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Lundin Petroleum AB (LUPE), the Swedish explorer focused on Norway, said there won’t be any new oil output in the ice-filled waters of the Arctic for at least 15 years because of technical and logistical challenges.
“I don’t think we’ll see any oil production in the Arctic any time soon — probably not this decade and not the next,” Chairman Ian Lundin said in a Feb. 20 interview in Stockholm. “The commercial challenges are too big.”
The Arctic holds 30 percent of the world’s undiscovered natural gas reserves and 13 percent of its undiscovered oil, according to U.S. Geological Survey estimates. Still, exploration of the Arctic ocean floor, where 84 percent of these resources are thought to be trapped, has suffered setbacks in recent years.
Royal Dutch Shell Plc. (RDSA), Europe’s biggest oil company, in January again halted drilling plans off Alaska after a court ruled the area had been illegally opened to exploration. That followed a previous postponement after a series of technical mishaps in 2012, including the stranding of a rig.
Off the coast of Greenland, drilling has yet to resume after Cairn Energy Plc (CNE) spent $1 billion on exploration without making commercial finds in iceberg-ridden waters, while Russia’s Shtokman gas project, 600 kilometers (370 miles) from shore in the Barents Sea, has been stalled for years.
As companies including Shell and Norway’s state-controlled Statoil ASA (STL) cut planned investments amid rising costs across the industry, expensive Arctic projects could get a lower priority.
“It may take a while to develop the right technology,” Lundin’s chairman said. “Investments are very, very high so it still has to be commercially justified.”
Another factor undermining the appeal of expensive exploration projects is the outlook for crude prices. Brent oil for delivery in 2016 is trading at about $97.45 a barrel, down 11 percent from the current spot price of $110.07 for the global benchmark, according to data compiled by Bloomberg from the Ice Futures Europe Exchange.
An exception to Arctic challenges is the southern part of Norway’s Barents Sea, Lundin said. While inside the Arctic circle, it benefits from a less-harsh climate and shallower and ice-free waters, and may hold 8 billion barrels of oil equivalent in undiscovered resources, more than 40 percent of the country’s total.
To compensate for dwindling reserves in aging North Sea fields, Norway is pushing into the Barents, which holds 54 of the 61 blocks the government has proposed issuing in its next licensing round. More than half will be in a newly opened area previously disputed with Russia.
“In the Barents Sea we’ll probably see production much sooner because there’s no technological gap,” he said. “It’s now just a matter of having the reserve base that you’re required to have to justify the investment.”
Lundin fell as much as 0.8 percent and traded 0.2 percent lower at 127.3 kronor as of 10:40 a.m. in Stockholm. That curbs the stock’s gain to 1.5 percent so far this year and gives Lundin a market value of 40.5 billion kronor ($6.2 billion.)
Some oil production has already started in Arctic waters. BP Plc (BP/)’s Prudhoe Bay field in Alaska has been producing since the 1970s, while OAO Gazprom in December became the first Russian company to extract oil from the Arctic seabed at the Prirazlomnoye field in the Pechora Sea.
Eni SpA (ENI) will become the first company to produce oil in Norway’s Barents Sea when its Goliat field starts in the third quarter this year, even though the Norwegian Petroleum Directorate has said it expects delays. Statoil’s Snohvit gas field, which began output in 2007, is the only producing field in the Norwegian Barents Sea to date.
Lundin discovered as much as 145 million barrels of oil at the Gohta prospect in the Barents Sea last year. That has helped revive optimism among explorers after Statoil postponed an investment decision on its nearby Johan Castberg project because of higher costs, taxes and uncertainty about resource estimates of as much as 600 million barrels of oil.
Gohta was Norway’s first oil discovery in Permian layers with sufficient flow, and opened up a new exploration model for the area with as many as 10 new drilling targets, the Swedish explorer has said. Lundin is planning an appraisal well at Gohta in the second quarter and will drill the nearby Alta prospect in the third.
Lundin’s optimism contrasts with Statoil, which has found oil at just one of four exploration wells designed to boost crude resources for its Castberg project and make it more profitable. Still, current resources are sufficient to be developed and Gohta could even be coupled with Castberg, Lundin has said.
“There are other discoveries in the same area” as Gohta, the chairman said. “After we go through the appraisal phase we’ll hopefully be in a position where we can just press the button for development.”
