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.

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.

Commodities trading: Not for the faint-hearted

(First published on Platts.com) Once the darling of hedge funds, commodities are now looking like a poisoned chalice. Last year, hedge funds such as BlueGold, which specialized in crude oil; Centaurus, in natural gas; and Fortress Commodities, across all raw materials, shut down. Several commodities fund of funds also closed last year after clients fled.

Commodities trading, it seems – and in particular oil – is not for the faint of heart. The field is littered with failed ventures and prison sentences.

International sanctions on exporting countries such as Iran can make trading crude an even more dangerous game. On May 9, the US Treasury said it was penalizing Sambouk Shipping for contravening these sanctions. Sambouk is allegedly associated with Dimitris Cambis, who, along with a network of front companies, was executing ship-to-ship transfers of Iranian oil to obscure its origin.

Getting access to less-than-transparent sources of oil, metals, grains and other commodities has become more hazardous as the US Department of Justice and Securities and Exchange Commission begins to aggressively enforce the Foreign Corrupt Practices Act (FCPA). Archer Daniels Midland became the first commodities trading house to suffer under it.

Because of the global importance of commodities such as oil and foodstuffs, the commodities markets have become a target for public criticism regarding manipulation, bribery and corruption.

So much so that Switzerland, the go-to location for commodities trading houses over the past ten years, is fretting that it will suffer reputational damage because of its newish role as a trading hub. Switzerland is home to the world’s biggest oil and other commodity trading houses, including oil traders Vitol, Glencore, Trafigura, Mercuria and Gunvor.

In a world where deep knowledge, hands-on experience and extensive personal contacts are necessary to do a deal, even those at the top of their game can get into hot water or lose money.

So it is not surprising when Wall Street and City of London hedge funds miss the boat. Trading paper contracts, such as energy futures and derivatives, can be difficult when you don’t have an insider’s view into the physical movements of oil.

What is surprising, perhaps, is that some of the mega-importers of oil have not succeeded in entering the oil trading game. After all, purchasing vast quantities of crude oil and products should theoretically teach importers some of the tricks of the trade.

But many new entrants apparently fail to grasp the basics of the oil trading culture. One recent example is PetroChina. It hired a small staff of traders and operations people in Houston in 2008, with the aim of increasing the Chinese company’s US trading volumes and growing the Houston office.

Last week, a team of six of its Houston oil traders (and reportedly some support staff) left the Chinese oil company en masse, allegedly because promised bonuses were not paid.

The oil trading game is difficult, dangerous and often loss-making. But there is one caveat that remains true: If a company wants its staff to take the risks involved, it should be prepared to make it worth their while.

Pickens, Chickens and Eggs: Using LNG as Transport Fuel

(Originally published on Platts.com) When T. Boone Pickens takes a notion to invest in something, he tries to make sure that everybody else takes the same notion.  So, when he announced that he was putting his money behind LNG filling stations in the US for long-haul trucks, people took notice.

But rhetoric is just the beginning. There is a huge need for the actual infrastructure to support the idea, commonly known as the chicken-and-egg conundrum. If Pickens — and Canada and China and Europe — build LNG-filling stations, will they (trucks, ships) come? They should. After all, gas is cheap, clean and plentiful. But support from government and industry is essential to get the egg to grow into a chicken.

Luckily, Pickens is not the first person to get behind the LNG-as-transport-fuel notion. It is happening all across the globe, with companies and countries pledging support for natural gas and LNG-powered vehicles and ships.

In Canada, the federal government is introducing regulations to discourage ships from using bunker fuel in the Great Lakes and within 200 miles offshore, which will encourage greater use of LNG in marine transportation, according to reporting from our Calgary correspondent Ashok Dutta. Trucks and even locomotives in Canada are also using LNG.

Shell is increasing its LNG-for-transport projects to include shipping the fuel to Canada and the US for trucking, and to Europe for marine use. The European Commission is proposing that LNG fueling stations be installed in all 139 maritime and inland ports on the Trans-European Core Network by 2020 and 2025, respectively.  Singapore plans to have LNG bunkering in place by 2014. And auto and truck engine makers such as Volvo and Westport are gearing up to make and market so-called HHP (high horsepower) engines which will use LNG as fuel.

But LNG is a tricky substance, needing cooling or compressing in order to move it, store it and use it. An LNG-fueled truck has to install a special thermal fuel tank to hold the super-cooled liquid. Also, special engines that run on LNG must be installed. So, is it worth the effort?

According to Ben Schlesinger, founding president of Benjamin Schlesinger and Associates energy consultancy, using gas for transport is a no-brainer. LNG is also clean; it eliminates 100% of sulfur and 20-25% of carbon dioxide emissions.

