios that could impact supply.
- On the demand side economic activity in most of the world is slowing, even with QE / Easing measures and low interest rates, plus the slow down in China is in my view significantly worse than is being reported and these factors will negatively impact demand.
- The US is always very adaptive and shale oil debts will be quickly written off and there will be other companies and hedge funds bottom fishing shale oil once oil pricing looks up and US supply will recover more quickly than people think if its profitable. Other more expensive long lead time projects will be negatively impacted for years.

For those of us invest in oil E & P a price rise can’t come soon enough.
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Goldman Sachs is not predicting $20 pbl but $45 pbl (average for 2016). Apparently the $20 pbl is their worst case prediction that could happen if China crashes.

http://money.cnn.com/2015/09/11/investing/oil-price-goldman-...



6 days ago their Asia Pacific director was telling CNN the risk of a hard landing in China was low.

http://money.cnn.com/2015/09/06/news/economy/china-goldman-s...


Its always the extremes that get the headlines- even with CNN the $45 got kicked aside in favour of the $20.
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Hi Chisels,

Thank you for your comments about the dire situation afflicting the offshore supply chain in Brasil. As you say Brasil/Petrobras really is a special case. It's all a bit hazy in my mind now but if I remember Petrobras used to be a state controlled entity. About 20 yrs, or so ago, the moderate PDSB party led by Fernando Henrique Cardoso assumed power. The economy was opened up to globalisation and state holdings were either sold off or reduced. As a result of this paradigm shift state participation in Petrobras was reduced to below 50%. One of the stated aims of doing so was to liberate Petrobras from state shackles and to see how efficient they could become (or not) versus the Chevrons and ExxonMobils of this world. Things seemed to be going swimmingly. Petrobras became more efficient, their ultra deepwater offshore drilling and production capability became world class culminating in those massive pre-salt Santos Basin discoveries. Some of the worlds best reservoirs. Something like 27(?) pre-salt wells on stream now, averaging about 30Kboepd per well each, apparently with connected volumes up to 10Km from an individual well. The sub-surface is brilliant.

The real mess happened above ground. After 8 yrs of being in power, PDSB lost out to the left leaning workers party(PT). And in no particular order

(1) State participation in PBR was increased to over 50% and concomitant hands on State input into Petrobras 5 year investment plans.

(2) Revision of some aspects of the PSA or the fiscal terms.

(2) All pre-salt discoveries mandated to be operated by Petrobras, with a minimum 30% participation.

(3) A national plan to create a massive shipbuilding industry more or less from scratch. This would build scores of shuttle tankers, 20 or so UDW Drilling Rigs, 10 or more replicant FPSO's. Weren't 3 massive shipyards constructed for this purpose? Surely Petrobras would have preferred to order that lot from Modec or Samsung?

(4) The "transfer of rights" of 5 billion barrels (or was it 7 billion barrels?) for Petrobras to develop on top of their existing discoveries.

Plus other stuff. Rather a lot for one company to do. Human resources and capital.

Believe the 2014-2018 5 yr plan called for over $200bn of investment. And isn't PBR the worlds most indebted oil company?

Then oil prices crashed. So the revised 5 yr plan only is only $130bn now.

Oh and I forgot to mention some of the companies building the rigs couldn't finance them.

Oh and then there was a new refinery somewhere in the north of Brasil that's late and at least $12bn over budget.

Oh and then Operation Car Wash emerged, where it seems at least $3.5bn cash seems to have vanished https://en.wikipedia.org/wiki/Operação_Lava_Jato

Isn't OCW enveloping practically the whole national offshore supply industry in Brasil. Everyone, it seems is implicated. Major local players banned from Petrobras tenders.
http://www.bloomberg.com/news/articles/2014-12-30/petrobras-...

Now Marcelo Odebrecht (and others) have been arrested. Marcelo is like industrialist royalty.
http://www.bloomberg.com/news/articles/2015-06-19/arrest-of-...

And now we hear the police/judge are probing the former President of Brasil (Lula) and the ex-CEO of Petrobras (Maria das Graças Foster).

