Tuesday, July 8, 2014

Greed and the Bakken: Explosive Oil Needs Stabilizing

Today's Wall Street Journal article about Bakken crude oil production makes my blood boil. I have been following the crude oil quality issue since the Lac-Megantic explosion last year, trying to get Platts reporters (when I was editor there) to find out why it was so explosive. They failed, whereas the WSJ investigation has unearthed some very disturbing facts.

From today's issue:

When energy companies started extracting oil from shale formations in South Texas a few years ago, they invested hundreds of millions of dollars to make the volatile crude safer to handle.
Now the decision not to build the equipment is coming back to haunt the oil industry as the federal government seeks to prevent fiery accidents of trains laden with North Dakota oil.  
In North Dakota's Bakken Shale oil field, nobody installed the necessary equipment. The result is that the second-fastest growing source of crude in the U.S. is producing oil that pipelines often would reject as too dangerous to transport.
North Dakota shale oil contains 33% light ends - the flammable stuff like gases and gasoline. In other words, 33% of a barrel of oil from the Bakken is highly flammable. It also has a high Reid Vapor Pressure (again, thanks to WSJ's excellent investigative reporting), making it one of the most explosive barrels of oil on the planet. Around one million barrels per day comes out of the Bakken and makes its way to refineries around the USA and Canada through pipelines, barges and - mainly - by rail (more than 60% currently moves by rail).

Only one stabilizer - which would remove the most volatile gases - is slated for the Bakken. Why? Money. Stabilizers are expensive; the ones built for the Eagle Ford shale area in Texas cost producers hundreds of millions of dollars. So far, Bakken crude has been one of the best deals going for American (and to a lesser extent Canadian) refiners. It is cheap to produce and cheap to move by rail.  Making Bakken more expensive to produce would hit the American consumer, say refiners and politicians.

Who wants to add to the costs by adding stabilizers? I would say that the next group of people to experience a crude by rail crash and fireball in their town might think it worthwhile. I would also say that after the next rail crash and fire, lawsuits could very well target Bakken producers. And a multi-billion dollar lawsuit could very well make adding stabilizers look cheap.

Friday, May 2, 2014

Get it Through Your Heads: U.S. Crude Oil is Explosive

   The latest derailment of a train carrying crude oil -- which exploded violently and caught fire in Lynchburg, Virginia -- proves yet again that U.S. crude is no average oil. 
   On the whole, crude oil does not explode, nor does it easily catch fire. But newer sources of American crude, particularly from the Bakken field in North Dakota, are proving to be an unwelcome anomaly. 
   Crude oil coming from the Bakken, and also Eagle Ford in Texas, is of high quality. It is very low in density and sulfur. But that does not necessarily make it explosive. 
   After the crash and explosion that killed 47 people in Lac-Megantic, Quebec last year, I urged reporters at Platts (where I was an editor) to dig deep and find the specifications for Bakken from their sources. None of their sources would release any but the most rudimentary of specs. 
   Then analysis done by the Wall Street Journal showed that Bakken crude has an unusually high Reid Vapor Pressure, which is a measurement of volatility. As there are no laws mandating RVP tests for crude, the combustible nature of Bakken and Eagle Ford was largely ignored. Regulators were slow off the mark to test the quality of the oil being shipped by rail. Oil producers and refiners -- in their haste to sell and refine these cheap feedstocks -- often misclassified them as less hazardous than they really were. 
   Because the infrastructure supporting oil transportation in the U.S. is sorely substandard, with barges and existing pipelines overbooked (and proposed new pipelines like Keystone XL unlikely to be built), the U.S. and Canada too quickly embraced moving crude by rail car. They neglected to test crude quality from newer U.S. fields and failed to strengthen safety regulations until after several fiery crashes. They allowed inferior quality rail cars known as DOT 111s to continue to be used, even as they proved themselves to be very good moving firebombs. 
   Now, however, responsible producers and users are beginning to take steps of their own to try and prevent further accidents, and avoid the wrath of the law and punishing insurance claims. Canada will phase out the older cars by 2017. U.S. oil distribution company Global Partners just announced that it would immediately switch to newer specification tank cars called CPC 1232, trying to head off New York Governor Cuomo's move to slow down a Global oil by rail development in Albany. 
   Oil producers, gatherers, traders and end users surely knew the kind of oil they were dealing with, yet they put it onto rail cars that were not fit for the task. The sooner DOT 111s stop carrying oil the better. And the sooner railway operators and regulators get a grip on crude oil, its specifications and flammability, the sooner these accidents will stop happening.

