Guest Post by Oxford Analytica
National oil companies (NOCs) will play an increasingly important role in all areas of the oil and gas sector. Many are well funded, technologically capable and forward-looking. The technological gap between IOCs and NOCs will continue to erode in the foreseeable future. NOCs will retain the advantage of state backing, and their inroads into the refining sector will be supported by demand growth from non-OECD countries.
All top ten oil companies in the world, in terms of oil equivalent reserves, are state-owned and from OPEC members, according to the Oil & Gas Journal. However, many have scarce funds due to claims made on them by the state. In addition, with such large reserves at hand, some feel little need to seek foreign assets. However, such national oil companies (NOCs) are a heterogeneous group, and many have international ambitions:
- Malaysia’s Petronas, Brazil’s state-controlled Petrobras and Russia’s state-owned Gazprom and Rosneft are all technically proficient, and backed by developed domestic oil services sectors.
- These companies have recently been joined by a new breed of NOCs from net importing countries, such as China, India and South Korea, in the search for foreign assets.
There is an identifiable successful model for NOCs, which involves operational independence from government, retention of profits for investment, and a strong focus on technology.
International oil companies (IOCs) are being challenged in the downstream sector. NOCs’ new refinery operations are well placed geographically to capture demand growth in developing economies, while OECD refinery operations face falling demand in the long-term, at least from their domestic markets. Capacity closures already are taking place, reducing IOC share of this sector worldwide.
NOC emergence. The five-year escalation in oil prices to the summer 2008 saw a number of related trends, namely:
- state intervention to increase governments’ share of the price windfall, either through harsher tax regimes, or more directly, expropriation;
- rising competition for international oil and gas assets from a new class of NOCs, notably Asian, driven primarily by supply security concerns; and
- increased international ambition on the part of NOCs from traditional exporting countries, particularly the more technically proficient ones, supported both by state backing and their own higher revenue streams as a result of oil price bonanza.
These factors led to rapid asset price inflation, also fuelled by rising commodity prices, and constriction in international assets available. The result can be seen in the thin margins foreign companies were prepared to commit to when world-class opportunities arose.
Competitiveness. Some oil and gas producing regions have strong NOC presence, though IOCs remain highly competitive:
- Libya. The three initial Libyan development licensing rounds since 2004 were largely dominated by IOCs. Yet the fourth, focused on exploration, had NOCs as the major winners, especially Algeria’s Sonatrach, Oil India, IndianOil and Gazprom
- Brazil. Brazil is a special case, as the discovery of multi-billion barrel pre-salt fields has prompted changes to the way new licences will be awarded, with significantly more control handed to Petrobras. However, it was mainly IOCs — ExxonMobil, Spain’s Repsol, the British Gas (BG) Group, Chevron and Portugal’s Galp — that secured licences prior to these discoveries.
- Caspian. In the Caspian, IOCs have been notable in their participation in large projects, such as the BP-led Azeri-Chirag Guneshli oil development and the giant Shah Deniz gas field, where BP is also the operator. However, China National Petroleum Corporation (CNPC) also has a strong presence in the region, having made large investments in Kazakhstan and Turkmenistan.
- Iraq. In Iraq, foreign NOCs are very well represented among the winners in the first post-war auctions, started in 2009. Bidding in the country showed IOCs’ increased willingness to team up with NOCs in consortia for large projects.
- Venezuela. In Venezuela, the recently announced awards for the development of new heavy oil projects in Carabobo also saw IOCs and NOCs successfully bidding together..
Technorati Tags: BP, ExxonMobil, national oil companies, NOC, oil-&-gas, Royal Dutch Shell
Guest Post by Philip H. de Leon of OilPrice.com.
Gazprom faces regular opprobrium for its bullying ways of using energy as a pressure and political tool. Seen by some, mostly Russians, as the symbol of a successful and strong Russia, others see it as a dominating juggernaut, economic right arm of the Kremlin implementing, or should we say, imposing its policies by using energy as a weapon.
Just like Louis XIV used to say “L’Etat c’est moi” (I am the State), Gazprom could say the same in light of its commercial power and the unconditional governmental backing it enjoys. However, just like Monsanto generates passionate debates with its genetically engineered seeds, Gazprom’s activities cannot be simply labeled as right or wrong and subject to final judgments.
Though far from being an angel, Gazprom is not necessarily a demon either. It is easy to point fingers and to forget that oil & gas is a merciless sector where every major is trying to position itself for the next 20 to 30 years and secure predictable supply and demand at home and abroad. After all, large Western energy companies were not born nice and proper. It took decades for codes of conduct, tacit or written, to be adopted and enforced. It is also easy to forget that all energy companies have in mind the interests of the country they come from.
