Refining margins and crude price

Linking to a comment exchange with Geoff Styles in response to his recent post on the oil earnings backlash. My initial reaction was that it seemed like Geoff was implying that refining businesses are structurally short crude and therefore oil majors are not as long oil as we think they are.

I agree with you and Robert that the majors are price takers, and accusations of "gouging" are generally misguided, but it's misleading to imply that they are not way long crude price. High prices are great for upstream and generally passed through by refining (unless there's some evidence that refining margins shrink when crude prices rise?), so on net a clear plus for the integrated majors.

In brief, I ran a few quick correlations based on this refinery margin data, and came out with R squareds of approximately zero. This would indicate no consistent relationship (i.e. full price pass-through over time), although I recognize that the analysis is crude and I'd welcome any improvements or corrections.

Also keep in mind that while refining margins don't rise and fall with crude prices, it's a highly cyclical industry, and through-cycle returns are pretty thin. Not a place I'd want to be sinking a lot of capital right now, especially with lots of NOCs building refinery capacity for reasons often more related to jobs than pure financial returns.

More money on unconventional gas

Schlumberger’s $11bn acquisition of Smith International is big news in the oilfield services sector, and Cyrus Sanati thinks it’s all about unconventional gas:

“There is I don’t think any doubt that long-term shale gas is going to be one of the big new energy sources both in the U.S. and overseas,” Andrew Gould, Schlumberger’s chief executive, said in a conference call with analysts on Monday. “Smith’s capacity to serve that market in North America is of great interest to me.”

Like Exxon’s purchase of XTO, I suspect that the real long-term value here is in exporting unconventional gas technology outside North America, where its potential has barely been tapped. And as a service provider, Schlumberger may be even better positioned than an oil major like Exxon, given the increasing clout of national oil companies, resource nationalism and the increasing difficulty of acquiring underlying resource rights in many countries.

Not so fast

Looks like Exxon’s Jubilee bid isn’t a done deal yet, with talk of a counterbid from China’s CNOOC and discontent within the Ghanaian government and national oil company.

China National Offshore Oil Corp. is in advanced talks with the Ghana National Petroleum Corp. to make a rival bid challenging Exxon Mobil Corp.'s $4 billion offer for a stake in a giant oil discovery off of West Africa, said people familiar with the matter.

A GNPC-Cnooc bid, which one person said "will be competitive to what Exxon has offered," reflects both the Chinese government's desire to secure access to more of the world's oil and the Ghanaian government's to be a larger participant in the discovery, known as Jubilee.

News of the Exxon agreement infuriated the Ghanaian government and GNPC, which had been trying to negotiate to increase its 13.8% stake in the field. "I don't see the Exxon-Kosmos deal as done," said GNPC chief executive Thomas Manu said in an interview this weekend. The Ghanaian oil minister also expressed his unhappiness with not being notified that Kosmos had made a deal with Exxon and said he believed the country had the right to block the offer.

Kosmos thinks it can sell to anyone, but even with Ghana attempting to hold itself to a higher level of sophistication and investor friendliness, it would be unwise to count out the host government so soon. (That said, Blackstone and Warburg will probably still make out like bandits.)

This is also getting boringly repetitive, but China is really leaving no stone unturned in its quest to secure resources in Africa, Guinea being the latest target (or beneficiary, depending on how you view it and whose interests you're rooting for).

Sinopec to buy Addax

If I'm not mistaken, at $7.2 billion this would be the biggest upstream petroleum deal yet since the downturn... and while it's only one data point, it's hard not to read into the fact that it's a national oil company doing the buying. They have certainly been looking...

Update: Jay Yarow points out that "this is the biggest takeover of a foreign firm in China's history."

Update: Dealbook clarifies, technically China's 2nd-largest deal ever - the Alcoa/Aluminum Corporation of China JV to acquire 12% of Rio Tinto last year was bigger, at $14.3bn.