To contact the editor responsible for this story: Jonas Bergman at firstname.lastname@example.org
Posted by Jeff Rubin on January 27th, 2014
Judging by pump prices, Canadian drivers might think oil companies were rolling in profits that only move higher. Lately, though, the big boys in the global oil industry are finding that earning a buck isn’t as easy as it used to be.
Royal Dutch Shell, for instance, just announced that fourth quarter earnings would fall woefully short of expectations. The Anglo-Dutch energy giant warned its quarterly profits will be down 70 percent from a year earlier. Full year earnings, meanwhile, are expected to be a little more than half of what they were the previous year.
The news hasn’t been much cheerier for Shell’s fellow Big Oil stalwarts. Exxon, the world’s largest publicly traded oil company, saw profits fall by more than 50 percent in the second quarter to their lowest level in more than three years. Chevron and Total, likewise, are warning the market to expect lower earnings when fourth quarter results are released.
What makes such poor performance especially disconcerting to investors is that it’s taking place within the context of historically high oil prices. The price of Brent crude has been trading in the triple digit range for three years running, while WTI hasn’t been far off. But even with the aid of high oil prices, the supermajors haven’t offered investors any returns to write home about. Since 2009, the share prices of the world’s top five publicly traded oil and gas companies have posted less than a fifth of the gains of the Dow Jones Industrial Average.
The reason for such stagnant market performance comes down to the cost of both discovering new oil reserves and getting it out of the ground. According to the International Energy Agency’s 2013 World Energy Outlook, global exploration spending has increased by 180 percent since 2000, while global oil supplies have risen by only 14 percent. That’s a pretty low batting average.
Shell’s quest for new reserves has seen it pump billions into money-devouring plays such as its Athabasca Oil Sands Project in northern Alberta and the Kashagan oilfield, a deeply troubled project in Kazakhstan. It’s even tried deep water drilling in the high Arctic. That attempt ended when the stormy waters of the Chukchi Sea crippled its Kulluk drilling platform, forcing the company to pull up stakes.
Investors can’t simply count on ever rising oil prices to justify Shell’s lavish spending on quixotic drilling adventures around the world. Prices are no longer soaring ahead like they were prior to the last recession, when heady global economic growth was pushing energy prices to record highs.
Costs, however, are another matter. As exploration spending spirals higher, investors are seeing more reasons to lighten up on oil stocks. Wherever oil producers go in the world these days, they’re running into costs that are reaching all-time highs. Shell’s costs to find and develop oil fields, for instance, have tripled since 2003. What’s worse, when the company does notch a significant discovery, such as Kashagan, production seems to be delayed, whether due to the tricky nature of the geology, politics, or both.
Shell ramped up capital spending last year by 50 percent to a staggering $44 billion. Oil analysts are basically unanimous now in saying the company needs to rein in spending if it hopes to provide better returns to shareholders.
Big Oil is discovering that blindly chasing production growth through developing ever more costly reserves isn’t contributing to the bottom line. Maybe that’s a message Canada’s oil sands producers need to be listening to as well.
Royal Dutch Shell revealed Thursday that 2014 will see the company stop its Alaska program and focus on achieving better capital efficiency by making ‘hard choices’ about new projects and reducing capital spending.
Announcing its results for 2013, Shell said that the landscape the company had expected has changed and it cited factors such as the worsening security situation in Nigeria and delays to non-operated projects in several countries. With North American natural gas prices remaining low, the company said it particularly plans to focus on restructuring and improving profitability in its North American upstream operations.
“Our ambitious growth drive in recent years has yielded a step change in Shell’s portfolio and options, with more growth to come, but at the same time we have lost some momentum in operational delivery, and we can sharpen up in a number of areas,” New Shell CEO Ben van Beurden said in a company statement.
“Our overall strategy remains robust, but 2014 will be a year where we are changing emphasis, to improve our returns and cash flow performance.”
Meanwhile, Shell said the recent Ninth Circuit Court decision against the Department of the Interior “raises substantial obstacles to Shell’s plans for drilling in offshore Alaska”. As a result, Shell has decided to stop its exploration program for Alaska in 2014.
“This is a disappointing outcome, but the lack of a clear path forward means that I am not prepared to commit further resources for drilling in Alaska in 2014,” van Beurden said. “We will look to relevant agencies and the Court to resolve their open legal issues as quickly as possible.”