Why would it be any different for Gazprom? And why should Gazprom take upon itself to act differently if it can get away with what it does and not be sanctioned by its own government?
The main issue with Gazprom could be summarized by using the famous quote of U.S. Secretary of Defense Donald Rumsfeld who said about Iraq “there are known unknowns. That is to say, there are things that we now know we don’t know. But there are also unknown unknowns. These are things we do not know we don’t know.” Because of all the things we do not know about Gazprom, sensitivity to what Gazprom does is greater because ultimately what it decides to do today and how it does it will impact energy supplies for years to come and how the game is played.
The lack of information on the personal relationships between the business and political world, on its exact ownership structure, on the exact identity and role of business intermediaries, on the flow of money through a labyrinthine network of offshore and shell companies, and on the overall exact modus operandi of Gazprom is what leads Gazprom to be subject to greater scrutiny and interrogations. It efforts to maintain an export monopoly for gas flowing to Europe and Asia at a huge cost, possibly over-committing dwindling resources at a time of lower energy prices and lower needs from consumers is another concern as would happen if Gazprom was to fail?
Gazprom: The Lord of the Rings
Gazprom is a behemoth: it is Russia’s largest company, state-controlled and the world’s largest gas producer. Engaged in gas exploration, processing, and transportation, it operates an extensive pipeline network stretching thousands of kilometers across Central Asia and Europe. Gazprom ranks #22 in the 2009 annual ranking of the world largest corporations published by Fortune magazine and has 456,000 employees. With close ties to the Kremlin – President Dmitry Medvedev used to be chairman of Gazprom’s board of directors – and accounting for about 25% of Russia’s federal tax revenues according to pre-crisis data, Gazprom has a unique leverage and has no qualm about flexing its muscles.
Gazprom has an uncanny ability to do things that are morally reprehensible by Western standards and to be oblivious to the critics that ensue. Image building and public relations are concepts that have not sunk in, even more so as Russians have the deep belief to be justified in their actions, be it with its dealings with Chechnya or Georgia, or when cutting gas to Europe in January 2009. Russians also like to push situations to the limits, just like driving without seatbelts and passing cars with incoming traffic on an icy road.
Gazprom and Ukraine: who’s bad?
Russians are full of contradictions, and so is Gazprom. One can only be amused to read its mission statement extracted from its Gazprom in Figures 2004 -2008 and 2008 Annual Report that state: “OAO Gazprom mission is to ensure an efficient and balanced gas supply to consumers in the Russian Federation and fulfill its long-term contracts on gas export at a high level of reliability.” That did not prevent Gazprom from bluntly cutting the gas supply to Ukraine in January 2009 over non-payment issues and quantities to be supplied, impacting 18 European countries in the mix in the midst of a cold winter.
The image of Russia as a reliable partner has been severely damaged, even more so as this was not the first time gas supply to Ukraine was cut like in January 2006. Even the Soviet Union did not tamper with gas supply, knowing how important the energy cash machine was to its economy and survival. Those cuts prompted (i) end-user countries to find alternative suppliers and (ii) producing countries that rely on the Gazprom pipeline network, to find alternative export routes for their existing clients, in addition to finding new clients.
In this context, the Nabucco Pipeline that bypasses Russia gains momentum while Turkmenistan can sigh with relief with the new Central Asia – China Gas Pipeline inaugurated in December 2009 that takes gas from the Caspian Sea via Uzbekistan and Kazakhstan to China.
Russia makes no efforts to work on its international public image but Russia and Gazprom would have benefited from elaborating over the payment mechanisms in place with Ukraine. For many years, Ukraine has enjoyed discounted prices, significantly below world market prices. It also has resisted price adjustments sought by Russia. Those sweet deals have been detrimental to Ukraine and to the competitiveness of its industry. According to the European Bank for Reconstruction and Development (EBRD) “Ukraine is one of the most energy-intensive countries in the world and is only one-third as energy efficient as the average European country.”
The following facts would have been good to communicate to show that Russia and Gazprom were sensitive to the challenges that gas price increases represent for Ukraine, both economically and socially. At the end of 2008, Ukraine was enjoying heavily discounted prices and resisted Gazprom’s price adjustment efforts, despite a very preferential rate being offered. Gazprom went as far as to lower its price offer from $418 to $250 for 1,000 cubic meters. When the Ukrainians made a counteroffer of $235, Gazprom reverted to if initial offer of $418. The lack of agreement over pricing by December 31, 2008 led to the January crisis. After the crisis, Ukraine still paid 20% less then European prices. Starting in January 1, 2010, a 10-year contract stipulates that Ukraine will switch to market prices.
