Of long calls and more Colombian barrels

Despite an awful lot of bearishness in the market, and global inventories showing no tangible signs of rebalancing, the Oilholic finds the number of long plays in the market to be astounding.

In fact, US shale producers are in their element, and producing comfortably at the current oil price range. 

As the International Energy Agency noted at the recently concluded 22nd World Petroleum Congress - "the only oil producing region that has actually seen a rise in investment has been American shale, where compared to 2016, investments are up 53%."

Here are yours truly's thoughts in greater detail via a Forbes op-ed. Away from the oil price, given  a sequence of the OPEC meeting, a trip to New York and the World Petroleum Congress, a report on Colombian oil production - published by GlobalData earlier in the month - escaped this blogger's attention. 

It is well worth a crude read, for the research and analysis outfit suggests Colombia is well on track to reinvigorate its upstream sector after the oil price shock. 

"Improvements already made to the country's royalty framework will benefit licenses currently held in the exploration phase, which may provide some stimulus in the short to medium term, and more flexible licensing procedures are likely to lead to greater uptake of available exploration acreage. However, based on recent life-cycles from exploration to production any newly awarded areas over the next two years will be unlikely to add significant production before 2025," GlobalData notes. 

This could change; and as for offshore development, Colombia represents one of the most competitive regimes in Latin America and interest in its Caribbean exploration has been steadily growing over recent years. 

The fiscal regime, according to GlobalData, is currently geared to foster investment with a regionally and internationally low fiscal take. The government is reportedly planning to include areas in the Caribbean Sea as part of the open areas to be made available in 2018, and a recent large gas discovery in the area by Anadarko highlights the potential of this underexplored region.

Colombia's Agencia Nacional de Hidrocarburos (ANH) is set to open onshore areas in the North and Northwest of the country in the Sinú-San Jacinto, Llanos Orientales and Medio Valle del Magdalena basins on an open basis and adding areas in the Caguan-Putamayo basin in 2018, with the number of areas available for exploration potentially rising from 20 to 40. 

The country's current production level is in the region of 706,000 barrels per day (bpd). While that is considerably below its 2015 peak of 1.005 million bpd, more barrels are imminent over the medium term. That's all for the moment folks! Keep reading, keep it crude!

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© Gaurav Sharma 2017. Photo: Oil tankers in the Persian Gulf off Musandam Peninsula, Oman © Gaurav Sharma 2013.

Santos hopes to give peace a chance in Colombia

After a fascinating two weeks travelling around South America, the Oilholic is back where the journey on the continent started in Bogota, Colombia, before heading back to London. 

In using the Colombian capital (seen on the left from Mt. Monserrate) as a starting point, this blogger wanted to both feel first hand as well as write about how far this country has come following five decades of armed conflict resulting in a tragic human and socioeconomic cost, above all else. More so, as peace is finally getting a chance in 2015.

In September, President Juan Manuel Santos inked a preliminary agreement with the Revolutionary Armed Forces of Colombia (or FARC). After three prolonged attempts since the 1980s by successive Colombian governments to broker peace, the recent accord appears to be the best chance for achieving that objective.

Despite being the first president in decades to have an upper hand on FARC thanks largely to a heavy military build-up under his predecessor Alvaro Uribe, Santos staked his presidency on finding a solution to end the violence through peaceful means, though not at any cost.

Reaching an agreement depended on FARC doing jail time, as demanded by the court of public opinion so heavily traumatised by violence perpetrated by the rebels over the years on a daily basis. On that front there is some dissatisfaction with the proposed deal.

While the finer points are still to be worked out over the next six months, the Santos administration and FARC have broadly agreed that foot soldiers of the militant outfit would receive amnesty, but its leaders charged with “serious crimes” will face a special tribunal that would include foreign judges alongside Colombian ones.

Those FARC operatives who cooperate and confess to their crimes would receive lighter penalties including five to eight years of community service with restriction on movement, but not prison time in the strictest sense. However, those who do not cooperate could go to jail for up to 20 years. 

A judicial framework along similar lines would be applied to right-wing paramilitary forces and their supporters. In return, FARC, which still has over 6,000 combatants, has also agreed that the rules will only apply if they give up their weapons. 

The significance of the deal cannot be overstated even if public demand for stricter penalties on FARC is not being met. From M-19 to the still active ELN, Colombians have seen too much death and destruction, and the dark side of human conflict that no one needs to see.

Among the many expressions by Colombian artists summing up the tragedy of conflict within the country's borders, the Oilholic was privileged to see the late Alejandro Obregón’s Muerte a la bestia humana (Death to human beast) on display at the National Museum of Colombia in Downtown Bogota.

Friends here in Colombian capital say the painting (see right) was Obregón’s expression of disgust at those responsible for the kidnapping and gruesome murder of Gloria Lara de Echeverri, a government official abducted in June 23, 1982. 

