Tag Archives: International

Lybia In Flames And The Clash of Civilizations

English, Global Economy, Lybia, On the cover

How naive we were. We thought that the riots in Egypt were going to wake up a sort of semi-hippy dream of peaceful transition to an oasis of Western-style liberal democracy.The Western world is increasingly lost, and we believe our own illusions. And the illusion is over.

On Tuesday, Colonel Gaddafi slashed all expectations and brought us back to reality . From the balcony of one of his homes, speaking to a virtual audience as the camera focused a huge golden statue of a fist crushing a military aircraft, he reminded us that the delusions of peace and democracy were just that, delusions. The picture was worth a thousand words. The Colonel is not resigned to be another Mubarak .

Until last week, the risk to the energy market appeared to be limited because the process in Egypt and Tunisia was contained with no impact on the supply of oil and gas. Tunisia and Egypt were not high-risk countries. The protests were relatively peaceful. They had weak governments. The army was close to the people. None of the two countries owes large sums to Western banks and governments, and none was a significant net exporter of oil (both net importers of 25 thousand barrels per day in 2010 due to growing demand).

Libya is different . Because Libya is a large net exporter and the real army “is” Gaddafi’s 120 thousand soldier. Because Gaddafi arrived in 1969 when he was 27 years old in a coup that many thought would fail, and has shaped the country to his image and personality, with a mixture of Islam, iron hand, socialism, capitalism and good old totalitarianism … and there he has remained, longer than any of the international leaders, rivals or friends.

Now anarchy is about to explode along the risk of breaking up the country in tribal areas. And if that happens, billions of western investments into the country will be wiped out.

The Western press shows a country seemingly unanimous in their demands and objectives. Nothing is further from the truth. The Libyan population is extremely diverse, proud and a machine of military prowess. Both Italy and the late Ottoman Empire are aware of the risk of facing the Libyan tribes. Of the 140 tribes in the country, thirty are considered highly relevant as agglutinating powers, of which four have real influence in the circles of power. The tribe Misurata is one of them, particularly strong in two cities, Benghazi and Darneh. The tribes Beni Hilal Beni Salim have goals and interests that are perceived to be opposed to Colonel Gaddafi, but another, the Magariha tribe, is considered very close to the leader, although some observers believe it may be precisely this one which could instigate a coup. The risk of civil war and dismemberment of the state is far from negligible. And democracy or Alliance of Civilizations? No way.

Do not forget that Colonel Gaddafi has been a unique dictator, only comparable to Saddam Hussein in his mix of charisma, influence and iron fist control of a highly complex ethnic puzzle. Rumors that Gaddafi has a personal army of 120k mercenaries (compared to 50k of the official army), willing to blast wells and refineries and defend his position, make Libya a dangerous powder keg and the similarities with the Iraq of Saddam Hussein in 1991 are quite significant.

Also, do not forget that the Libyan leader has gone from being public enemy number one in the seventies and eighties to one of the most defended by politicians of all colors. While he was self-proclaimed defender of Palestine, the “anti-imperialism” of Cuba and of Islam, he also became a major trading partners for Italy, the US and UK, laying down his weapons of mass destruction in 2003 and collaborating with the West in the war on terror.

This led to a huge flow of Western investment between 2001 and 2010, particularly Italian. And Libyan oil concessions are some of the most attractive margins and returns for firms in the country. Lybia has also been one of the largest investors in Italy, with c€50bn in investments including Fiat,Unicredit and ENI.

Colonel Gaddafi from this balcony reminds us that we have much to lose. And that the examples of Egypt and Tunisia are nothing more than that, examples. That MENA (Middle East and North Africa) is not the EU. Each country is a world of ethnic, tribal, religious and military power. And the risk of further deterioration and lengthening of the crisis is not small, bringing to mind the memory of Saddam Hussein in 1991, whom also seemed trapped after the massacres of Kurds and Shiites and still remained 12 more years in power. And the information I receive from the Middle East reminds me that Bahrain, Syria and Jordan will not be comparable to Egypt and Tunisia.

Saudi Arabia, Oman, Kuwait and UAE still remain in relative calm. They should stay that way. Saudi Arabia has announced measures to increase social security protection, subsidies for housing and job creation as well as increasing the budget for charity and reduction of citizens’ bank debt. From our European paternalism we may criticize what we want, but do not forget the importance of balance in geopolitics. I recommend “The Lesser Evil” by Michael Ignatieff. Because things can get much nastier.

Libya produces 1,661,000 barrels per day of crude, 80% of them for export, and 16BCM of natural gas. It has about 44 billion barrels of oil reserves and 54 trillion cubic feet of natural gas reserves . And unlike in Egypt, supply shortages are a reality.

ENI, OMV, and Repsol, have the highest Lybian exposure, with 20%, 24% and 7% respectively of its net asset value in the country. They all announced on Tuesday the evacuation of nearly all staff in the country.