Needless to say that the door was swung right back at Gazprom by the countries through which Gazprom’s gas transit. For instance, Ukraine raised transit fees by almost 60% from $1.70 per 1,000 cubic meters per 100 kilometers of transit to $2.70 in 2010. On top of this, Gazprom accuses countries like Belarus and Ukraine to “siphon” gas out of its pipelines, in other words to take gas out of the pipelines without having agreed to pay higher prices.
Russia would also have benefited from addressing the issue of the intermediaries involved in gas transactions such as RosUkrEnergo which according to its website “plays the role of a mediator of interests between Russia and Ukraine with regard to collaboration in natural gas issues. On the one hand, it acts as guarantor for natural gas deliveries to Ukraine at prices that are tolerable for the economy of that country and, on the other hand, RosUkrEnergo is financial guarantor for Gazprom, to which it makes the appropriate payments for natural gas supplied to Ukraine.” That mediation role, notably in paying Gazprom for gas going to Ukraine is where sand got into the mechanism as the money transfer seems to not have proceeded properly and in a timely manner, resulting in the January 2009 conflict. Middlemen need to be cut out of energy transactions and interestingly this was already agreed between Prime Minister Yulia Tymoshenko of Ukraine and Vladimir Putin in 2008.
Living dangerously but too big to fail?
In 2008 the company reportedly ended 2008 with about $50 billion in debt and its net profits fell by almost 50% in the first two quarters of 2009. With aging fields and equipment, ambitious development plans, numerous procurement contracts signed, 2010 will be the year of many challenges for Gazprom and anyone dealing with Gazprom, countries or companies.
Multiple issues should be kept on the radar screen:
- What is the financial situation of Gazprom? One may think that since an international auditing firm, namely PricewaterhouseCoopers (PwC), is the auditor of Gazprom, the books should be in order. That’s possible but one should not forget that PwC has recently been involved in multiple high profile scandals with over $1bn involved in each case. The question is then: how much credit can we give to PwC’s audits? These scandals involve the Satyam case in India, where a large IT outsourcing company cooked the books saying it had $1 billion when it fact it was lest than $78 million, and the Bernard Madoff Ponzi scheme as PwC was the auditor of Fairfield Sentry, one of the feeder funds that channeled $7.2 billion to Mr. Madoff which disappeared in the debacle.
- Economically sound deals? Gazprom agreed in December 2009 to buy up to 30 billion cubic meters (bcm) of gas a year from Turkmenistan. At a time where many wonder if there will be enough gas to fill the Western-endorsed Nabucco pipeline, such a large deal can be seen as an attempt to short circuit and challenge the viability of the Nabucco pipeline. Nabucco, a project supported by the United States and many European countries, is in direct competition with the Russian-endorsed South Stream pipeline and there are concerns that there may not be enough gas to supply both pipelines. Nabucco would ultimately have a capacity of 31 bcm per year and South Stream of 63 bcm/y. The South Stream website though uses sibylline statements saying that “If both South Stream and Nabucco are to be implemented, the South Stream consortium will closely cooperate with Nabucco in order to optimize gas flows and guarantee reliable supplies.”
- The underlying question is what will Gazprom do with all this Turkmen gas at a time of diminishing demand from Europe, including Ukraine where a large proportion of Turkmen gas transited or ended. Payment issues are an additional headache and Alexey Miller, Chairman of the Management Committee of Gazprom even assessed in December 2009, “the situation with [Ukraine's] payment for Russian gas supplies in December as very alarming.”
- An evolving world: Gazprom and Russia may see the table turned on them. Despite repeated statements of its desire to be a reliable partner, the 2006 and 2009 events with Ukraine have forced dependent countries to find alternative gas providers and transit routes. For a while Gazprom may have thought its use of Liquified Natural Gas (LNG) would have enabled it to regain the upper hand by opening up new export markets and routes but many countries have significant experience in that technology such as Qatar, Algeria and Libya, while more countries are coming to the market such as Australia and Egypt. Furthermore, in 2009 the United States overtook Russia as the world’s largest producer of natural gas. This is concerning for Gazprom as it confirms a growing trend pushing for energy independence, vocally defended in the United States by U.S. billionaire T. Boone Pickens in his “Pickens Plan” that advocates for the use of renewable energy and American natural gas in addition to energy savings.
What is in the pipeline for 2010?