Shell’s capital spending in 2014 is targeted at around $37 billion, compared with the $46 million it spent in 2013. Meanwhile, the firm plans to increase the pace of its asset sales, which are expected to be $15 billion for 2014-2015 in both its upstream and downstream segments.
“We are making hard choices in our world-wide portfolio to improve Shell’s capital efficiency,” van Beurden added.
Quarterly earnings for Royal Dutch Shell have declined sharply due to large expenditures, delays, and lower than expected production. The oil-giant reported that it expects fourth quarter earnings from 2013 to come in 70% lower than the same quarter for the previous year. Fourth quarter earnings are expected to decline to $2.2 billion, down from $7.3 billion in 2012. The decline prompted Shell to issue a profit warning, its first in 10 years, hitting its stock price. The company expects to release a full-earnings report on January 30.
Shell’s capital spending surpassed $44 billion in 2013, a 50% jump over the prior year. While investing in growth is necessary to turn a profit, many of Shell’s projects are floundering. After sinking over $5 billion in a multi-year effort to tap oil in the Arctic, Shell has nothing to show for it except for a series of mishaps and bad publicity. The company wants to return to the Arctic in 2014 after taking the year off last year to regroup, and submitted a scaled-back plan that they hoped would soothe the concerns of the Department of Interior. Yet with a January 22, 2014 decision from the Court of Appeals from the Ninth Circuit found that Interior violated the law when it sold offshore leases for exploration back in 2008. The ruling throws Shell’s plan into deep uncertainty, and is merely the latest blow to the company’s bungled Arctic campaign.
Shell has also bet big on Kazakhstan, sinking over $30 billion in a project, again with little to show for it thus far. The project is 8 years overdue.
Related article: UAE to Invest $1.2bn in Kurdish Oil
The latest news may be indicative of a new phase for major international oil companies. Shell is not alone in investing huge sums to develop complex oil fields in far flung places around the globe. As easy-to-get oil declines, Shell and other oil companies are forced to search for oil in places that present geological and engineering difficulties –and thus present significantly higher costs. According to Reuters, the rising cost of oil projects around the world is a major topic of discussion at the World Economic Forum in Davos.
Another example is Chevron’s Gorgon LNG project, which is expected to come in at $54 billion, or $20 billion more than originally expected. Italian oil company ENI expects to blow around $50 billion on the Kashagan oil field in Kazakhstan, five times what it expected.
Ben van Beurden, Shell’s new CEO, hopes to take a more conservative approach, paring back large investments in “elephant projects,” according to the Wall Street Journal.Other major oil companies are also promising their shareholders they will cut back on expenditures. Reducing costs may be a good strategy in the short-term, but the profitability of major oil companies depends on their ability to replace reserves and produce oil, not just now, but 10-20 years from now. If these companies decide not to invest in new oil fields, they will not have additional capacity coming online in the years ahead.
But it is telling that Shell and others do not find it wise to invest in new oil projects. If that is indeed the case, then the world could be looking at much more expensive oil in the not-so-distant future as existing fields naturally decline and supply tightens.
By. Nick Cunningham
Last week, Lorraine Mitchelmore, the top Canadian executive for Royal Dutch Shell, broke with industry narrative, stating that “the argument for environmentalism is not an emotional argument. It is just as rational as the argument for growing our energy industry.”
There is an important underlying realization in Mitchelmore’s statement that some conservative pundits, as well as our own government, seem to willfully miss. Sustainability — smart environmental decision-making — has everything to do with prosperity. It has everything to do with people’s jobs and their quality of life, with the opportunities they want for their kids. It is, in fact, the rational decision to carefully steward, protect, and invest in the natural capital on which our communities and future livelihoods depend.
What is dangerously irrational is making decisions based on short-term economic pay-offs that we know will undermine our future prosperity, perhaps catastrophically.
This is exactly what the proposed Northern Gateway pipeline threatens to do. Our government is apparently determined to move unprocessed diluted bitumen by tanker through the Great Bear Sea, which by Environment Canada’s own assessment, is one of the most treacherous sea passages in the world. No one can guarantee that there will not be an accident. Indeed, given the extremely dangerous waters of the Hecate Strait, it is rational to argue that an accident is simply a matter of time. And as two recent reports point out — one commissioned by the Province of B.C. and the other by the Federal government — Canada is woefully ill-prepared to deal with an oil spill in these waters.
