Contextualising what’s afoot in Spain

No one can argue that Spain is among the big beasts of the euro zone, a country boasting high profile companies from banking to oil and gas. However, all is not well with this beast. The financial crisis and subsequent property market crash have taken their toll.

At present, the country has one of the highest unemployment rates in the euro zone, rising public debt and low consumer confidence.

To understand Spain's current economic malaise, one must contextualise the past – from recent politics to socioeconomics issues, from past histories to recent discontent. Veteran journalist William Chislett's brilliantly concise book - Spain: What everyone needs to know - helps you do just that.

The author, who had his first brush with Spain in 1970s and has lived there since 1986, begins the narrative by touching on the country's often turbulent history from the seventh century to the Franco years, and recent past either side of the Madrid bombings.

Chislett demonstrates strength in brevity, as this book of just under 230 pages, split into seven parts touches on the key protagonists who shaped or help shape Spain for better or for worse. In each case, from Franco to Zapatero, the author has interpreted trends and sentiments as he perceived them with a sense of balance, wit and proportion which is admirable.

Privatisations of state-owned companies from telecommunications to banks and of course that oil and gas behemoth called Repsol are duly mentioned with details of how, when and why Spain crossed that bridge. With the summary done, Chislett turns his attention to what lies ahead for the euro zone's fourth largest economy currently grappling with huge socioeconomic problems.

You can literally breeze through this splendid book and be wiser for it if Spain interests you. The Oilholic is also happy to recommend it to students of economics, the European Union project and those of a curious disposition with a thirst for improving their general knowledge about a country, its people and the challenges they face as a nation.

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© Gaurav Sharma 2014. Photo: Front Cover – Spain: What everyone needs to know © Oxford University Press, July 2013.

On Brent's direction, OPEC, China & more

Several conversations last week with contacts in the trading community, either side of the pond, seem to point to a market consensus that this summer’s rally in the price of Brent and other waterborne crudes was largely driven by geopolitical concerns. Tight North Sea supply scenarios in September owing to planned maintenance issues, the nagging question of Iran versus Israel and Syrian conflict continue to prop-up the so called ‘risk premium’; a sentiment always difficult to quantify but omnipresent in a volatile geopolitically sensitive climate.

 

However, prior to the announcement of the US Federal Reserve’s economic stimulus measures, contacts at BofAML, Lloyds, Sucden Financial, Société Générale and Barclays seemed to opine that the current Brent prices are nearing the top of their projected trading range. Then of course last Thursday, following the actual announcement of the Fed’s plan – to buy and keep buying US$40 billion in mortgage-backed securities every month until the US job market improves – Brent settled 0.7% higher or 78 cents more at US$116.66 per barrel.

 

Unsurprisingly, the move did briefly send the WTI forward month futures contract above the US$100 per barrel mark before settling around US$99 on the NYMEX; its highest close since May 4. But reverting back to Brent, as North Sea supply increases after September maintenance and refinery crude demand witnesses a seasonal drop, the benchmark is likely to slide back downwards. So for Q4 2012 and for 2013 as a whole, Société Générale forecasts prices at US$103. Compared to previous projections, the outlook has been revised up by US$6 for Q4 2012 and by US$3 for 2013 by the French investment back.

 

Since geopolitical concerns in the Middle East are not going to die down anytime soon, many traders regard the risk premium to be neutral through 2013. That seems fair, but what of OPEC production and what soundbites are we likely to get in Vienna in December? Following on from the Oilholic’s visit to the UAE, there is more than just anecdotal evidence that OPEC doves have begun to cut production (See chart above left, click to enlarge).

 

Société Générale analyst Mike Wittner believes OPEC production cuts will continue with the Saudis joining in as well. This would result in a more balanced market, especially for OECD inventories. “Furthermore, moderate demand growth, led – as usual – by emerging markets, should be roughly matched by non-OPEC supply growth, driven by the US and Canada,” Wittner added.

 

Of course, the soundbite of last week on a supply and demand discussion came from none other than the inimitable T. Boone Pickens; albeit in an American context. The veteran oilman and founder of investment firm BP Capital told CNBC that the US has the natural resources to stop importing OPEC crude oil one fine day.

 

Pickens noted that there were 30 US states producing oil and gas; the highest country has ever had. In a Presidential election year, he also took a swipe at politicians saying neither Democrats nor Republicans had shown “leadership” on the issue of energy independence.

 

At the Democratic convention the week before, President Obama boasted that the US had already cut imported oil by one million barrels per day (bpd). However, Pickens said this had little to do with any specific Obama policy and the Oilholic concurs. As Pickens explained, “The economy is poorer and that will get you less imports. You can cut imports further if the economy gets worse.”