According to the U.S. Energy Information Agency, Gazprom was planning in 2008 to invest around $45 billion in 2010 just to maintain production at its top four gas producing fields has been declining. With a GDP contraction in Russia of nearly 9% in 2009, tumbling energy prices, lower international demand, and stricter borrowing requirements, 2010 will not necessarily be as ambitious as originally planned. This said, the year started well with the resumption of the gas flow from Turkmenistan after an eight-month hiatus.
For Alexey Miller, and as stated in his column “the beginning of 2010 was marked with a very important event – Gazprom has started up natural gas procurement from Azerbaijan for the first time ever. (…) Objectively, Gazprom offered the most competitive conditions of gas purchase from Azerbaijan since we had everything needed for that purpose: the common borders and the gas transmission infrastructure under operation.” All this comes as a result of intense efforts from Gazprom’s top executives that travelled the world in 2009, oftentimes with high-level Russian governmental delegations, to meet with world leaders to negotiate lucrative agreements.
Russia is often referred as the “Wild East” in a reference similar to the U.S. “Wild West” when people and companies operated in a semi-lawless environment. Russia has laws but its judiciary remains weak and corruption is deeply ingrained. The lack of accountability in Russia that permeates through the society enabling anyone to do as they please goes on par with the dismissive attitude towards the rule of law, which President Dmitry Medvedev calls “legal nihilism,” namely Russians’ tendency to disregard the law. That is unfortunate. In this context, it is not surprising to see Gazprom take advantage of the system, even more so as it enjoys the status of national champion.
For an analysis of the dark side of Gazprom, readers can read the well-documented work of Roman Kupchinsky “Gazprom’s European Web.” Those interested in Gazprom’s perspective and strategy can go directly to Gazprom’s website at: www.gazprom.com. As to finding an answer to the question: “Angel or Demon?,” it is a very subjective matter as it really depends on what is at stake for whom and on the criteria used to judge…
Technorati Tags: (GAZP), Gazprom, guest post, oil-&-gas
Guest Post by Ben Lando of OilPrice.com
What was once considered a pipe-dream could become reality: after decades of dictatorship, war and international sanctions, Iraq’s massive oil reserves are set to be tapped properly and the country once known for two overflowing rivers could be crowned oil king.
If the seven oil projects awarded to foreign oil companies this weekend, and the three from an auction earlier this year, develop as planned, within eight years, Iraq will see its oil production capacity leap to more than 12 million barrels per day (bpd). “We think it is a big victory for Iraq to be able to be a leader in the world,” Iraqi Oil Minister, Hussain al-Shahristani, said after the auction.
Saudi Arabia, the world’s largest producer at 8.18 million bpd, has a capacity of just over 11 million bpd today, after slower demand growth halted plans to expand to 12.5 million bpd by the end of this year.
Iraq – behind Saudi Arabia and Iran – has the world’s third largest proven oil reserves, with potentially more remaining to be found. Currently, however, its 115 billion barrels below ground pump at just 2.4 million bpd, with production hampered by political, structural and security problems that could moot the enthusiasm from this weekend’s auction.
Out of the 10 oil projects on offer during the two-day auction, seven were awarded to a dozen companies. Three fields up for grabs in a June 30 auction were awarded, with one deal already finalized. And there are more than 60 fields discovered but not yet developed. These include two that the ministry is negotiating directly with foreign companies outside of an auction process.
Currently, Iraq relies on oil revenue for 95 percent of its revenue. This will increase if the fields develop as planned. Only after, however, Iraq reimburses companies for their investment and pays them a relatively small fee per barrel of increased output.
But this is Iraq, where, aside from this weekend’s bidding round, it seems nothing goes according to schedule.
Since late 2006, a new oil law to replace current oil governance – an often vague and conflicting mix of the 2005 Constitution and laws left from previous eras – has been delayed by political squabbles. Laws reestablishing the national oil company, reorganizing the oil ministry and formalizing revenue redistribution, are also languishing.
Iraq’s Kurds, who favor heavy decentralization, and nationalist Arabs, who want strong state control, have both questioned Shahristani’s oil deals. Some have called them illegal.
In press conferences and speeches before the auction, both Prime Minister Nouri al-Maliki and Oil Minister Shahristani, reiterated the government’s pledge that the deals would remain valid – no matter what happens in the March 7 national election.
Legal cover has been as much of a concern to foreign oil companies as physical security. Three days before the first field was put on the block, five bombs killed more than 120 people. Iraq’s northern export pipeline was offline for a week, during both October and November, due to sabotage.
“The contract specifies very clearly the responsibilities of the companies and the security for the fields is the responsibility of the Iraqi government but if the oil companies require specific security for their personnel or their activities, that is their responsibility,” said Shahristani.
