Third Time Lucky for OMV?

OMV’s takeover of Turkey’s Petrol Ofisi A.S. should be applauded for the Austrian company’s sheer persistence in its attempts to acquire strategic assets, if nothing else. It has a mixed record at best when it comes to takeover attempts, as I was joking with my old colleague CNBC’s Steve Sedgwick at the OPEC summit in Vienna ten days ago.

OMV was successful in acquiring Romania’s Petrom in 2004 but failed spectacularly in its takeover attempt of Hungary’s MOL which was swiftly and successful rejected by the Hungarians in June 2007. As I had just arrived in Vienna from Budapest, Steve said, as only Steve can, that I’d been "MOL"-ing over OMV’s fortunes in the wrong city. The failed bid for MOL aside, OMV also tried and failed to acquire utility Verbund.

In a statement on Friday, OMV said the Turkish acquisition, slated at €1 billion ($1.4 billion) is a further step in its growth strategy and aims at "positioning Turkey as a third hub, besides Austria and Romania."

OMV would now own 95.75% of the Turkish company after buying out Dogan Holding's stake of 54.17% stake in it; formalities are set to be completed within the next three months. The companies have also agreed to pay a dividend to Petrol Ofisi shareholders prior to that.

Ahead of the announcement, ratings agency Standard & Poor’s noted that Petrol Ofisi's credit profile would benefit were OMV to become its majority owner. It placed the Turkish company’s 'B+' long-term corporate credit ratings on CreditWatch with positive implications.

Per Karlsson, credit analyst at Standard & Poor's, said, "The positive implications of the CreditWatch placement reflect our view that should such a transaction materialize we are likely to raise the ratings on Petrol Ofisi by one notch or more."

As for takeover attempts – looks like OMV has been third time lucky!

© Gaurav Sharma 2010. Photo: Photo: OMV Petrol Station, Austria © OMV

Performance of Russian Oil Co’s Remains “Robust”

A recent report by ratings agency Moody’s suggests that Russian integrated oil and gas companies demonstrated financial robustness during the economic downturn, as "certain key features" acted to support their operational and financial profiles.

It notes that negative effects of low oil prices were mitigated by a devaluation in the Rouble and favourable changes to the Russian tax system, which along with cost-containment initiatives and good access to funding boosted the companies' resilience to market turmoil. In fact, the ratings agency said outlook for the sector is stable.

The report titled "Russian Integrated Oil and Gas Companies: 2009-10 Review and 2011 Outlook", further suggests that since late 2009 and all through H1 2010, the operating and financial performance of Russian players gradually improved post-recession, lifted by relativelyhigher oil prices as the global economy recovered.

Moody’s now feels that the operating performance of Russian oil companies is likely to improve in 2010 and in 2011 on the back of stronger oil prices and ongoing cost-cutting and modernisation initiatives. However, the ratings agency does not believe there will be a major upwards trend in profitability in H2 2010 or in 2011, due to the growing tax burden and inflation in non-controllable costs, notably energy and transportation tariffs.

Furthermore, it must be noted that despite overseas overtures, the current reserves and production bases of Russian companies remain concentrated in their own backyard. This, according to the report, "exposes them to geological and geopolitical risk."

Despite the lack of positive ratings momentum, in 2010, Russian players benefited from greater access to bank and bond funding, with lenders offering longer maturities at lower rates. Moody's expects lending conditions to continue to improve in 2011. In addition, overall free cash flow improved in 2010 and will likely remain marginally positive in 2011 as companies ramp-up capital expenditure on projects that were delayed during the downturn.

Continuing with Russia, on October 22 Moody's assigned a provisional rating of (P)Baa2 to the upcoming Eurobond issue by Lukoil via Lukoil International Finance B.V., its indirect and wholly owned subsidiary. The rating is based on an irrevocable and unconditional guarantee from the Russian company and is in line with the company's issuer rating of Baa2. The outlook is stable, according to Moody’s.

The proceeds are largely expected to be used by Lukoil for general corporate purposes, as well as refinancing of existing indebtedness. Moody's believes the Eurobond issue will support Lukoil's liquidity position.

© Gaurav Sharma 2010. Photo: Photo: Oil Drill Pump, Russia © Lukoil

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

Final Thoughts From the 157th OPEC Conference

Alongside Thursday’s decision by OPEC to hold its official oil production target at 24.84 million barrels a day, i.e. the level set following a production cut in December 2008; the cartel also noted that global oil demand had dipped in two concurrent years; a situation unseen since the 1980s.