Also: “There is no price risk — it has been low for 20 years. It is easy to install in trucks. It is easy to hedge. The payoff for a vehicle is one year,” Schlesinger said at a lunch seminar on March 26 in New York (although other experts have put the payback period at 1-3 years).

The shipping industry also thinks that it is a good idea, chickens and eggs aside. At the Sea Asia CEO Roundtable last month, Precious Shipping’s managing director put it this way: “The fuel of the future is gas.”

So… LNG is clean, it is cheap, it is plentiful and industry and government are putting some commitment and money into the infrastructure. What more could anyone ask?  That it offers a new source of revenue for governments, perhaps?

The US state of Georgia has already thought about that, according to the local Times Herald.  On March 27, its Senate passed legislation that drivers who use LNG in their cars and trucks will not escape the state’s motor fuel tax. The bill had already been passed by the House of Representatives, and is now awaiting the governor’s signature.
Other states and countries will no doubt follow Georgia, making LNG as a transport fuel a win-win.

ICE -- the mouse that roared -- takes on the Big Board

    In the year 2000, a tiny little upstart energy exchange was born in Atlanta, Georgia. It began by building an electronic trading system for electricity and natural gas, something that was a popular idea at the time.

But it was – perhaps – before its time.

So the InterContinental Exchange cast its eye over the markets to find something with a little more liquidity. Maybe something that could benefit from its technological prowess. ICE spied a very interesting energy exchange on the other side of the Atlantic and engineered a surprising – to the City of London, at least - takeover.

     When ICE bought the International Petroleum Exchange in 2001, no one in the oil business could imagine life without the IPE floor. The idea of oil trading on an electronic exchange was considered heresy. “Impossible,” traders said.

     The thought was that since oil is the game of professional traders, and not mom and pop investors, the floor broker was essential to the game. Swaggering, hard-drinking and mainly Cockney in origin, the IPE floor brokers were considered a permanent fixture in the business.

     IPE’s own automated trading system had gone through many technology iterations and was never up to the task, in many traders’ opinions. So, like a lion stalking the weakest wildebeest, ICE swooped in.

It transformed the International Petroleum Exchange, second only to the New York Mercantile Exchange in terms of energy futures trading, seemingly overnight--from an open outcry “pit” into a sophisticated electronic trading venue. Cockney brokers out, computers in.

     The IPE’s membership and operators should have learned a lesson from their LIFFE brethren, whose massive open outcry trading floor was closing down at the time - pit by pit. LIFFE’s main competitor – Deutsche Borse, had gone electronic with its derivatives trading and was walloping LIFFE. LIFFE’s state-of-the-art floor closed doors in November 2000, while its LIFFE Connect electronic trading system went from strength-to-strength.

     The LIFFE exchange itself sold to Euronext, eventually ending up in NYSE’s hands along with the very valuable acquisitions LIFFE had made along the way. This included the London Commodities Exchange, where softs such as coffee, sugar and cocoa were – almost exclusively – traded.

But ICE’s CEO Jeff Sprecher was not daunted by his competition. His dogged determination to make all things electronic took ICE into clearing in a big way, adding the capacity for clearing OTC credit default swaps, and into diversifying its products offerings. ICE’s dominance in markets from oil to interest rates and credit derivatives prompted NASDAQ in 2011 to choose ICE as its partner in its failed bid for NYSE.

     The fact that ICE persevered with its electronic trading platform, making it ever-faster, offering clearing electronically – is probably why it had the money and the ability to buy the venerable New York Stock Exchange and its many acquisitions. I am sure that during the due diligence process, ICE had a good look at NYSE’s hodge-podge of trading systems and infrastructure.

     NYSE members and management had initially resisted the seismic shift to electronic trading, preferring its image as the bastion of Wall Street with its colorful floor brokers and trading pits and specialists. It adopted a hybrid model of automated-cum-open-outcry trading, buying--and then largely ignoring--state-of-the-art trading systems such as ARCA. Aggressive all-electronic competitors such as NASDAQ and newcomers including BATS stomped all over NYSE’s model, gradually eating away at the Big Board’s once-dominant market share.  

     ICE was lurking in the underbrush. Sprecher’s strategy of diversification meant that he needed to further integrate other asset classes, which – once siloed were now tightly correlated with oil trading. Equities, interest rates, foreign exchange, and agriculturals such as corn and sugar were suddenly noticeable as a necessary adjunct to oil futures and swaps trading.

     Limping from its market battering by electronic competitors, NYSE Euronext was the weakest wildebeest.

     Since 1792, when it was formed under a buttonwood tree on Wall Street, the New York Stock Exchange has captured the imaginations of people around the world. It has attracted some of the best and brightest young people to work on Wall Street, conjuring up an image of stolidity and grace.

     Now, although the NYSE brand will remain, ICE will become the top dog. New York City must be stunned that it has lost its bulwark stock exchange to a jumped-up little technology upstart from Atlanta.