 

He also said the US should build the Keystone XL oil pipeline, currently blocked by the Obama administration, to help bring more oil in to the country from Canada. Meanwhile, US Defense Secretary Leon Panetta is in Japan and China to calm tempers on both sides following a face-off in the East China Sea. On Friday, six Chinese surveillance ships briefly entered waters around the Senkaku Islands claimed by Japan, China and Taiwan.

 

After a stand-off with the Japanese Coastguard, the Chinese vessels left but not before the tension level escalated a step or two. The Chinese reacted after Japan sealed a deal to buy three of the islands with resource-rich waters in proximity of the Chunxiao offshore gas field. Broadcaster NHK said the stand-off lasted 90 minutes, something which was confirmed over the weekend by Beijing.

 

With more than just fish at stake and China’s aggressive stance in other maritime disputes over resource-rich waters of the East and South China Sea(s), Panetta has called for “cooler heads to prevail.”

 

Meanwhile some cooler heads in Chinese boardrooms signalled their intent as proactive players in the M&A market by spending close to US$63.1 billion in transactions last year according a new report published by international law firm Squire Sanders. It notes that among the various target sectors for the Chinese, energy & resources with 30% of deal volume and 70% of deal value and chemicals & industrials sectors with 21% of deal volume and 11% of deal value dominated the 2011 data (See pie-chart - courtesy Squire Sanders - above, click to enlarge). In deal value terms, the law firm found that North America dominates as a target market (with a share of 35%) for the Chinese, with oil & gas companies the biggest attraction. However, in volume terms, Western Europe was the top target market with almost a third (29%) of all deals in 2011, and with industrials & chemicals companies being the biggest focus for number of deals (29%) but second to energy & resources in value (at 18% compared to 61%).

 

Big-ticket acquisitions by Chinese buyers were also overwhelmingly concentrated in the energy & resources industries where larger transactions tend to predominate. Sinopec, the country’s largest refiner, brokered a string of the largest transactions. These include the acquisition of a 30% stake in Petrogal Brasil for US$4.8 billion in November last year, a US$2.8 billion deal for Canada's Daylight Energy and the 33.3% stake in five oil & gas projects of Devon Energy for US$2.5 billion.

 

Squire Sanders notes that Sinopec, among other Chinese outbound buyers, often acquires minority stake purchases or assets, in a strategy that allows it to reduce risks and gain familiarity with a given market. This also reduces the likelihood of any political backlash which has been witnessed on some past deals such as CNOOC’s hostile bid for US-based oil & gas producer Unocal in 2005, which was subsequently withdrawn.

 

Since then, CNOOC has found many willing vendors elsewhere. For instance, in July this year, the company announced the US$17.7 billion acquisition of Canadian firm Nexen. To win the deal, which is still pending Ottawa’s approval, CNOOC courted Nexen, offering shareholders a 15.8% premium on the price shares had traded the previous month.

 

Squire Sanders’ Hong Kong-based partner Mao Tong believes clues about direction of Chinese investment may well be found in the Government’s 12th five-year plan (2011-2015).

 

“It lays emphasis on new energy resources, so the need for the technology and know-how to exploit China’s deep shale gas reserves will maintain the country’s interest in US and Canadian companies which are acknowledged leaders in this area,” Tong said at the launch of the report.

 

Away from Chinese moves, Petrobras announced last week that it had commenced production at the Chinook field in the Gulf of Mexico having drilled and completed a well nearly five miles deep. The Cascade-Chinook development is the first in the Gulf of Mexico to prospect for offshore oil using a floating, production, storage and offloading vessel instead of traditional oil platforms.

 

Finally, after the forced nationalisation of YPF in April, the Argentine government and Chevron inked a memorandum of understanding on Friday to explore unconventional energy opportunities. Local media reports also suggest that YPF has reached out to Russia's Gazprom as well since its nationalisation in a quest for new investors after having squeezed Spain’s Repsol out of its stake in YPF.

 

In response, the previous owner of YPF said it would take legal action against the move. A Repsol spokesperson said, “We do not plan to let third parties benefit from illegally confiscated assets. Our legal teams are already studying the agreement."

 

Neither Chevron nor YPF have commented on possible legal action from Repsol. That’s all for the moment folks. Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Graph: OPEC Production 2010-2012 © Société Générale CIB 2012. Chart: Chinese M&A activity per sector by deal valuation and volumes © Squire Sanders. 

Oh drat! Brits ask what the ‘Frack’!

The Oilholic arrived back home from Texas last week to the sound of fellow Brits discussing ‘fracks’ and figures in favour of shale gas prospection here. All UK activity ground to a halt last year, when a couple of minor quakes majorly spooked dwellers of Lancashire where a company – Cuadrilla – was test fracking.