Supplies of gas to Italy through the Greenstream pipeline have been suspended. This means 8BCM of gas and nearly 80% of supplies from Libya to Italy, which accounts for 10% of the total supply of gas to the country.

The reason why the commodities market has reacted more strongly to Libya than the Egyptian crisis lies not only in the aggressiveness and forcefulness of the government’s response to the demonstrations, but the fact that the majority of Libya’s production is exported. If we consider that there is a risk of cuts in oil production because of the crisis in the MENA region, the net exported barrels (total production minus domestic demand) of Libya, Yemen and Bahrain account for 1.7 million barrels a day, almost 1.8% global production.

Today those possible “lost” barrels can easily be replaced immediately by barrels of spare capacity from Saudi Arabia (4 million barrels a day). But the contagion risk, and inaction of the West are starting to shift the market’s mind to the possibility that the spare capacity of OPEC as a whole, 5.5 million barrels a day can evaporate rapidly, and then find ourselves in a really problematic environment.

But the danger is complacency and to think that this ends here, and stay looking and waiting. Italy at least has a chance to mitigate the Libyan risk due to its access to Russian gas from Gazprom. But for Spain, although Libya is irrelevant within the total supply, the real risk lies in Algeria, followed by Qatar and Egypt. Algeria was no less than 30% of gas supplies to Spain in 2010, Qatar and Egypt 15% 8%. And Algeria, in terms of geopolitical risk, comes after Libya . Do not forget that in Algeria there were intense protests in January, but also years ago, long before the crisis erupted in Tunisia and Egypt.

Those who mention nationalization risks should not forget that that process already occurred. The vast majority of producing countries nationalized all their reserves between 1951 and 1980. But, as mentioned here two weeks ago, oil companies are going to be, as they have been for decades, the ones paying in this situation. All those investors who have been driven to buy shares of large integrated oil stocks in a Bear Market forget that they are mere concessionaires and that the PSC (Production Sharing Contracts) are at risk of further cuts, at best, or fall into the limbo of a long and tedious administrative chaos. And it should be noted that the Libyan PSCs are some of the most attractive.

In the end, Samuel Huntington was quite right in his indispensable book, “The Clash of Civilizations.” Most of the instigators of the riots don’t seek Western democracy. They seek regime change and conquest. Huntington did not predict that the detonating force would be the implosion of some Middle Eastern countries First, implosion, in which the Internet has played an undeniable detonator effect, and after explosion. And the shock wave could be coming towards the European Union.

Egypt: A brief guide to the energy implications of the unrest

Egypt: A brief guide to the energy implications of the unrest

Energy, Global Economy, On the cover,

Egypt: A brief guide to the energy implications of the unrestHere is a summary of my views on the Egypt crisis, stocks involved and how to play it.In terms of oil, none of the countries presently affected is a major producer in a global context of oil (1.1mb/d). Yemen and Egypt are important for gas markets as significant producers of LNG for international supply (20mtpa/ 8% global capacity). However, they are very important for low cost deliveries to Europe and for South Europe refiners (Repsol gets part of its crude for Cartagena and ENI for Toscana from Egypt).

The threat of contagion within the MENA region (Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Palestinian territories, Qatar, Saudi Arabia, Ethiopia, Sudan, Syria, Tunisia, United Arab Emirates and Yemen) is what most analysts see as most worrying. I would categorize the risk as low in the pure arab states (Saudi-EUA-Kuwait and Iran) and higher in Algeria, Jordan and Syria, where civil unrest has been highest (food prices up 59% in Jordan and Syria while unemployment soared). Out of these, only Algeria is a serious threat to global supply of gas.

Algeria has 159 trillion cubic feet (Tcf) of proven natural gas reserves – the tenth-largest natural gas reserves in the world, and the second largest in Africa. Algeria produced 3.08 Tcf of dry natural gas in 2010, and consumed 1 Tcf of dry natural gas domestically.

Egypt consumed more than it produced for the first time in 40 years in 2010.

Egypt’s EGPC is a strange animal as it does not operate any of the licenses in the country, but foresees the developments and takes the money. Most of the production is offshore or in the Western desert and has not been affected by the riots. As an example, in the past 20 years of presence of Apache in the country there has never been a change of license or nationalization. Egypt also has a very advantageous (for the country) taxation system, local content employment requirements and now that is a net importer, needs more from IOCs than ever.

The final risk is the possibility of disruption to the smooth passing of ships through the Suez Canal. So far this has been denied as a threat.

Companies exposed to Egypt and Algeria.

If we establish the low(er) risk of disruptions in Saudi, Iran, Iraq, etc… The key companies exposed to the Egypt problems are:

OMV, REPSOL & ENI have the largest exposure with c.20% of their commercial reserves in the region.

ENI’s Egyptian exposure is 14% of group production and 7% of upstream value. However, ENI is the most exposed to North Africa and the MENA with additional risk to supplies to Italy from Egypt and Algeria. Eni has a limited exposure to Egypt but 36% to the region (including Libya and Algeria).