A Middle-Aged Woman Moves to New York

  If you are waiting for the punchline - I'm it. In the autumn of my life I upped sticks and moved to Manhattan. (Husband and cat to follow soon.) My friends and most of my family think I am nuts.
  Certainly the moving house - twice - and going back to work (more than) full time was a wrench. My time is no longer my own. My home is not my own. I can't find my winter clothes, and I can't seem to get my bills paid on time. Sleep is erratic. And some woman (has to be) has been trying to grab the attention of a sleeping man (has to be) who is double parked outside her VW Beetle (I recognize the horn) since 5:30 am.   Otherwise I think it is working out OK.
  I often heard older friends of mine in London say "I have one more job left in me" and I think that is what has happened here. I was not ready to retire, which is what freelancing from a leafy New England small town felt like to me.
  But retirement is one of the reasons I am here in NYC working full time. As I rush past middle age it becomes ever clearer that I need a lot more money to realize my retirement goals. Which are pretty lofty: a flat in Paris for city/culture/shoulder seasons, a house in a warmer climate (Spain? Florida?) for winter, and a (bigger) house in Maine for summers.
  Then yesterday I read an article in the Wall Street Journal entitled The Let's-Sell-Our-House- And-See-the-World Retirement by Lynne Martin. She and her husband sold their California home and are now spending their retirement traveling from country to country, staying enough time in each one to experience it fully. They stay in flats or houses that they find on Homeaway.com or VRBO.com. They cook and shop and go to museums, and they soak up the culture of each place they stop. Wow.
   So I have a new plan, thanks to the Martins. I won't forgo a house or two, as I plan to have them paid off by then. But any extra cash I get I will save for travel, going into a special retirement travel fund - for rent, flights, food, fun. We will spend a few months in every place we want to visit, living like natives and learning as much as we can. Suddenly retirement doesn't feel like death to me. And it makes working (more than) full time even more fun.

Why Working from Home Does Not Always Work

   I am not the world's most sociable person. I don't like going out for dinner. I don't do parties as a rule. And I get irritable when my house is full of people for more than a few days. So why is it that what seems to be the ideal job for me - working in solitude from home - is far from ideal?
   I moved to a small port city, population 17,000, in Massachusetts a few years ago. After living and working in London for the better part of 20 years, this meant that I was moving to an area where I knew no one, had no work colleagues and no family. My husband had secured a great job in a NH town 30 miles north, where he worked with one of his best friends and found an instant circle of like-minded colleagues.
   Luckily I had already established myself in freelance writing, so I reached out to colleagues and friends and Wall Street types and got contracts for several financial and technology publications, plus I got a lucrative PR gig with a large UK news agency. I worked from 6:30am until 4:30pm most days, with a one-hour gym break or walk mid-morning. The money was pretty good and it was satisfying to see that the more I wrote the more I got paid. I liked the big  house, two cars and clean air but I missed London, I missed my friends. Most of all I missed going to work, where there would be banter and ideas flying and talk of global events or travel or the financial markets.
   To help compensate I started a social group of local writers. As I write this we have about 40 members; usually 15-20 would show up to the "potluck" dinners that they all seemed to prefer (rather than meeting in restaurants). I made some friends. I learned a lot about writing and publishing books, something I had always yearned to try. But there was a major flaw. Few of the group had the vaguest notion of what I do for a living - which is writing about issues and trends in financial markets, energy and technology. I would go so far as to say they disliked hearing about it, especially if I mentioned places on the globe I have travelled or "faces" I have met in the course of my work.
   Then I discovered a fabulous writers' workshop in Boston and signed up for course after course, where I received encouragement and learned about writing a novel.  I finished my novel. And revised it. I met agents at a writers' conference who were encouraging. But I just couldn't drop my paying work to do the work necessary to polish it. Plus - gasp - I found it boring. Re-writing and revising the same 90,000 words over and over again versus writing a hard-punch article about high speed trading? Or a cleverly funny blog about self-learning algorithms? Or a straight-forward story about oil prices? The book lost.
   Gradually I realized that even the stories that I loved writing were getting harder and harder to write. I had no context. I was not going to conferences unless I paid for them. I didn't meet anyone in my line of work. Phone calls helped, but being out of the line of fire was really dulling my senses. I was working alone, in a quiet and sleepy little town. My cats were my only companions during the workday. They don't know much about finance.
   So when a job at my old alma mater McGraw-Hill was posted on Gorkana, I did not hesitate to apply. It offered a newsroom, a team, offices around the world, a topical subject matter. I got the job, and had to speed up my planned move to NYC. So with much organization and money spent I am on my way to New York on Sunday. I don't intend to work from home again for a very long time. Maybe when I retire.