Three Months, Three Cities, Three ‘crude’ reports

The three cities being – Delhi, Doha and Vienna, the three reports being Oilholic’s work on Latin American Offshore, Shale Oil & Gas and Refineries projects outlook, research for which was spread over December, January and February from the 20th World Petroleum Congress to the 160th OPEC Meeting to the streets of ‘crude’ Delhi.

The last of the three reports was published by Infrastructure Journal on Feb 29th and while the analysis in the reports remains the preserve of the Journal’s subscribers, the Oilholic is more than happy to share a few snippets starting with the Latin American offshore landscape, which shows no signs of a post ‘Macondo’ hangover [1].

In fact, the month of May, will be a momentous one for the region’s offshore oil & gas projects market in general and Brazil in particular, as the country would dispatch its first shipment of oil from ultradeepwater pre-sal (‘below the salt layer’) sources. The said export consignment of 1 million barrels destined for Chile is a relatively minor one in global crude oil volume terms. However, its significance for offshore prospection off Latin American waters is immense.

When thinking about Latin American offshore projects think Brazil; think Brazil and think Petrobras’ Lula test well in the Santos basin, named after the former president, which is producing 100,000 barrels per day (bpd). Almost over a third of the Chilean consignment originated from the Lula well according to the Oilholic’s sources.

What should excite project financiers, corporate financiers and technical advisers alike is the fact the company expects to pump nearly 5 million bpd by 2020 and its ambitious drive needs investment.

However, ignoring other jurisdictions in the region and focussing only on Brazil, its promise and problems would be a fallacy. Others such as Argentina, Columbia and prospection in Falkland Islands waters are worth examining, the latter especially from the standpoint of corporate financed asset acquisitions.

Data always helps in contextualising the market movements. Using the present Infrastructure Journal data series on project finance, which commenced in 2005, figures certainly suggest the sun is shining on the Brazilian offshore industry. Of the 15 Latin American offshore projects on record which reached financial close between October 2006 and Sept 2011, 13 were Brazilian along with one apiece from Panama and Peru (Click on pie-chart above to enlarge). With a cumulative deal valuation of just under US$9.3 billion, among these Brazil’s Guara FPSO valued at US$1.2 billion led the way reaching financial close in June 2011.

The year 2010, was a particularly good one for Brazil with five projects reaching financial close. Over the last three years, sponsors of offshore projects in the country have been consistent in approaching the debt markets and bringing three to five projects per annum to financial close, with 2011 following that trend.

Moving on to the Oilholic’s second report, for all intents and purposes, Shale oil & gas prospection has been the energy story of the last half decade and Q1 2012 would be an apt time to scrutinise the ‘Fracks’ and figures[2].

To say that shale gas has altered the American energy landscape would be the understatement of the decade, or to be more specific at least half a decade. Courtesy of the process of hydraulic ‘fracking’, shale gas prospection – most of which was initially achieved in the US by independent upstart project developers – has been an epic game changer.

US shale gas production stood at 4.9 trillion cubic feet (tcf) by end-2011, which is 25% of total US production up from 4% in 2005. Concurrently, net production itself is rising exponentially owing to the shale drive according to the EIA.

Project finance aside, it is in the corporate finance data where the shale story is truly reflected – i.e. one of a steady rise both in terms of deal valuation as well as the number of projects. From four corporate infrastructure finance deals valued at US$1.89 billion in 2009, both data metrics posted an uptick to seven deals valued at US$8.35 billion in 2010 and 10 deals valued at US$7.58 billion in 2011 (Click on bar-chart above to enlarge).

However, a short term global replication of a US fracking heaven is unlikely and not just because there isn’t a one size fits all model to employ. While American success with shale projects has not escaped the notice of Europeans; financiers and sponsors in certain quarters of the ‘old continent’ are pragmatic enough to acknowledge that Europe is no USA. The recent shale projects bonanza stateside is no geological fluke; rather it bottles down to a combination of geology, American tenacity and inventiveness.

Europe’s best bet is Poland, but European shale oil & gas projects market is unlikely to record an uptick between 2012 to 2017 on a scale noticed in North America in general and the USA in particular between 2007 and 2012. The financing for shale projects – be it corporate finance or project finance – would be a slow, but steady trickle rather than a stream beyond North America.

Finally, to the Refineries report, given the wider macroeconomic climate, refinery infrastructure investment continues to face severe challenges in developed jurisdictions and Western markets[3]. Concurrently, the balance of power in this subsector of the oil & gas infrastructure market is rapidly tipping in favour of the East.

Even if refinery investment of state-owned Chinese oil & gas behemoths, which rarely approach the debt markets, is ignored – there is a palpable drive in emerging economies elsewhere in favour of refinery investment as they do not have to contend with overcapacity issues hounding the EU and North America.