What is at risk is very clear. Just talk to the people who live in this region, and they will tell you. It’s their jobs — the fishing and tourism industries — and their cultural identity. And it’s the spectacular ecosystem upon which all of that depends. A place that is as unique a global treasure as the Great Barrier Reef or the Amazon rainforest. It is no wonder that so many Canadians exercised their democratic rights by participating in the review process for this project. More than 9,500 people wrote to the Joint Review Panel, 96 per cent against the pipeline. The overwhelming majority of the 1,000+ people who provided oral testimony were also opposed. There is no question that the concerns raised by this project are the legitimate concerns of Canadians who value their livelihoods.
The real question is why we would take such a huge risk in such a special place.
If the answer is “to defend jobs”, it is misguided and misleading. More jobs will be destroyed by an oil spill than will be created by Enbridge’s proposed Northern Gateway pipeline. Coastal First Nations’ traditional territories and coastal communities depend economically on the Great Bear Sea. Marine-dependent activities in these territories represent significant economic value. B.C. seafood and tidal recreational fishing generate $2.5 billion per year – and support more than 30,000 jobs. Exporting raw, unprocessed bitumen creates far more jobs outside Canada than it does here.
It is also irrational to repeat mistakes that we now have the knowledge and ability to avoid.
A generation ago, the Exxon Valdez ran aground and foundered, off the coast of Alaska. The resulting oil spill was an ecological, economic and social disaster that crippled coastal communities and deprived a generation of its livelihoods. The loss of the herring fishery alone cost the economy $400 million. Many communities have not yet fully recovered. In fact, some never will.
It’s a fate that we have the power to prevent in the Great Bear region, by pragmatically acknowledging that the risks of this proposed oil pipeline outweigh the benefits.
Yes, the argument for environmentalism is a rational one. For the people whose lives would be destroyed by an oil spill, it is also an emotional one. And for Canada, particularly at this moment, it is the one that will determine our future as global leader or laggard.
This article originally appeared in the Financial Post on Dec. 17, 2013
When civil rights advocates grew restless because of President Richard Nixon’s right-wing rhetoric on the issue of desegregation, then-Attorney General John Mitchell told them, ”Watch what we do, not what we say.”
Those following the hype over America’s supposed newfound abundance of oil and natural gas would do well to follow that advice when evaluating what oil and gas company executives and their surrogates say.
When Royal Dutch Shell pulled the plug on its U.S. gas-to-liquids project recently, the company offered the same explanation it used when it shut down its oil shale project earlier this year: Shell sees better opportunities elsewhere. This explanation–much like the I’m-resigning-to-spend-more-time-with-my-family explanation–tends to deflect questions about why things aren’t working out.
What’s not working out for Shell is a planned $20 billion plant in Louisiana designed to turn natural gas into diesel, jet fuel, lubricants and chemical feedstocks, products typically produced by oil refineries. The plug was pulled, however, while the project was still in the planning stage.
Shell did actually say a little more about why it is abandoning the project in this almost inscrutable piece of corporate prose:
Despite the ample supplies of natural gas in the area, the company has taken the decision that GTL is not a viable option for Shell in North America, at this time, due to the likely development cost of such a project, uncertainties on long-term oil and gas prices and differentials, and Shell’s strict capital discipline.
Now, here’s the same paragraph translated into simple English:
The plant is going to cost a lot more to build than we thought it would. Natural gas prices are going up and could easily make it uneconomical to produce diesel and jet fuel from natural gas when compared to making them from oil. And, we don’t have unlimited funds to spend on everything we think of just to see if it works.
Shell CEO Peter Voser has voiced doubts about the so-called “shale revolution” in the United States (which refers to advances in drilling technology that have opened previously inaccessible shale deposits of natural gas and oil to exploitation). In fact, Shell took a $2.1 billion write-down on its shale assets in the United States. In lay terms, the company had to reduce the value of those assets on its balance sheet to reflect reality. The company also sold small tight oil fields related to shale deposits, fields that it no longer wishes to develop.