It bemoaned the “rollercoaster” ride in crude prices, particularly between Q4 2007 and Q1 2009. As usual speculators were blamed, with OPEC noting that oil had increasingly emerged as an asset class, with “excessive speculation adding appreciably to market volatility.”

It also appears that the cartel is irked by renewable energy initiatives or at least the talk of renewable energy. OPEC believes that the ambiguity of a number of energy and environmental policies, often with “evidently over-ambitious targets”, particularly in developed regions, has led to uncertainty in regards to future oil demand requirements.

The 158th OPEC conference would be held in Quito, Ecuador on December 11th, where the cartel hopes to publish its Long Term Strategy, as discussed by its 12 member nations here in Vienna on Thursday. Following that, OPEC would meet again in June 2011 in Vienna.

In a surprise move, it was confirmed Iran would assume OPEC presidency in January 2011; it last held the post in 1975. And last but not the least, there is finally a lady at the OPEC table – Nigeria's petroleum minister - Diezani Kogbeni Alison-Madueke, who having been a Shell executive took a certain amount of delight in telling the assembled press scrum that she had been in male dominated industries before and pretty much held her own!

To summarise, OPEC – in line with prevailing sentiment – noted that the market remains well supplied and given the downside risk to the global economy, did not feel the need to raise production.

That’s it from Vienna – time to say Auf Wiedersehen!

© Gaurav Sharma 2010. Photo: Nigeria's petroleum minister Diezani Kogbeni Alison-Madueke (Centre), © Gaurav Sharma, OPEC 157th Conference, Vienna, Oct 14, 2010

UK Drilling Activity Down But Exploration is Rising

Offshore drilling in the UK Continental Shelf (UKCS) dipped 20% Q3 2010 on an annualised basis, according to the latest oil and gas industry figures obtained from Deloitte.

It’s Petroleum Services Group (PSG), revealed in a report published on Friday that a total of 24 exploration and appraisal wells were spudded in the UK sector between July 1 and September 30, compared with 30 exploration and appraisal wells during the corresponding period last year.

Concurrently, PSG also said a 4% quarter over quarter rise was noted in the number of wells spudded in the UKCS in the third quarter of this year, attributed to higher levels of exploration drilling in the UKCS, up 32% for the first three quarters of 2010 when compared to the same period of 2009.

Overall, international deal activity saw a marked increase during the third quarter of 2010, following a period of no activity at all in the previous quarter. Most notable were the corporate acquisitions announced following KNOC’s acquisition of Dana and EnQuest’s decision to buy Stratic Energy.

However, corporate level activity within the UK has decreased since the second quarter of 2010 with only one corporate asset sale announced compared to three announcements and one completion in the previous quarter.

Graham Sadler, managing director of Deloitte’s PSG, commented in a statement that seeing deal activity in the UK decreasing for a second consecutive quarter was not a major surprise.

“There is evidence of a shift in company strategy as organisations are opting for less costly and less risky policies as they look to adjust their portfolios. This is reflected in the fact that the number of farm-ins announced has almost tripled this quarter to 11, in comparison with just four announcements during the second quarter. Until more confidence in the recovery of the market becomes further evident, this may be a trend that continues in the future,” Sadler said.

Elsewhere in the UKCS, Norway saw seven exploration and appraisals wells spudded, which represents a 56% decrease when compared to the number of wells drilled in the second quarter of this year.

Netherlands, Denmark and Ireland also reported low levels of drilling activity according to the Deloitte report while the four wells spudded in the Cairn Energy drilling programme in Greenland marked the first activity in the region for a decade.

On the pricing front, despite the overall decreased activity, the price of Brent Crude oil has remained stable throughout the whole of the third quarter of 2010, achieving a quarterly average of US$76.47 per barrel.

Carrying on with the theme, I met several analysts here at OPEC who think Brent appears to be winning the battle of the indices. The sentiment is gaining traction. David Peniket, President and Chief Operating Officer of Intercontinental Exchange (ICE) Futures Europe remarked in May that WTI is an important US benchmark but that it does not reflect the fundamentals of the global oil market in the way that Brent reflects them.

© Gaurav Sharma 2010. Photo: Andrew Rig-North Sea © BP