Her body was found five months later on the steps of a church. While a FARC faction was alleged to have been behind the act, the case was never fully resolved and remains a source of debate to this day. For Obregón and his peers in the art community, Gloria Lara, like several of her countrymen and women were innocent victims who deserved better but lasting peace, bar the odd ineffective ceasefire aside, could not be brokered. 

So if an imperfect deal now offers a chance for peace, then it needs to be looked at. FARC knows its back is against the wall and has as much of a vested interest in making the deal work as the Santos administration. Things are changing in Colombia. While every life is precious, and 600 Colombians civilians were lost to conflict last year, 2015 has so far been the year to see the fewest deaths to armed conflict since 1985, according to local data.

While there is petty crime and gun violence in Bogota, it is no longer the kidnapping capital of the world, like it was back in the 1980s. Beleaguered FARC’s ire has been directed more towards near daily attacks on Colombian infrastructure, mainly power lines and oil pipelines.

One recent attack resulted in 15,000 barrels of crude spewing into a river. April saw heated exchanges of fire between government forces and FARC. However, while talks were progressing the skirmishes diminished in frequency and ferocity.

It now remains to be seen, if the agreement holds, and Santos has said the Colombian people will have their say on the final agreement. The visible human tragedy aside, disruption caused by conflict lowers the country’s GDP by 15% to 20% per annum according to some estimates. It appears a chance to change that is on the horizon. Here's hoping it holds. That’s all from Bogota for the moment folks! Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2015. Photo I: View of Bogota, Colombia from Mt. Monserrate. Photo II: Muerte a la bestia humana by Alejandro Obregón on display at National Museum of Colombia in downtown Bogota © Gaurav Sharma, August 2015

Why ‘chiflados’ in Caracas infuriate Colombians

Colombia and Venezuela haven’t always been the best of friends over the last 15 years, since the late Hugo Chavez swept to power. However, here in Bogota, the Oilholic finds relations between the two neighbours at an all time low, largely down to a select bunch of “chiflados oportunistas en Caracas” (loosely translated as opportunistic crackpots in Caracas), who blame everyone but themselves for  the effects their own mad economic policies, say locals.

But first some background – A general election is slated for 6 December in Venezuela with oil nowhere near the three-figure per barrel price the country needs to balance its budget. Regional analysts fear a sovereign default and monthly inflation according to independent forecasts is in double figures as Caracas hasn’t published official data for a while (even the fudged version). Meanwhile, industrial production is in doldrums as the government continues to print money. 

The Venezuelan Bolivar’s official exchange rate to the dollar is VEF6.34, but you’d be lucky if anyone in Bogota or elsewhere in Latin America would be willing to exchange the greenback for VEF635; forget the decimal point! Price controls and availability have played havoc with what Venezuelans can and cannot buy. More often than not, it is no longer a choice in a country that famously ran out of loo rolls last year. So what does President Nicolas Maduro do? Why blame it all on “conspirators” in Colombia! 

Now hear the Oilholic out, as he narrates a tale of farce, as narrated to him by an economics student at the local university, which this blogger has independently verified. With the Venezuelan Bolívar more or less not quite worth the paper its printed on – as explained above – most of the country’s citizens (including Chavistas, and quite a few regional central banks if rumours are to be believed) – turn to DolarToday, or more specifically to the website’s twitter account, to get an unofficial exchange rate based on what rate the Bolívar changes hands in Cucuta, a Colombian town near the border with Venezuela (The website currently puts the Bolivar just shy of VEF800 to the dollar). 

It is where Venezuelans and Colombians meet to exchange cheap price-controlled fuel, among other stuff from the false economy created by Caracas, to smuggle over to Colombia. The preferred currency, is of course, the Colombian peso, as the dollar’s exchange rate to the Bolívar is calculated indirectly from the value of the peso with little choice to do anything else but. 

The final calculation is extremely irregular, as the Colombian peso itself grapples with market volatility, but what the fine folks in Cucata come up with and DolarToday reports is still considered a damn sight better than the official peg, according to most contacts in Colombia and beyond, including the narrator of the story himself. 

So far so much for the story, but what conclusions did President Maduro take? Well in the opinion of the Venezuelan President, DolarToday is a conspiracy by the US, their pals in Colombia and evil bankers to wreck Venezuela’s economy; as if it needs their help! Smuggling across the border and of course food shortages in the country have been promptly blamed on private enterprise players “without scruples” and Colombians, carefully omitting Venezuela’s National Guard personnel, without whose alleged complicity, it is doubtful much would move across the border.

Maduro subsequently closed the border crossing from Tachira, Venezuela to Norte de Santander, Colombia earlier this quarter. He also announced special emergency measures in 13 Venezuelan municipalities in proximity of the Colombian border. The shenanigans prompted an angry response form President Juan Manuel Santos, Maduro’s counterpart in Bogota. Both countries recalled their respective ambassadors in wake of the incident. 