For some it is a needs-based investment; for others it makes geopolitical sense as their Western peers holdback on investing in this subsector. The need for refined products is often seen superseding concerns about low refining margins, especially in the Indian subcontinent and Asia Pacific.

Industry data, empirical, anecdotal evidence and direct feedback from industry participants do not fundamentally alter the Oilholic’s view of tough times ahead for refinery infrastructure. As cracking crude oil remains a strategic business, investing in refinery infrastructure reflects this sentiment, investor appetite and financiers' attitudes.

According to current IJ data, investment in refinery infrastructure via private or semi-private financing continues to remain muted; a trend which began in 2008. In fact, 2011 has been the most wretched year since the publication began recording refinery project finance data.

Updated figures suggest the year 2010, which saw the artificial fillip of Saudi Arabia’s mega Jubail refinery project (valued at US$14.04 billion) reach financial close, has been the best year so far for refinery project finance valuation despite closing a mere two projects. However, industry pragmatists would look at 2008 which saw ten projects valued at US$9.39 billion as a much better year (Click on bar-chart above to enlarge).

From there on it has been a tale of post global financial crisis woes with the market struggling to show any semblance of a recovery and most of the growth coming from non-OECD jurisdictions. In 2009, three projects valued at US$4.79 billion reached financial close, followed by two projects including Jubail valued at US$15.04 billion in 2010, and another two projects valued at US$1.49 billion in 2011. By contrast, the pre-crisis years of 2005, 2006 and 2007 averaged US$6.71 billion in terms of transaction valuations.

A general market trend in favour of non-OECD project finance investment in refineries is obviously mirrored in the table of the top deals between 2005 and 2011 (above). Of the five, four are in non-OECD countries – led by Jubail Refinery (Saudi Arabia) valued at US$14.04 billion which closed in 2010, followed by Guru Gobind Singh Bhatinda Refinery, India (valued at US$4.69 billion, financial close – 2007), Jamnagar 2 Refinery, India (US$4.50 billion, financial close – 2006) and Paradip refinery, India (US$2.99 billion, financial close – 2009).

Only one deal from an OECD nation, which is a very recent member of the club, made it to the top five, namely Poland’s Grupa Lotos Gdansk Refinery Expansion valued at US$2.85 billion which reached financial close in 2008. Simply put, the future of infrastructure investment in this sub-component of the oil & gas business lies increasingly in the East wherein India could be a key market. That’s all for the moment folks! Keep reading, keep it ‘crude’!

NOTES:

[1] Latin American Offshore O&G Outlook 2012: Brazil’s decade, By Gaurav Sharma, Infrastructure Journal, January 17, 2012. Available here.

[2] Shale Oil & Gas Outlook 2012: The ‘Fracks’ and figures, By Gaurav Sharma, Infrastructure Journal, January 25, 2012. Available here.

[3] Refinery Projects Outlook 2012: ‘Cracking’ times for Eastern markets, By Gaurav Sharma, Infrastructure Journal, February 29, 2012. Available here.

© Gaurav Sharma 2012. Graphics: Pie Chart 1 – Latin American Offshore Project Finance transactions (October 2006 to Sept 2011), Bar Chart 1 – Number of Shale Corporate Finance transactions (2009-2011), Bar Chart 2 – Refinery Project Finance Valuation (2005-2011) © Infrastructure Journal.

Crude M&A activity, Majors' profits & more

As we approach the end of the year, the Oilholic is convinced that 2011 will see M&A activity in the oil & gas sector returning to, or perhaps even exceeding pre-crisis deal valuation levels. Research for Infrastructure Journal by this blogger suggests that while the year still has a little over two months left the deal valuation figure for acquisition of oil & gas infrastructure assets, using September 30th as a cut-off date, is well above the total valuation for 2008, the year that the global credit squeeze meaningfully constricted capital flows.

In fact, back in 2008, Infrastructure Journal noted 23 oil & gas M&A corporate finance transactions valued at US$19.33 billion. Deal valuation then declined to US$18.14 billion and US$16.70 billion in 2009 and 2010 while the number of transactions first fell to 19 and then rose to 32. In fact 2009 would have been a wretched year in relative terms, had it not been for a US$6.3 billion transaction concerning the acquisition of Stogit & Italgas. Big ticket deals were largely absent in 2010 and while the number of transactions rose, valuation declined. IJ analysts have so far noted 21 transactions and a deal valuation to the tune of US$27.11 billion (and counting) in 2011. (Click on graph to enlarge © Infrastructure Journal)

Michael Byrd, Houston-based partner at Baker & McKenzie feels that conditions for making an oil & gas asset acquisition are quite conducive, more so for upstream assets. “Opportunities exist in all three – Downstream, Midstream and Upstream projects, but in case of the latter, projects in remote offshore and onshore basins have become more economical due to new technologies and more favourable oil prices (long-term),” he said in recent webinar which makes for compelling listening, caveats and all, if asset acquisition is on your mind. You could possibly download a recording here.