“We will make necessary precautions to deal with it,” said Torgeir Kydland, the senior vice president for Iraq at Statoil, the Norwegian firm which partnered with Russia’s Lukoil to increase production at the West Qurna-Phase 2 project from nearly nothing now to 1.8 million bpd.
That additional crude, however, now needs somewhere to go. And throughout the value chain, there are missing links. Iraq needs to upgrade refineries, build more storage units, and create a larger capacity transport infrastructure. Following wars and sanctions, everything needs repair and modern technology.
Iraq cannot export much more than it does already; depending on which segment of the pipeline system, either repairs have not been made or an increase in oil flow risks all-out rupture.
“The amount of work required for the infrastructure to handle such a massive production and to transport it and to export it is huge,” said Shahristani. He said a pipeline and export master plan will be completed soon after assessing the needs of the fields awarded for development.
“There will be another port there and also a network of pipelines extended from the north of Iraq to the south and from the east to the west of Iraq to export oil from different areas,” he said. Such a move will diversify recipients, increase delivery to those already served, and allow it to separate the different qualities of crude instead of selling it as a concoction of one.
And when it makes significant gains in production, it will have to find its place within OPEC’s quota system, which Iraq – a founding member – has been excused from because capacity was cut by wars and sanctions. Shahristani said the 12 million bpd target will merely be Iraq’s capacity, and that actual output will be based on market demands and aligned with OPEC. There is language in the contracts that compensates foreign companies if production is reduced, he said.
Iraq is considered by Transparency International as one of the most corrupt countries in the world. And the influx of potentially hundreds of billion dollars of foreign investment into an as yet unproven government of struggling institutions is a volatile concoction producing in other developing yet resource-rich nations what has come to be known as the “resource curse.”
That is, when oil revenues aren’t used to benefit the citizens of the producing country but, rather, the elite. Investor companies are often enablers if not complicit, and their home nations approving.
The result is a populace lacking basic services and a polluted environment that soon turns into violence, destabilizing both oil operations and government. The resource curse in Iraq, however, is not inevitable. And although history is a bad indicator, in Iraq and in most oil producers, such a trend can be slowed and reversed.
“That’s why we’re glad it’s not coming on line all in one day,” said a senior U.S. official. The ministry’s Inspector General’s office is considered to be both progressive and aggressive.
The companies are expected to reach an initial agreement with the ministry by the end of the year.
“They will give us a work plan about the numbers of the fields to be developed, the expected costs, the invested money, and the number of the workers,” said Shahristani.
This is then followed by Cabinet approval and the final signing. Thirty days later the companies must pay the signature bonus, which is no less than $100 million, depending on the field. And it’s non-recoverable, as opposed to the first round where the much larger signing bonus was given as a loan.
OilPrice.com focuses on Fossil Fuels, Alternative Energy, Metals, Oil Prices and Geopolitics.
Technorati Tags: Iraq, oil, oil refiners, oil-&-gas
Fitch Ratings’ 2010 outlook for the global oil & gas is stable as the rally in crude oil prices from the lows experienced during the first quarter of 2009 continue to provide considerable support to industry activity levels and financial profiles. Credit profiles across the oil & gas sector are expected to be largely in-line with 2009 levels, with exceptions for the refining and drilling and service sectors, Fitch said.
The key risk for upstream companies and integrateds relates to the potential for weaker oil prices during the year.
Fitch sees reasons to believe the current run in crude prices may not be fully based on fundamental factors, exposing the sector to changes in monetary and fiscal policy and modified inflation expectations in 2010. As a result, should global economies and/or the appetite for oil as an inflation hedge weaken in 2010, oil prices could fall dramatically leading to further downside potential for the sector.
… inflationary expectations, combined with the significant amounts of liquidity being injected to global financial markets, are expected to keep crude prices above the price levels justified by the underlying supply/demand fundamentals.
Fitch’s stable outlook is not uniform across all sectors and credits within the oil & gas industry. In general, upstream, oil focused companies should see improved cash flows and credit metrics during the year stemming from higher oil prices. Natural gas prices are expected to remain weak which could result in weaker credit profiles for companies focused on natural gas related drilling. However, the refining sector remains under the most pressure as a result of continued low utilization rates, weak margins and continued falling end-user demand.