Voser said he still believes Shell’s remaining $24 billion investment in U.S. shale gas and tight oil will “be a success story for Shell.” Three-quarters of that investment is devoted to natural gas from shale. But, Voser added that the potential for natural gas and oil from shale elsewhere in the world has been “a little bit overhyped” citing concerns specifically about Europe.
Now, because this rhetoric is coming from an oil industry CEO, we can assume that he is walking the line between saying things which will get him removed from the invitation lists of his fellow oil executives’ cocktail parties–things otherwise known as the awful truth–and misrepresenting the facts to shareholders, which would get him into trouble in other ways.
But abandoning the gas-to-liquids plant speaks much more loudly than Voser’s actual remarks. It means Voser expects that natural gas prices simply won’t stay low long enough to make such a huge investment pay off. And, that means that he doesn’t believe the hype about an ongoing glut of U.S. natural gas.
So, Voser directs Shell to abandon a gas-to-liquids plant, the profitability of which would be destroyed by high prices for the natural gas which the plant must purchase. At the same time, he has Shell retain most of its shale gas wells, a move which only makes sense if he expects U.S. natural gas prices to go higher. And, those prices will only go higher if there is increased demand or reduced supply, or a combination of both.
It’s not hard to figure out the meaning of what Peter Voser is doing. But it is understandably difficult to shut out the constant din of abundance stories sponsored by the industry and its well-financed public relations machine–that is, until you understand that it’s not what the industry says that’s important, but what it actually does.
Tank cars offload crude, likely from the North Dakota Bakken formation. Photo by Roy Luck. Creative Commons licensed.
One of Canada’s top energy analysts has warned investors and geologists that “the shale revolution” will not meet conventional expectations as a so-called game-changer in energy production.
Speaking at the Denver meeting of the Geological Society of America and later at Queen’s University and an energy conference in Toronto, David Hughes challenged the assumptions of industry cheerleaders by spelling out startling depletion rates for high-cost unconventional shale and tight oil wells.
“The shale revolution has been a game-changer in that it has temporarily reversed a terminal decline in supplies from conventional sources,” said Hughes in both talks given in late October and early November. “Long-term sustainability is questionable and environmental impacts are a major concern.”
The geoscientist, who now lives on Cortes Island, has studied energy resources in Canada for four decades, including 32 years with the Geological Survey of Canada as a coal and natural gas specialist.
After reviewing data from unconventional oil wells, Hughes found that these difficult and high-cost operations deplete so rapidly that between 47 to 61 per cent of oil from plays like the Bakken, the first major tight oil play developed, is recovered within the first four years.
Hughes noted that the Bakken and Texas’ Eagle Ford plays, which currently produce two-thirds of U.S. tight oil and are supposed to take the country into energy independence territory, will actually peak in production by 2016 or 2017.
Incredibly, most tight oil wells, such as in North Dakota’s booming oilfields, will become “stripper wells” (producing less than 10 barrels a day) and be ready for abandonment within 11 to 24 years.
Shale no panacea
Shale gas wells follow a similar decline profile. In Louisiana’s Haynesville play and Pennsylvania’s contentious Marcellus fields, producing wells decline by as much as 66 per cent after the first year.
More than 3,500 wells have been drilled in the Haynesville play, which in 2012 was the top-producing shale gas play in the U.S., yet production is falling owing to the 47 per cent yearly field decline rate. The current price of gas is not high enough to justify the 600-plus wells needed annually to offset the steep field decline (each well costs between $8 to $10 million).
Data from Drilling Info/HPDI.
“The shale revolution has provided a temporary respite from declining oil and gas production, but should not be viewed as a panacea for increasing energy consumption… rather it should be used as an opportunity to create the infrastructure needed for a lower energy throughput to maximize long-term energy security,” warned Hughes.
Hughes also told investors that they can no longer ignore the real and high-cost environmental issues associated with hydraulic fracturing, including high water consumption; groundwater contamination; methane leakage; land fragmentation; air pollution and property devaluation.
“There has been a great deal of pushback by many in the general public, and in state and national governments, to environmental issues surrounding hydraulic fracturing,” he said.
Quebec, Labrador and Newfoundland have declared moratoriums on the technology of high-volume horizontal hydraulic fracturing. In addition, Canada’s largest private sector union representing a high percentage of energy works hascalled for a national moratorium.
Although the number of gas-producing wells in Western Canada has reached an all-time high of 230,000 wells, actual gas production has been in decline since 2006.