Alternatively, Baker & McKenzie have another one of these webinars coming-up on November 16 under their Global Energy Webinar Series. This one would discuss the full cycle of tax planning and compliance issues around permanent establishments for major energy and power projects.

Moving away from IJ’s figures and Baker & McKenzie webinars, financial advisers Ernst & Young’s research on a related note suggests that increases in M&A of London-based AiM-listed oil & gas firms are to be expected following substantial falls in their market valuation.

The firm’s quarterly index shows the value of AiM-listed oil and gas companies fell 26% in the three months to September. The index has been in decline since the start of 2011. Additionally, fundraising by AiM-listed oil and gas companies totalled £168.7 million during the third quarter - a fall of 48% on the same quarter last year.

Jon Clark, oil & gas partner at Ernst & Young, said, "Those companies with weaker balance sheets and particularly those with development projects will be looking towards larger, better capitalised acquirers. The slowdown in the global economic recovery and the market turbulence created by issues including the US credit downgrade and the eurozone sovereign debt crisis will continue to turn investors off riskier assets. This doesn't bode well for the fourth quarter."

All-in-all, the remainder of 2011 would be a good time to swoop for an asset or even an entire mid-cap company. Concurrently, the oil majors are queuing up to announce decent profits. The third quarter’s current cost of supply net income at Shell doubled to US$7.2 billion, compared with US$3.5 billion during the same period a year ago. ExxonMobil saw its quarterly profits rise by 41% to US$10.3 billion.

Earlier in the week, BP said its operations were “regaining momentum” and that it had “turned a corner” reporting third quarter profits of US$5.14 billion, a near tripling of the US$1.85 billion replacement cost profit it made in the same period a year ago. The firm is also increasing its asset selling programme from US$30 billion to US$45 billion.

Meanwhile, the British Energy and Climate Change Select Committee of MPs has criticised the UK Treasury's move earlier this year to increase a levy on the oil & gas industry calling it an "opportunistic raid". On the back of recent good news from the North Sea – they said in a report that the way in which the £2 billion hike was announced may have undermined investor confidence.

The report notes: "If the (UK) government is serious about maximising production from the UK Continental Shelf (UKCS), it needs to consider the long-term impact of changes to the tax regime on investment. The evidence on the impact of 2006 increase in the supplementary tax charge on oil and gas production in the North Sea is inconclusive, but there is a clear need to sustain investor confidence by avoiding surprises, such as the further increase announced in the 2011 Budget. It is not sensible to make opportunistic raids on UKCS producers." Powerful stuff – well delivered!

Finally, in Thursday intraday trading the crude oil price registered a strong rebound of over 2%, accompanied by a rally in the equity markets following the positive vibes from the European leaders’ summit overnight where an agreement to raise the European rescue fund to €1 trillion was finally reached.

Sucden Financial research expects further gains in crude oil prices, as the market seems relieved after the European Summit. The stronger euro provides further support, while most commodity prices enjoying a strong rally. WTI crude oil has further upside potential toward US$95/$96 per barrel, while Brent oil might find modest resistance near the US$115 per barrel area, Sucden analysts note further.

© Gaurav Sharma 2011. Graph: Corporate Finance infrastructure M&A deals 2008-2011 (year to date) © Infrastructure Journal, October 10, 2011. Photo: Shell Gas Station © Royal Dutch Shell

Talking Refinery Infrastructure on CNBC

This week marked the culmination of almost a month and a half of my research work for Infrastructure Journal on the subject of oil refinery infrastructure and how it is fairing. Putting things into context, like many others in the media I too share an obsession with the price of crude oil and upstream investment. I wanted to redress the balance and analyse investment in the one crucial piece of infrastructure that makes (or cracks) crude into gasoline, i.e. refineries. After all, the consumer gets his/her gasoline at the gas station – not the oil well. The depth of Infrastructure Journal's industry data (wherein a project’s details from inception to financial close are meticulously recorded) and the resources the publication made available to me made this study possible. It was published on Wednesday, following which I went over to discuss my findings with the team of CNBC’s Squawk Box Europe.

I told CNBC (click to watch) that my findings suggest activity in private or public sector finance for oil refinery projects, hitherto a very cyclical and capital-intensive industry currently facing poor margins, is likely to remain muted, a scenario which is not going to materially alter before 2012.

The evidence is clear, integrated oil companies have and will continue to divest in downstream assets particularly refineries because upstream investment culture of high risk, high rewards trumps it.