While the drilling and services sector is expected to weaken modestly, contract backlogs and the run in oil prices are expected to continue supporting activity levels and credit profiles of these firms. Merger & acquisition (M&A) event risk continues to be a concern, although high oil prices and strong 2010-2011 futures prices for natural gas have mitigated activity to-date. Offshore drilling companies continue to look to the current downturn as an opportunity to expand fleets. Weak refining conditions have resulted in significantly reduced prices for refining assets leading to potential risks for bondholders across the sector. Fitch notes that event risk remains issuer-specific.
For details, see Oil & Gas 2010 Outlook: Exposure to Deflation Remains High (Premium)
Technorati Tags: Aker Solutions ASA, Anadarko Petroleum Corporation, Apache Corporation, BG Energy Holdings Limited, BP plc, Chesapeake Energy Corporation, Chevron Corp, China Petroleum & Chemicals Corporation, Citgo Petroleum Corporation, CNOOC Limited, ConocoPhillips, Conocophillips Company, Devon Energy Corporation, Empresa Nacional Del Petroleo, ENI SpA, Exxon Mobil Corporation, Halliburton Company, Hess Corp, Indian Oil Corporation Ltd., JSC NC KazMunaiGaz, oil refiners, oil-&-gas
As previewed in last week’s guest post from oilprice.com, oil companies have not been deterred by the risks of doing business in Iraq. In this guest post, Oxford Analytica examines the results of Iraq’s latest oil licensing round.
Iraq held its second oil and gas licensing round on December 11-12 and succeeded in awarding seven out of ten tendered licenses. This compares very favourably with the award of just one of eight offered fields in the first licensing round in June. The partial failure of the first licensing round contributed to far better pre-bid communication between the Oil Ministry Petroleum Contracts and Licensing Directorate and the international operating companies (IOCs) before this round.
Process. Although less transparent than June’s bidding process, a degree of pre-negotiation ensured that expectations were well aligned:
- In the first round, the Minimum Remuneration Fee (MRF) offered by oil companies (the royalty per barrel of new oil brought on stream) was up to ten times higher than Baghdad was willing to pay.
- In the second round, competition for fields was less intense, with a smaller set of bidding IOCs making serious bids that mostly succeeded.
Majnoon. The super-giant Majnoon field was won by a consortium led by Royal Dutch Shell (60%) with backing from Petronas (40%). The win is important for Shell, allowing it to show adherence to a transparent tendering process, diffusing criticism of its no-bid win of the southern gas utilisation monopoly.
West Qurna 2. The other super-giant field tendered was won by a consortium led by Lukoil (85%), with backing from StatoilHydro (15%). They bid an aggressive 1.15 dollars MRF and promised to raise output to 1.8 million bpd.
Gharraf. The non-producing Gharraf field in Dhi Qar province will be developed by Petronas (60%) and Japex (40%), promising a Plateau Production Target of 230,000 barrels per day and a MRF of 1.49 dollars. The deal underlined the value of long-term positioning with the Iraqi government:
- Petronas has emerged as a valuable partner in Iraq due to the company’s strong rapport with Prime Minister Nuri al-Maliki and due to Malaysia’s Islamic status.
- Japex has been courting the ministry since 2005 by providing free seismic surveying in Gharraf.
Halfayah. The Halfayah field in Maysan province was won by CNPC (50%), Petronas (25%) and Total (25%). CNPC has a long history of activity in the Halfayah area. The key challenge for the winning consortium will be security, as the area continues to be the main thoroughfare for Iranian-backed militants crossing the border. US and Iraqi military bases in the area are regularly attacked by rocket and mortar fire.
Badra. This non-producing field on the Iran-Iraq border was won by a consortium of Gazprom (40%), KOGAS (30%), Petronas (20%) and Turkish company TPAO (10%). The field’s output will be raised to 170,000 bpd for a MRF of 5.50 dollars.
Najmah and Qayyarah. These two licenses were won by Angola’s Sonangol, which will aim to reach a PPT of 120,000 bpd within six years in Qayyarah and 110,000 bpd in Najmah.
Outlook. IOCs appear undeterred by the current lack of related legislation or the delay of national elections until March. The deals will not come to commercial fruition until the 2013-17 timeframe, by which time one or possibly two new government terms will have passed.
The significant confidence and commitment shown by IOCs suggests that hydrocarbons development is gaining strong momentum that will not be derailed by political arguments over oil policy under the next government.
Technorati Tags: CNPC, Gazprom, Japex, KOGAS, Lukoil, oil-&-gas, oil-exploration, Petronas, Royal Dutch Shell, StatoilHydro, Total, TPAO
Moody’s has issued the first in a series of Special Comments looking at whether and how fast (or rather, how slowly) various sectors of the economy are recovering.