The proverbial is hitting the fan. It's not surprising things are slowing down in your FPSO conversion neck of the woods :)
Brasil seems to have tied itself up in knots.
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Thoughts?

I suspect Saudi oil minister Ali al-Naimi is playing a long game, don't think he'll call a halt on his "market share" strategy soon, probably not this year, perhaps not the following year either. In order to increase/protect Saudi's market share and keep it at maximum level for the long run, he'd want to inflict maximum difficulties for other countries and oil/gas companies to maximise their production.
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Hello xxnjr

A quick reply to you comments before we get closed down.

The company I work for are one of the companies under investigation (OCW), albeit through contractual association with an major contractor, but leaving enough of a smell for other larger international partners to disassociate themselves from us until there is some clarity from Petrobras regarding future awards.

Petrobras have taken on far more of the supply chain than they are capable of handling, we see this in the state of contracts where they have been the driver, the FEED stage is an area they are trying desperately to save money on but which is having dire consequences during construction, our current project is massively over budget and will make a huge loss.

You mentioned three shipyards, the main yard for integration is Brasfels yard just south of Rio, this was an existing yard that had closed in the 90's, and then reopened after being bought by Keppels/Singapore. Brasfels handle modular fabrication and integration for various companies, Modec and before they were disqualified SBM, they also recently started to take on projects direct from Petrobras, you mentioned the Replicant orders, P66 is in the yard now, but has huge design problems and will be over budget and delayed, they also have two semi sub drill ships half completed and which the client has basically ran out of money, If I understand it correctly, Petrobras are stepping in financially to ensure these two vessels are completed, the joys of doing business in Brazil.

A new yard is under construction in Rio Grande do Sul, St Jose de Norte, which is where I'm stationed now,, on the border with Uruguay. FPSO P74 is in Rio now, the hull conversion is almost complete, after which it will sail down to this yard to be kitted out with the production modules.

I'm not aware of another new yard being built, I did hear that SBM are interested in acquiring an existing yard in Brazil for their anticipated return to the bidding process, but maybe that's fallen by the wayside due to current Petrobras difficulties.

Most large construction projects offered to overseas contractors come with a large percentage of local content supply, this is where Petrobras are struggling, local companies are awarded large local content contracts and can't fulfill them, get a part way through them, and then run for the hills leaving thousands of unpaid workers and suppliers in the lurch.

You mentioned Modec, they have recently delivered three FPSO's to Petrobras, but their method of delivery is through a charter system, they continue to own the vessels, and operate them in the field, being paid a charter fee for each vessel, apparently this is proving costly for Petrobras to maintain due to the number of vessels they will eventually be operating, which brings us back to them wanting to design, build and operate their own fleet, but at the moment they don't have the experience in manpower to do this successfully.

So, to conclude, the proverbial has hit the fan and splattered just about everyone in it's own sordid mess, investigations are supposedly under way but as with everything in this wonderful but seriously flawed country, nothing will be as it seems and the powerful will emerge even more so.

Rgds
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Will the ongoing turmoil in Brazil affect the BG-Shell merger? I'm aware the Brazilian authorities cleared the deal back in July but with the disparity in BG and Shell share prices currently this must mean the market is factoring in some risk that it won't proceed as otherwise merger arbitrage seems an easy way to make 15-20% within the next 6-9 months.
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Excellent reply, thank you Chisels. My knowledge is nowhere near as acute as yours, as I'm recollecting what I thought I saw through the prism of being a BG shareholder at the time the pre-salt discoveries started coming through. I'd forgotten Modec had established a presence in Brasil. What I was getting at, at least from Petrobras's perspective, is it really would have been better if the drilling units and FPSO's had been sourced from established asian yards as quality/reliability/on time/on budget would more or less have been guaranteed. Your comments about the performance of the local yards illustrates this perfectly.

Modec charter arrangements often have an option to buy the FPSO. Petrobras may have that option but could be cash constrained?

Not sure if the third shipyard was totally new or just upscaled. But anyway, the one I had in mind was the Atlântico Sul Shipyard in Suape Port, just a little bit south of Recife. See slide 36 of "Maritime Sector of Brasil"

http://www.google.com/url?q=http://www.aakp.no/download.aspx...
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