Hughes also noted that the quality of shale oil and gas plays varies greatly. A few are prolific because they have sweet spots, he said. These special zones are targeted first and lead to an early rise in production followed by a decline, often within five years or less.
As a result, 88 per cent of shale gas production comes from just six of 30 plays, while 70 per cent of all tight oil production comes from two of 21 plays: North Dakota’s Bakken and Texas’ Eagle Ford.
Bad omens for BC
Rapid depletion rates, high capital costs and low market prices do not bode well for British Columbia’s much-hyped plans to export shale gas to Asian markets via a liquefied natural gas (LNG) system that currently does not exist.
“In terms of B.C., the well depletion will be similar. All of the fields outside of the Horn River and Montney plays are in decline,” Hughes told The Tyee in an interview.
“The province would have to nearly quadruple gas production just to satisfy the demands of five LNG terminals.” As many as 12 terminals have been proposed for B.C. “It’s a huge scaling problem.”
The government of Premier Christy Clark has championed LNG development as the province’s new economic miracle by subsidizing geoscience, roads and water for shale gas companies.
It has also lowered royalties. Income from shale gas peaked in the province in 2006 at more than $2 billion and has since fallen to less than $400 million, excluding government subsidies.
Data: BC Ministry of Finance, Economic and Financial Review and Budget 2013.
The Business Council of British Columbia whose executive council includes representatives from Encana and Kinder Morgan, supports accelerated LNG development on the grounds that global markets will likely not need the gas in the future: “Overall, there is sufficient evidence in the marketplace to suggest that, if the current LNG contract window closes before B.C. is able to secure final investment decisions, there would be potentially lengthy delays before B.C. and Western Canadian natural gas would have another LNG export opportunity.”
Hughes told investors that the shale gas revolution follows a predictable life cycle.
A land-leasing frenzy follows discovery. Then comes a drilling boom, necessitated by lease requirements, which locates, targets and depletes the sweet spots. Gas production grows rapidly and is maintained “despite potentially uneconomic full cycle costs.” (Production provides cash flow even though the well may not have been economic in its own right).
After five years, fields such as the Haynesville reach middle age. At that point geology takes over from technology, and it takes progressively more wells to offset field declines as drilling moves out of sweet spots to lower quality areas.
‘It’s all in the red’
Due to depressed natural gas prices, the shale gas industry has written down billions of dollars worth of assets and refocused drilling on more lucrative liquid rich formations. Other companies have lobbied strongly for government subsidies for LNG exports.
Rex Tillerson, CEO of Exxon Mobil, a multi-billion dollar shale gas investor,exclaimed last year that the industry was making no money: “It’s all in the red,” he said.
Royal Dutch Shell has written down $2 billion in shale assets and even put its Texas Eagle Ford properties up for sale. Meanwhile, one of its senior executives has complained that the industry has “over fracked and over drilled.”
Encana, one of the largest holders of shale gas real estate in B.C., has sold off many assets and laid off 20 per cent of its workforce due to poor investments in uneconomic shale gas plays.
The company pioneered the transformation of landscapes across the West, with industrial clusters of wells combining horizontal drilling with multistage hydraulic fracturing. The 10-year-old mining technique blasts large volumes of water, sand and toxic chemicals into dense rock formations up to two miles underground.
Hughes, head of Global Sustainability Research Inc., will be one of the experts addressing the Transatlantic Energy Forum in Washington, D.C. on Monday. The forum brings together energy and climate change experts from both sides of the Atlantic Ocean.
Move Over FX And Libor, As Manipulation And “Banging The Close” Comes To Commodities And Interest Rate Swaps | Zero Hedge
While the public’s attention has been focused recently on revelations involving currency manipulation by all the same banks best known until recently for dispensing Bollinger when they got a Libor end of day print from their criminal cartel precisely where they wanted it (for an amusing take, read Matt Taibbi’s latest), the truth is that manipulation of FX and Libor is old news. Time to move on to bigger and better markets, such as physical commodities, in this case crude, as well as Interest Rate swaps. And, best of all, the us of our favorite manipulation term of all: “banging the close.”