Focusing on corporates, it contains an overview of the economy and coverage of the following global industries: autos, base metals, chemical, consumer durables, homebuilders, media and entertainment, oil and gas, packaging, retail, steel, and transportation.
Moody’s answers some of the following questions for each of these industries:
- How is the credit picture different than it was a few months ago?
- Have conditions stabilized? Are they beginning to improve?
- Is improvement in credit conditions well-established or precarious?
- Why haven’t credit conditions gotten better?
- What has to happen to improve credit conditions further?
Moodys.com Chief Economist Mark Zandi writes that “Another round of fiscal stimulus may also be warranted. The current stimulus, which includes aid to state governments and unemployed workers, tax cuts and increased infrastructure spending, has not yet had time to work and it may very well succeed. It is no accident that the recession will wind down in the next few months as the stimulus payout ramps up. The impact on jobs and unemployment should show up more clearly later this year and early in 2010. ”
However, given how surprisingly severe this economic downturn has been, it is only prudent to consider the need for even more temporary tax cuts and spending increases for next year. -Mark Zandi, Chief Economist, Moody’s.com
“The Obama administration will almost certainly have to significantly adjust its response to the foreclosure crisis, Zandi adds. ” Foreclosures continue to surge, weighing heavily on already crashing house prices. As long as house prices are falling and undermining household wealth and the financial system’s capital base, a self-sustaining economic recovery will not take hold. For foreclosures to abate and house prices to stabilize anytime soon, policy efforts to mitigate foreclosures through loan modifications must soon begin to work more effectively. To date, the Obama administration’s foreclosure mitigation plan has not had a meaningful impact.”
For details, see: Are Corporates on the Road to Recovery.
Technorati Tags: autos, base metals, chemicals, consumer durables, corporate-debt, foreclosures, homebuilders, media and entertainment, oil-&-gas, packaging industry, retail, steel, stimulus, transportation
Exploration and production (E&P) and oilfield service companies are suffering the effects of low natural gas prices, according to Standard & Poor’s.
Natural gas prices have fallen to the $3-$4/per million Btu (mmBtu) range in recent months after reaching a high of more than $13 mmBtu in July (Henry Hub).
Although companies in the oil and gas sector are accustomed to hydrocarbon price volatility, the prolonged decline in natural gas prices since the summer of 2008 has created new hurdles.
Lower natural gas prices hurt ratings on E&P companies for several reasons:
- Lower operating cash flow. Because of the hydrocarbon price declines and E&P companies’ innate high leverage, cash flows have fallen significantly in recent quarters.
- Financial covenants. As a direct result of lower cash flows, some companies are facing greater challenges in complying with financial covenants, such as debt to EBITDA tests.
- Reduced borrowing bases. Most speculative-grade companies’ (those rated ‘BB+’ or below) borrowing bases are re-determined semi-annually. As commercial banks lower their pricing assumptions, borrowing bases could decline, potentially causing liquidity constraints.
For details see Credit FAQ: How U.S. Exploration And Production And Oilfield Service Companies Are Coping With Lower Natural Gas Prices. The report answers frequently asked questions by investors about the implications of lower natural gas prices for E&P and oilfield service companies’ credit quality.
In a related report S&P sees Tough Times Ahead For European Oil and Gas Refiners
European refining activities are now exposed to what we think will be a prolonged refining downturn.
“Strength in diesel and gasoline cracks has switched around compared with 2008, and European players risk suffering the most in 2009. Visibility for oil service companies is also low as pricing pressures have increased and demand remains uncertain. Upstream-focused oil and gas companies are showing resilience, though, as evidenced by reasonable first-quarter results. ”
CreditSights has updated its Oil & Gas Capital Structure Update, which includes recent reports, earnings expectations, credit ratings, valuation comparisons, and performance comparisons.
Technorati Tags: natural gas, oil-&-gas, oil-exploration, oil-services
Moody’s says the drop in oil and gas prices over the last year may have given some US oil and gas producers an opportunity to mask production problems—as opposed to uneconomical conditions—that may have contributed to downward revisions in their reserves.
Amid the steep drop in commodity prices, the reserves considered economical to produce under SEC rules have dwindled and independent exploration and production (E&P) companies’ reported reserves have dropped accordingly, Moody’s says. Changes in pricing rules which come into effect on January 1, 2010, promise a far less volatile valuation for oil and natural gas reserves over the years.
“Last year for example, despite the enormous increase in oil prices in the first half of 2008, oil and gas prices tumbled from year-end 2007 to year-end 2008. In the case of investment-grade companies which accounted for 73% of total proved reserves, almost all revisions were price-related. Interestingly, a modest 4% of total reserves revisions in 2008 were performance-related.”