Fast forward to April 2012, and a UK government appointed panel of experts including one from the British Geological Survey now says, "There was a very low probability of other earthquakes during future treatments of other wells. We believe that (last year's) events are attributable to the existence of an adjacent geological fault that had not been identified. There might be other comparable faults, (and) we believe it's not possible to categorically reject the possibility of further quakes."

However, it added that while the tremors may be felt in areas where fracking is conducted, they won’t be above magnitude 3 on the Richter scale and were unlikely to cause any significant damage. The panel’s report has now been sent for a six-week consultation period.

The British Department of Energy and Climate Change (DECC) is expected to issue a set of regulations soon and ahead of that a verbal melee has ensued with everyone for or against wanting a say and environmental groups crying foul. However, there was near unanimous approval for a control mechanism which would halt fracking activity as soon as seismic levels rise above 0.5 on the Richter scale. The engineers wanted in too.

Dr. Tim Fox, Head of Energy and Environment at the Institution of Mechanical Engineers, says, “The recommendations that any shale gas operations should be more closely monitored are welcome. UK and European environmental regulations are already some of the most stringent in the world; and these proposed precautions are a good example of how to help mitigate the risk of any damage caused by seismic activity as a result of shale gas activity.”

City energy analysts also gave the panel’s conclusions a cautious thumbs-up as there is a long way to go before a meaningful extraction of the gassy stuff occurs in any case. Jim Pearce, Energy and Process Industries practice partner at global management consultancy A.T. Kearney, says, “Shale developments offer the UK an opportunity to exploit a relatively clean resource and fill the energy gap that is opening up once again as nuclear projects come under threat. If the UK is going to use gas we should look for the best available source, which is arguably shale gas. Moreover, shale developments may also provide the UK’s chemical industry with a much needed boost if ethane and other NGL’s (natural gas liquids) are also found.”

He opines that UK and the rest of Europe are falling rapidly behind on gas supply security and cost. “Our key industries will be coming under increasing threat if we do not react to the new order that shale has created. We have a great opportunity here to take the lessons learned from the US and benefit from them,” Pearce adds.

Oh what the ‘frack’, that’s surely reason enough to tolerate a few quakes providing the security of the water table is preserved and concerns over water pollution are addressed. Yikes, that’s another quaky one! Away from shale, the 30th anniversary of the Falkland Islands war between the UK and Argentina came and went earlier this month marked by remembrance services for the fallen, but accompanied by the usual nonsensical rhetoric from British and Argentine officials, more so from the latter irked by oil prospection off the Islands’ shores which it claims as its own.

Five independent British oil companies are exploring four areas for oil in Falkland Islands’ waters, but only one of these – Rockhopper – claims to have struck meaningful reserves of the crude stuff. It says it could get 350 million barrels in the Sea Lion field to the north of the islands, which it plans to bring onstream by 2016. However, analysts at Edison Investment Research noted in March that a total of 8.3 billion barrels could lie offshore. So expect each anniversary and the run up to it from here on to be accompanied by ‘crude’ rhetoric and much frothing from Buenos Aires.

When it comes to being ‘crude’, the Argentines are in a class of their own. Just ask Repsol! On Wednesday, the country’s Senate approved the controversial decision, announced last week by President Cristina Fernandez de Kirchner, to nationalise Repsol YPF thereby stripping Spanish giant Repsol’s controlling stake in YPF.

Following the bizarre but locally popular announcement last week, while its stock plummeted, rating agencies scrambled to downgrade Repsol YPF’s ratings with Fitch Ratings and Moody’s doing so in tandem. Warnings to Argentina from the Spanish government, EU Trade Commission and last but not the least Repsol itself have since followed.

Repsol wants around US$10 billion for its 57.4% stake in YPF, but Argentina has said it does not recognise that valuation. There also one more thing they don’t possibly recognise - it’s called ‘sound economics’ which often gets trumped by ‘good politics’ in that jurisdiction. A number of analysts’ notes have been doing the rounds since April 17th when Kirchner went down the route towards nationalisation. Most had the same dire forecast for Repsol, but for the Oilholic, one issued by the inimitable Stuart Joyner, head of oil and gas at Investec, stood out.

In it he notes, “The apparent decision to nationalise YPF means we move to a worst case for the value of Repsol's 57.4% stake. The Argentine Tango is the consummate dance of love, but there was little affection for the country's largest foreign investor in Buenos Aires yesterday.”

Well said sir! Meanwhile with near perfect symmetry while the Argentines were being crudely castigated, Time magazine decided to name Brazilian behemoth Petrobras' CEO Maria das Graças Silva Foster one of the most influential people in the world. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Gas pipeline © National Geographic photo stock.