The story of crude oil manipulation, primarily involving Platts as a pricing intermediary, has appeared on these pages in the past as far back as a year ago, and usually resulted in either participant companies, regulators or entire nation states doing their best to brush it under the rug. However, it is becoming increasingly more difficult to do so as the following Bloomberg story demonstrates.
Four longtime traders in the global oil market claim in a lawsuit that the prices for buying and selling crude are fixed — and that they can prove it. Some of the world’s biggest oil companies including BP Plc (BP/), Statoil ASA (STL), and Royal Dutch Shell Plc conspired with Morgan Stanley and energy traders including Vitol Group to manipulate the closely watched spot prices for Brent crude oil for more than a decade, they allege. The North Sea benchmark is used to price more than half the world’s crude and helps determine where costs are headed for fuels including gasoline and heating oil.
The case, which follows at least six other U.S. lawsuits alleging price-fixing in the Brent market, provides what appears to be the most detailed description yet of the alleged manipulations and lays out a possible road map for regulators investigating the matter.
The traders who brought it — who include a former director of the New York Mercantile Exchange, or Nymex, one of the markets where contracts for future Brent deliveries are traded – – allege they paid “artificial and anticompetitive prices” for Brent futures. They also outline attempts to manipulate prices for Russian Urals crude and cite instances when the spread between Brent and Dubai grades of crude may have been rigged.
The oil companies and energy-trading houses, which include Trafigura Beheer BV and Phibro Trading LLC, submitted false and misleading information to Platts, an energy news and price publisher whose quotes are used by traders worldwide, according to the proposed class action filed Oct. 4 in Manhattan federal court.
The method of manipulation is a well-known one to regular readers: spoofing.
Over 85 pages, the plaintiffs describe how the market allegedly showed that the Dated Brent spot price was artificially driven up or down by the defendants, depending on what would profit them most in swap, futures or spot markets. They allege the defendants used methods including “spoofing” – – placing orders that move markets with the intention of canceling them later. Platts’ methodology “can be easily gamed by market participants that make false, inaccurate or misleading trades,” the plaintiff traders alleged. BFOE refers to the four oil grades — Brent, Forties, Oseberg and Ekofisk — that collectively make up the Dated Brent benchmark.
Ironically, spoofing is one of the primary mechanisms by which the HFT cabal has also benefitted, and been able to, levitate the market to ever record-er highs on ever lower volume. That, and Bernanke of course.
What do the plaintiff’s allege?
Kovel represents plaintiffs Kevin McDonnell, a former Nymex director, as well as independent floor traders Anthony Insinga and Robert Michiels, and John Devivo, who held a seat on Nymex and traded for his own account. The complaint says the plaintiffs are among the largest traders of Brent crude futures contracts on Nymex and the Intercontinental Exchange. The four, who don’t specify the amount they are claiming in damages, seek to represent all investors who traded Brent futures on the two exchanges since 2002.
The plaintiffs allege that in February 2011, defendants manipulated the trade of Forties-blend crude, one of four grades used by Platts to determine the Dated Brent benchmark, which represents the price of physical cargoes for delivery on the spot market.
Shell offered to sell shipments to keep the price of Forties “artificially low,” according to the plaintiffs.
Morgan Stanley (MS) was the only buyer for one of four such orders, or cargoes, totaling 2.4 million barrels of oil, the traders said. The Feb. 21, 2011, transaction was prearranged to set a lower price for Dated Brent, according to the complaint.
So how was such wholesale manipulation able to continue for over a decade? Simple – same reason why nobody “knew” anything about the Libor cabal until recently – alligned financial interests of every participating party, in this case Platts, a unit of McGraw Hill Financial – the same parents as Standard & Poors rating agency – and all the other major commodity players in the space.
“By BFOE boys,” the plaintiffs said in their complaint, “this trader was likely referring to the cabal of defendants, including Shell, which controlled the MOC process.” The claimants also alleged that in September 2012, Shell, BP, Phibro, Swiss-based Vitol and Netherlands-based Trafigura rigged the market through “a combination of spoofing, wash trades and other artificial transactions” in the Platts pricing process.
The defendants pressured the market downward at the start of the month by colluding to carry out irregular and “uneconomic” trades, according to the lawsuit. They drove prices higher later that month, it said.
The four traders said Platts was “reluctant to exclude” the irregular trades because BP and Shell are “significant sources of revenue” to Platts.
Or, said simpler, don’t ask, don’t tell, and keep cashing those checks.