Wednesday, April 2, 2014

The High Frequency Trading Debate is Not New

I love Michael Lewis. He is the writer I most want to be. I live in his world, I am a journalist and have been a broker and am married to a trader. I know stuff. But I am not Michael Lewis. He is a brilliant writer. I am a hack and part-time flack. HOWEVER, I take exception to the recent the fuss over his book "Flash Boys." I keep hearing on CNBC that NO ONE knew how big the problem of high frequency trading was. I did. Here is one of the tongue-in-cheek blogs I wrote about the issue - in September, 2010.
In the 1960's American sitcom Get Smart there were two opposing agencies - CONTROL and KAOS. At CONTROL you had The Chief, Maxwell Smart (Agent 86) and Agent 99 as the good guys. KAOS was the bad guys of course.
In today's seemingly perplexing world of electronic trading The Chief appears to be played by U.S. Senator Charles Schumer. The well-meaning but hapless Maxwell Smart is played by U.S. Securities and Exchange Commission Chairman Mary Schapiro. (The SEC staff can take turns as Agent 99.) KAOS is represented by high frequency and algorithmic trading.
The Chief (Schumer) made a strong suggestion (order) to regulators to get a grip on KAOS, by looking into slowing down some high-speed trading at times of market stress and investigating manipulative strategies including quote stuffing.
Agent 86 (Schapiro) got on the case and the investigation is underway. One telling statement by Schapiro this week alluded to the algos that automate execution when she said that regulators need to decide whether they "are subject to appropriate rules and controls."
"An out-of-control algorithm not only can cause serious losses to the firm that uses it, it can also cause severe trading disruptions that harm market stability and shake investor confidence," Schapiro said in the statement. She added that the SEC will review market fragmentation and the role of dark pools of liquidity that fall outside the traditional market structure.
“High-frequency trading firms are subject to very little in the way of obligations,” Schapiro said at an event held by the Security Traders Association in Washington. “We will consider carefully whether these firms should be subject to an appropriate regulatory structure governing key aspects of their market behavior, including quoting and trading strategies.”
The SEC may also need to peer a little more closely into the market structure that preceded all of these issues. A third of TabbFORUM readers polled said that the Securities and Exchange Commission had something to do with the May 6 flash crash: 31% of respondents to the poll blamed the crash on Reg NMS. (Still, 29% said it was “something else." Cue Siegfried - the Vice President in charge of Public Relations and Terror at KAOS).
All of this investigating is good news, as long as moderation is the byword for resolution. If indeed your opinion is that HFT and algos are run by a shady KAOS-style cartel on Wall Street then the more controls the better. It is my opinion that KAOS-as-HFT is a figment of non-financial industry scaremongers, and that a lighter touch is needed.
CONTROL can best come out on top if it deploys the proper tools: pre-trade risk management and controls, real-time risk management, real-time market monitoring and surveillance. All of these will help to stop KAOS in its tracks before it has the chance to throw another bomb into the room (flash crash...get it?).
I knew about HFT. The SEC knew about HFT. The trading firms and exchanges and brokers knew about HFT. And everyone knew it was a bomb waiting for a detonator. I just wish I had written the book!

Thursday, March 27, 2014

Banning crude by rail in North America

When a train loaded with crude oil from North Dakota rolled away from its night-time berth near the town of Lac-Megantic, Quebec, no one would have predicted the scope of its devastation.
The July 2013 derailment and explosion left 47 people dead, a town decimated and the fires took days to extinguish. Rail cars were piled up like charred sausages from the grill scraped off a plate into the rubbish bin; the burnt remains of a BBQ gone wrong.  
Regulators and the oil industry were astonished -- crude oil was not supposed to explode. But Lac-Megantic was only one example of American crude oil from North Dakota doing just that. 

