Tom O’Malley, Harold Hamm, oil woes in the Middle East, Russian benchmarks…all in one day

A few observations from day one of the Platts Global Crude Oil Summit in London:

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One of the more interesting statements in the recent earnings call of PBF Energy was that the Tom O’Malley-led company might look to buy a refinery in California. It’s a locale O’Malley has operated in previously through Tosco and Premcor, but the state now has a full slate of greenhouse gas restrictions under AB 32, including the Low Carbon Fuel Standard.

But O’Malley, in a one-on-one interview at the conference, said it’s possible to succeed in the state’s business climate, as long as your eyes are open going in. “It’s a separate country,” he said. “That really is the way it operates, and you have to be sensitive to that.”

While the LCFS is “real,” AB 32 overall is “probably unworkable. There will be changes which I would call reinterpretations of what’s demanded.”

But there are two other supply factors involved in PBF’s consideration of a refinery purchase. He sees light crudes from the Midwest arriving there eventually (small quantities from PADD II have made it to California, according to this data). Those crudes will be “positive” under the LCFS, he said.

But that’s not the only factor. California has a great deal of untapped crude within its borders, and “the potential for more oil production in California is real.”

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Almost none of the speakers were optimistic about OPEC nations, except for Saudi Arabia, being able to reverse the slide in output that has bedeviled so many in recent years.

Iraq has strong prospects, according to several speakers, but David Fyfe, the head of market research and analysis for Gunvor, said the country getting to 5 million to 6 million b/d in the next 10 years “is pretty challenging.” He also said he expects to see Libyan production at less than 1 million b/d “for the foreseeable future”; the Platts monthly estimate for April had the country at less than 250,000 b/d.

Amrita Sen, the chief oil analyst at Energy Aspects, said it’s going to take about $1 billion to bring back the roughly 1 million b/d of output Iran has lost due to international sanctions.

On a more bearish note, however, Sen said if Iraq is able to tack on increasing amounts of output, then she doubts whether Saudi Arabia would be as accommodating as it has in yielding up market share to non-OPEC output, such as that out of the US. The difference, she said, is that the US is a high-cost country. But Aramco might be far less welcoming to a producing country with low costs…like Iraq. “I don’t think the market should be too complacent about Saudi Arabia,” she said.

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Andrey Bogatenkov, head of crude trading at Rosneft, tried to make the case that Urals in Europe and ESPO in Asia should be considered as possible benchmarks. Full disclosure: the Platts Dated Brent and Dubai assessments are now the benchmarks in those regions, so we have an interest in the outcome of this debate.

Bogatenkov reviewed familiar arguments: North Sea output is declining; Urals’ 35 API and sulfur content are “in the middle range” of what European refineries process; ESPO output is rising, as is its export capabilities.

But Bogatenkov pushed back against suggestions that benchmark status would be resisted for any crude under such tight government or government-owned company control. Urals isn’t just produced by Rosneft, though he named companies like Tatneft or Gazprom — both with deep state ties — as alternate producers. “A lot of work needs to be done,” he conceded.

Trying to argue that what is essentially a state-controlled crude flow should become an international benchmark, when that state is in the process of angering a pretty wide swath of the rest of the world, is either crazy or brave. Or maybe both.

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Back to O’Malley: he and Harold Hamm, who also sat for a one-on-one interview, have very different views about the future of tight restrictions on the export of US crude oil.

O’Malley and other PBF officials have offered up a somewhat qualified response to queries whether the company is leading an unofficial push against changing those restrictions. Refiners face other government limitations or mandates, like the Jones Act and the Renewable Fuel Standard. “Candidly, if we are removing the export restrictions on crude oil, clearly there’s no longer a security (of supply) issue,” O’Malley said, which should spur the removal of the Renewable Fuel Standard.

“If you removed those two things (RFS and Jones Act), we wouldn’t have a problem with the removal of export restrictions (on crude oil)” he said. But politically, O’Malley said there’s “no chance” the export restrictions are coming off. It could be perceived as a step that might increase the price of gasoline; no politician wants that on their record.

But Hamm said the opposite. Discussions with people in Washington have led him to conclude it will be lifted. But it might not be through legislation, he added. It could be done on a license-by-license basis, with the administration — now or in the future — looking favorably on one-off requests to be granted a license allowing exports.

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