Full lawsuit can be read below:
* * *
And in other news, the CFTC just charged DRW Investments with price manipulation by way of “banging the close” in Interest Rate Swap Futures Markets.
Defendants allegedly manipulated the IDEX USD Three-Month Interest Rate Swap Futures Contract by “Banging the Close”
The U.S. Commodity Futures Trading Commission (CFTC) today filed a civil enforcement action in the U.S. District Court for the Southern District of New York against Donald R. Wilson (Wilson) and his company, DRW Investments, LLC (DRW). The CFTC’s Complaint charges Wilson and DRW with unlawfully manipulating and attempting to manipulate the price of a futures contract, namely the IDEX USD Three-Month Interest Rate Swap Futures Contract (Three-Month Contract) from at least January 2011 through August 2011. The Complaint alleges that as a result of the manipulative scheme, the defendants profited by at least $20 million, while their trading counterparties suffered losses of an equal amount.
According to the Complaint, in 2010 the Three-Month Contract was listed by the International Derivatives Clearinghouse (IDCH) and traded on the NASDAQ OMX Futures Exchange, and was publicized as an alternative to over-the-counter, i.e., off-exchange, products. Wilson and DRW believed that they could trade the contract for a profit based on their analysis of the contract. At the end of 2010, Wilson caused DRW to acquire a large long (fixed rate) position in the Three-Month Contract with a net notional value in excess of $350 million. The daily value of DRW’s position was dependent upon the daily settlement price of the Three-Month Contract calculated according to IDCH’s methodology. As Wilson and DRW knew, the methodology relied on electronic bids placed on the exchange during a 15-minute period, the “settlement window,” prior to the close of each trading day. In the absence of such bids, the exchange used prices from over-the-counter markets to determine its settlement prices. Wilson and DRW anticipated that the value of their position would rise over time.
The market prices did not reach the level that Wilson and DRW had hoped for and expected, according to the Complaint. Rather than accept that reality, Wilson and DRW allegedly executed a manipulative strategy to move the Three-Month Contract market price in their favor by “banging the close,” which entailed placing numerous bids on many trading days almost entirely within the settlement window, none of which resulted in actual transactions as DRW regularly cancelled the bids. Under the exchange’s methodology, DRW’s bids became the settlement prices, and in this way DRW unlawfully increased the value of its position, according to the Complaint.
But the take home message here is simple: no matter the pervasive manipulation everywhere else, and seemingly by everyone including such titans of ethical fortitude as Steve Cohen, gold is not, repeat not, never has been, never will be manipulated.
ABOUT THAT SHALE OIL & GAS MIRACLE « The Burning Platform. (FUL ARTICLE)
Not a day goes by without a story in the MSM by some industry shill like Daniel Yergen about the imminent energy independence of the Great American Empire. Shale oil and gas will revolutionize the American energy prospects. We have hundreds of years of oil and gas under our feet. We will be a net exporter in the next few years. A glorious future awaits. Politicians tout the billions of barrels to be extracted from Bakken, Eagle Ford and the hundreds of untapped shale formations across the country. Wall Street puts out glowing investment analysis papers promoting the latest IPO. There’s just one little problem. It’s all hype.
Royal Dutch Shell is one of the biggest corporations in the world, with financial resources greater than 99% of all the organizations on earth. Their CEO probably knows a little bit more about oil exploration than the Wall Street systers and CNBC bimbos. His company has poured $24 billion into shale exploration in the U.S. It has been a huge failure. They have already written off $2.1 billion. They are trying to sell huge swaths of land in the Eagle Ford area. They are losing money in the shale oil and gas business. If Shell can’t make it profitable, who can?…
- Tight oil revolution may not be enough to secure energy security without Canadian crude (business.financialpost.com)
- Making money from the Eagle Ford Shale (peakoil.com)
- Shell Oil latest firm to quit Western Slope shale project (theoilandgasman.wordpress.com)
- Arctic Ice-Melt Cost Seen Equal to Year of World Economic Output – Bloomberg (bloomberg.com)
- Shell wins ruling on Arctic oil spill plans (fuelfix.com)
- UK failing to protect the Arctic from drilling, warn MPs (guardian.co.uk)
- Warning Over ‘Risky’ Drilling In The Arctic (news.sky.com)