Growth in finance activity is likely to come from Asia in general and surprise, surprise India and China in particular. It is not that margins are any better in these two countries but given their respective consumers’ need for gasoline and diesel – margins become a lesser concern.

However, in the west, while refiners’ margins remain tight, new and large refinery infrastructure projects would see postponements, if not cancellations. In order to mitigate overcapacity, a number of mainly North American and European refiners or integrated companies will shutdown existing facilities, albeit quite a few of the shutdowns will be temporary.

Geoff Cutmore and Maithreyi Seetharaman probed me over what had materially changed, after all margins have always been tight? Tight yes, but my conjecture is that over the last five years they have taken a plastering. On a 2010 pricing basis, BP Statistical Review of World Energy notes that the 2009 refining average of US$4.00 per barrel fell below the 2008 figure of $6.50 per barrel; a fall of 38.5%. In fact, moving away from the average, on an annualised basis, margins fell in all regions except the US Midwest last year while margins in Singapore were barely positive.

Negative demand has in effect exasperated overcapacity both in Europe and North America. BP notes that global crude runs fell by 1.5 million bpd in 2009 with the only growth coming from India and China where several new refining capacities, either private or publicly financed, were commissioned. Its research further reveals that most of the 2 million bpd increase in global refining capacity in 2009 was also in China and India. Furthermore, global refinery utilisation fell to 81.1% last year; the lowest level since 1994.

In fact does it surprise anyone that non-OECD refinery capacity exceeded that of the OECD for the first time in 2009? It doesn’t surprise me one jot. I see this trend continuing in 2010 and what happens thereafter would depend on how many OECD existing refineries facing temporary shutdown are brought back onstream and/or if an uptick in demand is duly noted by the OECD nations. A hope for positive vibes on both fronts in the short to medium term is well...wishful thinking.

Refineries were once trophy assets for integrated oil companies but in the energy business people tend to have short memories. Alas, as I wrote for Infrastructure Journal (my current employers) and told CNBC Europe (my former employers), now they are the unloved assets of the energy business.

© Gaurav Sharma 2010. Photo 1: Gaurav Sharma on Squawk Box Europe © CNBC, Nov 10, 2010, Photo 2: Oil Refinery Billings, Montana © Gordon Wiltsie / National Geographic Society

Nigeria is a Crude Spot with Crude Oil, Says Peel

Nigeria is a complicated country - a confused ex-colonial outpost with a complex ethnic and tribal mix turned into a unified nation and given its independence by the British some five decades ago. Having crude oil in abundance complicates things even further.

Some say the history of crude oil extraction has a dark and seedy side; most say nowhere is it more glaringly visible than in Nigeria. On the back of having interviewed Nigeria's petroleum minister - Diezani Kogbeni Alison-Madueke for Infrastructure Journal, I recently read a candid book on the country titled - A Swamp Full of Dollars: Pipelines and Paramilitaries at Nigeria's Oil Frontier written by Michael Peel, a former FT journalist, who spent many-a-year in Nigeria. He presents a warts n' all account about this most chaotic and often fascinating of African countries shaped by oil, driven by oil and in more ways than one - held to ransom by oil.

The author dwells on how the discovery of black gold has not been quite the bonanza for its peoples who remain among the poorest and most deprived in this world. End result is growing dissent and chaos - something which was glaringly visible between 2006-2009 when the oil rich Niger Delta went up in flames.

Peel's book is split into three parts, comprising of nine chapters, containing a firsthand and first rate narration of the violence, confusion, partial anarchy and corruption in Nigeria where its people who deserve better have to contend with depravity and pollution. Some have risen up and abide by their own rule - the rule of force, rather than the law.

If you seek insight into this complex country, Peel provides it. If you seek a travel guide - this is one candid book. If you seek info on what went wrong in Nigeria from a socioeconomic standpoint, the author duly obliges. Hence, this multifaceted work, for which Peel deserves top marks, is a much needed book.

I feel it addresses an information gap about a young nation, its serious challenges, addiction to its oil endowment and the sense of injustice the crude stuff creates for those who observe the oil bonanza from a distance but cannot get their hands into the cookie jar.

Peel notes that the chaos of Niger delta is as much a story of colonial misadventure, as it is about corporate mismanagement, corruption in the bureaucracy and a peculiar and often misplaced sense of entitlement that creates friction between the country's haves and have nots.

Drop into the mix, an unfolding ecological disaster and you get a swamp full of dollars whose inhabitants range from impromptu militias with creative names to Shell, from terrorists to ExxonMobil, from leaking pipelines to illegal crude sales.

© Gaurav Sharma 2010. Book Cover © I.B. Tauris