Overall, the E&P sector suffered a poor year in terms of reserves replacement. In Moody’s 54-company North American E&P universe, total proved reserves of 33.2 billion barrels of oil equivalent (boe) were revised lower from earlier reported figures by 757.2 million boe.
Around 61% of this downward revision was due to falling commodity prices; hence, companies attributed nearly 40% of their 2008 revisions to performance.
For details and company-by-company reserves see E&P Reserves Revisions: Price issue or performance problem?
Technorati Tags: oil reserves, oil-&-gas, oil-exploration
KPMG forecasts that 2009 will see a continued fall in global mergers and acquisitions (M&A) but that deal activity should slowly return late in the year as liquidity improves and attractive value is recognized in certain sectors.
KPMG’s latest Corporate Finance’s Global M&A Predictor— a forward looking survey of 1,000 leading companies’ estimated net debt to EBITDA ratios and prospective Price Earnings ratios — reveals a significant fall in 12-month forward corporate valuations and therefore appetite to do deals (down globally 22.2 percent from 15.3x end May 2008 to 11.9x at the end of November 2008). Forecast Net debt to EBITDA ratios have moved from 0.93 times to 1.06 times, a 13.5 percent deterioration, signaling a decreasing capacity to do deals.
However, our detailed analysis of the results of KPMG’s Predictor, coupled with historic M&A cycle trends, leads us to believe that there are indications that the corner may well be turned late in the second half of this year.
The Predictor has shown a decline in forward PE valuation across all sectors, with Technology (18.4x to 12.6x), Basic Materials (13.8x to 9.6x) and Industrials (15.5x to 11.1x) registering the most significant deterioration. Unlike the previous Predictor, Oil & Gas fell significantly (11.8x to 8.6x) along with Telecommunications (14.1x to 10.8x) Consumer Services (17.0x to 13.5x) and Health Care (15.5x to 12.5x). The smallest decline was the Consumer Goods sector (16.2x to 14.6x).
Utilities and Industrials continue to maintain the highest debt ratios, with net debt to EBITDA at 2.68 times and 2.27 times respectively. The Technology sector continues to show net cash which reflects a traditional balance sheet structure for this peer group but Health Care has moved from a net cash position to one of net debt.
No sectors/regions have shown improvement in both valuation and balance sheet capacity in the last six months, providing evidence that all sectors and regions have seen a decrease in both appetite and capacity.
The sectors/regions with the greatest balance sheet deterioration were Technology Latin America (0.19 times to 0.34 times), Consumer Goods Europe (0.84 times to 1.49 times), Oil & Gas AsPac (0.39 times to 0.63 times) and Oil & Gas North America (0.31 times to 0.49 times).
Technorati Tags: basic materials, consumer goods, health care, industrials, M&A, mergers and acquisitions, oil-&-gas, technology
Some weaker oil and gas companies could face difficulty funding their operations as a result of the sharp and swift decline in oil prices, according to Fitch Ratings.
The sharp drop in hydrocarbon prices at year-end 2008 may have a significantly negative impact on proven oil & gas reserve bookings under existing accounting rules, leading to increased debt/boe (barrel of oil equivalent) metrics across the sector, Fitch says in Lower Oil Prices to Pressure Debt/Reserve Metrics in 2009.
Firms with significant reserves booked under Production Sharing Contracts (PSCs)- predominantly integrated oil companies and larger independents- may see a partial offset to this as these contracts are generally structured to increase bookings under a low oil price environment and decrease bookings under a high-priced environment, Fitch says.
Currently, Securities and Exchange Commission (SEC) oil & gas disclosure rules require that firms test the economic viability of reserves based on year-end hydrocarbon prices. Although the SEC recently approved a major overhaul of these rules, including a move to 12-month average pricing instead of year-end pricing for the reserves test, these changes will not be effective for the 2008 fiscal year.
“From a ratings perspective, the impact of price-based negative reserve revisions may be muted insofar as they stem from a particular accounting rule which is in the process of being changed. In addition, it is important to note that Fitch evaluates the creditworthiness of the upstream sector throughout the cycle. However, with that said, Fitch expects that the range of negative reserve revision information will also communicate important information about an individual company’s relative asset quality.”
Fitch also notes that while negative price-based reserve revisions are not expected to affect the liquidity of most investment grade issuers, those companies whose revolvers are linked to the size and/or value of their reserves via a borrowing base could be negatively affected by downwards reserve revisions in the form of reduced borrowing capacity, which in turn may limit their ability to fund operations.
Technorati Tags: energy, oil-&-gas
