Post OPEC quips & LatAm, Shale outlook

The Oilholic returned from the OPEC+ ministers’ summit in Vienna, Austria to a crazy few weeks of crude chatter and of course umpteen discussions on the Saudi Aramco IPO.

Here are yours truly's thoughts on the final communiqué from OPEC via Forbes, and another take on the Aramco IPO via the same publication plus a ReachX podcast touching on the issue of the company's valuation kerfuffle.  

Away from it all, two pieces of research caught one's eye this month. Starting with the first of two, rating agency Moody's reckons 2020 will be a stable year for the Latin American oil and gas sector. While, global economic environment and trade disputes could become a concern to Latin America's commodity exporters, including those in the business of black gold and natural gas, Moody's opined that many regional players have indeed improved their capital structures. 

"Business conditions will vary in 2020, contributing to stable overall conditions. A shift toward exploration and production favours credit quality for Brazil's national oil company Petrobras, but 2020 production appears stable at best in Mexico as investment stalls," says Moody's Senior Vice President Nymia Almeida.

Mexico investment momentum in oil and gas is negative for 2020 as national oil company PEMEX has limited ability to increase investments and deliver on production and reserves targets, Almeida added. 

Away from Latin America, Rystad Energy predicted that even with potentially lower prices, the production outlook for North American shale "appears robust" in the years ahead.

In Norway-based analysis firm's base-case price scenario - that assumes a WTI price at $55 per barrel in 2019; $54/bbl in 2020; $54/bbl in 2021 and $57/bbl in 2022 - would see North American light tight oil supply will reach 11.6 million barrels per day (bpd) by 2022. 

This implies a compound annual growth rate (CAGR) of 10% from 2019 to 2022. In a price scenario with the WTI oil price remaining flat at $45 per barrel, supply of the same would plateau at 10.1 million bpd towards 2022.

"The flat development of US light tight oil production is also possible in lower price scenarios, but we would likely see an initial period of multi-quarter production decline, with output stabilising at a lower level," said Mladá Passos, product manager of Rystad Energy's Shale Upstream Analysis team. Plenty to ponder about as 2020 approaches, but that's all for the moment folks. Keep reading, keep it 'crude'!

To follow The Oilholic on Twitter click here.

To follow The Oilholic on Forbes click here.

To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2019. Photo: Oil exploration site in Oman © Royal Dutch Shell. 

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’!

To follow The Oilholic on Twitter click here.
To follow The Oilholic on Google+ click here.
To follow The Oilholic on Forbes click here.
To email: gaurav.sharma@oilholicssynonymous.com

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

A tailored guide to minerals and mining

Mining and quarrying together with oil & gas prospection complete the extractive industries landscape. Minerals have myriad uses in several key sectors of the world economy. Specifically in the oil & gas world, minerals used in the drilling process (e.g. - barytes, bentonites and frac sands) are key components of the hydrocarbon extraction processes.

 

Within this global setting, exploration, logistics and allied businesses are frequently impacted by constantly evolving commercial, legal, health and safety and cross-jurisdictional due diligence scenarios. Furthermore, professionals in the business as well as corporate project sponsors also need to keep abreast of technical and scientific matters ahead of a project feasibility study.

 

The book – Minerals and Mining: A Practical Global Guide – not only seeks to address an information gap in sector but also hopes to mitigate the information overload in this day and age. This succinct handy guide of just under 300 pages dwells on key legal and commercial concerns of the minerals and mining world. Various aspects of the subject at hand are examined by industry professionals via 19 detailed chapters.

 

Each chapter has been authored by jurisdictional experts ranging from Argentina to Russia  who work for some of the most recognisable brands in the legal and advisory business – including, but not limited to Allen & Overy, Norton Rose, SNR Denton and KPMG.

 

Topics include regulations, agreements, tariffs on minerals and mining; legal processes concerning  licences, concessions, production sharing and mining development agreements; financing; mining management and operating facets and last but not the least - the sale and purchase of mining assets. Additionally, mineral trading, environmental protection, social responsibility, accounting and taxation in various jurisdictions have also been examined.

 

The treatment of Latin American nations – Argentina, Brazil, Chile, Mexico and Peru – stands out for its veracity. However, it is the detailed chapters on emerging scenarios in Africa that sealed the deal for the Oilholic. As with works of this nature, consulting editor Per Vestergaard Pedersen of Lett Law Firm has done a commendable job of knitting this book of experts together. He has also authored an informative chapter on Greenland; a jurisdiction where mining activities have grown exponentially between 2002 and 2012.

 

On the whole, as expected the book is aimed at professionals with a mid-tier and upwards knowledge of the sector. The Oilholic believes it would make a handy and informative reference guide for legal practitioners and financiers. Executives at advisory firms, banks, engineering consultants and mining, shale, oilfield drilling project EPC contractors would appreciate it as well.

 

© Gaurav Sharma 2012. Photo: Front Cover – Minerals and Mining: A Practical Global Guide © Globe Law and Business

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.