However, in line with the prevalent theme of finding scapegoats, Maduro’s government didn’t stop there. Nearly 2,000 Colombians have been deported from Venezuela, according newspapers here. Another 20,000 have fled back to Colombia, something which President Santos has described as a humanitarian crisis. Santos also chastised Venezuela at the Organisation of American States (OAS) noting that Caracas was blaming its “own economic incompetence on others” (translating literally from Spanish).

The Colombian President might well have felt aggrieved but he need not have bothered. The chiflados in Caracas know what they are. For example, when Venezuela was hit by an outbreak of chikungunya (last year), a disease marked by joint pains and bouts of fever according to the WHO website, the government’s response was as removed from reality as it currently is when it comes to DollarToday and smuggling across the Colombia-Venezuela border.

At the time, a group of doctors west of Caracas calling for emergency help saw their leader accused of leading a “terrorist campaign” of misinformation. With a warrant was issued for his arrest, the poor man fled the country. Close to 200,000 were affected according media sources outside of Venezuela but government statistics put the figure below 26,500. 

Each time economists and independent analysts challenge any data published by PDVSA or INE or any Venezuelan government institution, it is dismissed by Caracas as “politically motivated.” And so the story goes with countless such examples, albeit an international spat like the one with Colombia are relatively rare. Maduro is also miffed with neighbouring Guyana at the moment, for allowing ExxonMobil to carry out oil exploration in “disputed waters” which prompted a strong response at the UN from the latter.

Expect more nonsense from Caracas as the Venezuelan election approaches. However, here’s one telling fact from Colombian experts to sign off with – over the past year the Venezuelan Bolívar’s value has plummeted by 93% against the peso in the unofficial market. Now that’s something. 

The Oilholic tried to change pesos for the bolivar officially in the Colombian capital, but found few takers and got lots of strange looks! That’s all from Bogota for the moment folks as one heads to Peru! Back here later in the month, keep reading, keep it ‘crude’!   

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© Gaurav Sharma 2015. Plaza de Bolívar, Bogota, Colombia © Gaurav Sharma, October 2015

Latin America's commodities downturn problem

The Oilholic finds himself roughly 5,300 miles west of London in Bogota, Colombia wandering around the city’s rustic and charming La Candelaria area. 

It’s the beginning of a journey through South America to find out how the recent commodities downturn is affecting the market mood and investment outlook in what (still) remains a very commodity-exports driven continent. 

One gets a sense of opportunities missed and dismay from those who saw the downturn coming – not just here in Colombia, but looking outside in at Chile, Argentina, Peru and of course that colossal corruption scandal at Petrobas in Brazil. While the sun was shining, and China’s double digit economic growth was fuelling the commodities boom, attempts should have been made at macroeconomic diversification instead of relying on a party that was bound to end sooner or later.

We’re not just talking oil and gas here; take in everything from minerals to soya beans, or copper specifically in the case of Chile. Most Latin American currencies got marginal power boosters during the commodities boom, if not a case of full blown Dutch disease, which resulted in lacklustre performance from non-commodities sectors that became increasingly uncompetitive and to an extent unproductive over the last 10 years.

The International Monetary Fund reckons come the end of 2015, if headline regional growth touches 1% we’d be lucky. In fact, in its latest update the IMF confirmed that Latin America would see its fifth successive year of economic output deceleration. While past commodity busts have triggered regional financial crises, thankfully not many locally as well as internationally, including the IMF, expect a repeat this time around. That’s largely down to the fact LatAm economies, with notable exception of Venezuela, have not indulged in fiscal populism and daft economic policies.

In sync, ratings agencies, while negative on the economic outlook of many countries in the region, but only fear a sovereign default in Venezuela. However, another negative aspect of dependency on the commodities market is that investment – especially on terms prior to the market correction – would be hard to come by.

Just ask Mexico! As the Oilholic noted in a recent column for Forbes, phase I of round one of Mexico’s oil and gas licensing was a damp squib. Hence, with the September 2015 (phase II) bidding round, the Mexicans had to adjust their thinking to attract (and eventually) secure a decent take-up of available blocks.

Peru’s nascent oil and gas market, Colombia’s emerging and hitherto impressive one face similar challenges as will the copper market in Chile. Argentina faces a general election on October 25th while Brazil is in a technical recession with the IMF seeing few improvement prospects for 2016.

Productivity, in all five countries is down with workers spending hours in a day commuting, and traffic jams (the first of which the Oilholic has already experienced) are legendary enough to give Bangkok and Delhi a run for their money. 

Over the coming weeks yours truly will make sense of it all talking to experts, policymakers, fellow analysts and local folks one is likely to meet and greet while having the odd touristy mumble about. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. La Candelaria, Bogota, Colombia © Gaurav Sharma, October, 2015