Sunday, October 6, 2013

Commodities: Private equity takes over where banks leave off

(Originally published on Platts.com)
Just as the US oil industry starts to get really interesting, banks are being forced to leave it.
New regulations and over-zealous government, nervous over the presence of banks in physical oil and commodities markets, are pushing the banks to shed their assets—and making room for other moneyed institutions to jump in.
Profitable opportunities are visible, with production soaring as the US winkles out tight oil and gas. E&P beckons investors, as do infrastructure plays such as rail terminals and blending facilities.
But banks are wary of making new investments and are seriously considering sloughing off the ones that they already have.
The US Senate Banking, Housing and Urban Affairs Committee is looking into whether large merchant banks, such as JP Morgan, should be allowed to own or operate oil terminals, pipelines, or warehouses that hold vast amounts of aluminum and other businesses that deal in global commodities.
JPMorgan Chase is selling or spinning off its entire physical commodity trading operations, as a Platts Oilgram News story reported. The bank emerged over the past few years as a major commodities trader, along with other US banks as Morgan Stanley, Goldman Sachs, Citigroup and Bank of America Merrill Lynch.
So, as the banks begin to shed their trading and physical assets, private equity firms are quietly sneaking in to take their place, and one of them at least is on the verge of an IPO in London.
Riverstone Holdings, an American private equity fund with over $24 billion committed to E&P, midstream and power investments, is planning an initial public offering for Riverstone Energy Ltd. The company will launch in late October on the London Stock Exchange, and is expected to raise up to £1.5 billion ($2.4 billion).
Riverstone has already gone where banks (now) fear to tread, taking ownership in refining maverick Tom O’Malley’s PBF, UK shale gas company Cuadrilla, and US deepwater E&P company Cobalt, among many others.
Perhaps Riverstone’s founders, both from Goldman Sachs, had inklings that commodities would be yanked away from investment banks once they became Fed-controlled “real banks.” After all, banks owning oil storage, and refineries — and trading the oil — when the market was rising was never going to look altruistic.
But from a private equity firm, no one expects altruism.   
Riverstone is just one of many that are investing heavily in energy assets. Denham Capital, which flies under the oil industry radar, has $7 billion under management in oil, gas, power and renewable funds. Billionaire Mikhail Fridman’s L1 Energy Fund will invest $20 billion (that his Alfa Group made from the TNK-BP sale in March this year) in oil and gas projects. And these are just the tip of the private-equity-in-energy iceberg.
According to Forbes, private equity accounted for 10% of 2012 energy buyout deal value worldwide. And 83% of energy-related buyout deal value was for oil and gas properties—nearly half of them in North America. (This included 2012’s biggest buyout, Riverstone Holdings and Apollo Global Management’s $7.2 billion acquisition of EP Energy, Forbes said.)
So, is this a new trend or one that is destined to become dull and mainstream? Is this a case of the bandwagon having sailed past already?
According to fund management firm Hamilton, in an article in Pensions & Investments magazine, limited partners are beginning to question if there is too much private equity capital chasing the energy sector.
“The simple answer is: No,” it said. “The size of the market, the long-term growth prospects and the complex nature of the energy value chain will continue to present investment opportunity. The massive capital spending requirements to meet expected global demand dwarf the amount of private equity capital available today.”       

Wednesday, September 11, 2013

Oil investors spurn Mexico and Latin America

(This blog originally appeared on Platts.com)   
     Everyone knows there is a lot of oil in Mexico. Venezuela has its fair share, as do Brazil and Argentina. There’s even more oil to be found in Ecuador, and the Falklands is having its day in the sun. But the news about oil exploration and production investment today is predominately focused on the US and Canada. Why is that?
      Decades of nationalistic sentiment have created a no-go area in Mexico and Latin America, with foreign nationals and major oil companies mostly conspicuous by their absence.
      When Enrique Pena Nieto was elected last year as Mexico’s new president, he pledged to reform the oil industry. Last month, he proposed that Pemex, the state oil and natural gas monopoly, would be able to launch contracts on the basis of profit-sharing rather than production-sharing.  But then the analysis started coming down, and it wasn’t good.

Tuesday, July 9, 2013

Lac-Megantic oil-by-rail crash could be rail's Exxon Valdez

     As the smoke clears in Lac-Megantic, Quebec after a runaway train packed with crude oil tankers crashed, the oil industry is coming to terms with a business that has perhaps grown too far, too fast.
     The Lac-Megantic accident is shining an unwelcome spotlight on the lack of regulatory oversight on oil by rail in both the US and Canada. The fact that the rail cars (belonging to the Maine, Montreal & Atlantic rail company) that crashed and exploded were considered unfit to carry hazardous materials sharpens that focus.
     Getting landlocked crude out of newer fields in North Dakota, Canada and other far flung parts of North America has become an obsession with producers, traders – and with refiners, looking lustfully at the cheaper feedstock.
     The oil rush has changed the face of rail in North America. In a country where passenger and cargo-bearing rail was largely replaced by the car and large 18-wheel trucks half a century ago, the speed with which new railroad lines, railcars and loading facilities are being built is simply astonishing.
     Today around one million barrels per day of crude oil is moved via rail across the US and Canada. To put that into perspective, it equates to more than the total output of the UK North Sea, which fell below 1.0m b/d last year. Or roughly to four VLCC’s worth of crude oil every week. In other words, it is a lot of oil.
     And this is set to grow. In the US, crude by rail shipments are expected to reach to near 1.10 million b/d at the end of 2014, up from about 718,000 b/d this month and about 156,000 b/d in January of 2012, according to Bentek Energy, a division of Platts.
     The Railway Association of Canada estimated that as many as 140,000 carloads of crude, totaling about 91 million barrels, will be shipped on Canadian tracks this year, compared with 500 carloads, or about 325,000 barrels, in 2009.
     The headlong dive into crude by rail may have just been stopped short by the Lac-Megantic incident. And, just as the Exxon Valdez oil spill in Alaska in 1989 spelled the end of single-hull oil tankers coming to the US (and banned them worldwide in 2010), the Lac-Megantic crash would spell the end of using DOT-111A railcars. And it could herald a new rash of regulation for the rail industry.
     A US National Transportation Safety Board study in 2012 said that 69% of tank cars are DOT-111A. In Canada, these are known as CTX-111A, and comprise 80% of the fleet, according to Canada Transportation Safety Board’s chief investigator Donald Ross.
Ross said that changes as a result of the MM&A investigation could include thicker steel or shields for the tank cars. The American NTSB had already changed the specifications of DOT-111 from October, 2011 to include thicker shells and a ½ inch thick head shield. But there is no rule on retrofitting existing cars, which have a long service life.
     Like the single-hull tanker post-Exxon Valdez, DOT-111As could be the next casualty of the oil rush in North America.
     But there are other issues raising their ugly heads, including the state of some of the railroad tracks around both countries: While the oil industry is spending billions on railcars and loading/unloading facilities, who is spending the money to maintain and upgrade the railroads?
     As Avrom Shtern, a rail-transport policy representative with Montreal-based Green Coalition, said in Oilgram News July 9: The Canadian government's budget cuts have left the rail industry to police itself. "That's unacceptable. You can't just write rules and expect the railways to police themselves," he said.
     Also, questions over the capital adequacy of smaller gathering and distribution companies such as World Fuel, which owned the oil on board the MM&A train, and others are rife. Will they have the financial stability to survive a lawsuit?
     The crash was only a few days ago, so most of these questions will be answered over time. But one thing is for sure, crude by rail has come a long way fast. But the Quebec accident could slow the pace and the way in which the industry grows going forward in both Canada and the US.