OMV has a 20% exposure to the region (mainly Lybia) and recently added exposure to Tunisia through an acquisition. OMV, Total and BP each gets 3-4% of their total production from Tunisia, Egypt and the Yemen in aggregate. However, Egypt, Tunisia and Yemen account for quite more than that in their growth strategy and give them the highest ROCE. Exxon also drills offshore Egypt but the exposure is negligible. Chevron and Conoco also only marginally present. Of the rest, exposure is also quite small, including Statoil with less than 10% upstream value exposure (mainly Algeria).

BG. Egypt and to a lesser extent Tunisia are relevant production centres with around 30% or 220kboe/d of its 2009 production. Worth noting it is mostly offshore, with a large presence of local workforce and that there has been no disruption to activities.

GDF-Suez, Shell. Jointly operate the Alam El Shawish concession in the western desert area of Egypt. In Egypt, GDF Suez holds stakes in two other offshore licenses: it operates and owns 50% in West El Burullus area (together with Dana Petroleum, bought by KNOC), where an initial discovery was announced in 2008 and has 10% in the North West Damietta licence operated by Shell (61%). In liquefaction gas, GDF owns 5% in the first LNG train from the Idku plant that delivers 4.8 bcm of natural gas annually and buys its total production. GDF SUEZ loads about 60 cargoes per year.

Gas Natural-Fenosa, Repsol YPF. Gas Natural owns and operates the Egypt Damietta liquefaction plant. The Egyptian government told Gas Nat-Fenosa to consider importing gas from abroad to meet the needs of the Damietta liquefaction unit located on the Egyptian Mediterranean coast, after the company suffered from a set back in its supplies from the gas national network during the first half of the fiscal year 2009/2010. The firm currently receives 320 million cubic feet of gas per day, 70% of it from the Egyptian Natural Gas Holding Company (EGAS).60% of natural gas delivered to Spain comes from Sonatrach (Algeria). Risks have increased in an ongoing and well-known dispute between the countries. Gas Natural lost the license for Gassi Touil in 2009.

RWE. In recent years the company made a number of major gas discoveries in Egypt and boosted its activities considerably with the acquisition of additional concessions. RWE Dea has a total of 13 onshore and offshore concessions in Egypt, across a concession area of about 13,300 square kilometres in the Nile Delta, Gulf of Suez and Western Desert.

EDF through Edison (Italy) Holds the $1.4-billion concession agreement for the offshore fields of Abu Qir, which has lost them money and were trying to sell or renegotiate.

Apache. Egypt is 21% of Apache’s production. Most of their assets are in the Western Desert. Apache is critical to Egypt as it drills 50% of all the country wells, supplies gas domestically at prices that are 60% below international prices, and employs 5000 Egyptians. Apache pays $11m a day in taxes to the treasury.

Premier has a very small exposure to Egypt (only 20% stake in a non-operated field).

Of services, Halliburton and Schlumberger undertake around 70% of the oil and gas service contracts in Egypt. Transocean has 10 jack-up rigs in Egypt, more than any other company, although six of those rigs are either cold-stacked or idle. Diamond Offshore has 3 rigs, 8% of its total rig count. Rowan Companies has 1 rig, but it wasn’t in use as of this week. Petrofac had a contract in Egypt that finished in December, and has no further exposure to Egypt but is very exposed to MENA region (15-20% of backlog). Saipem and Technip also have c20% of backlog in the region.

The biggest threat in my view is to the big IOCs and utilities who tend to solve these issues through paying up, and losing returns.

Play the oil and gas spike through utilities (generators with no Egyptian MENA exposure) and high oil geared explorers and producers more exposed to LatAm, US and especially Russia. Gazprom will love this MENA problem.

I see services relatively unaffected once the risk of oil and gas field shutdowns is clarified. In the Iraq war and other risky geopolitical environments the specialized names benefited from the need to protect and continue operating the oil and gas fields. However, the short term impact will likely continue to be negative. This is also bad for southern european refiners because their low cost oil comes from Lybia and Egypt and the refining margins will likely fall as oil rockets but heavy-Brent spreads collapse.

Further read:

http://energyandmoney.blogspot.com/2011/03/war-in-lybia-and-possible-algerian.html

http://energyandmoney.blogspot.com/2011/02/lybia-in-flames-and-clash-of.html

http://energyandmoney.blogspot.com/2009/11/china-exxon-and-war-for-resources.html

Continue reading Egypt: A brief guide to the energy implications of the unrest →

Anti-climatic Change, and UK Nat Gas

Global Economy, On the cover, Sin categoría,

(This article was published in Cotizalia in Spanish on December the 8th)

UK Gas balance

In May 2010, gas inventories in England were at a truly low level, with storage almost empty, at a level of 35%. The country decided not to take the opportunity of having gas prices at a minimum to fill storage for the winter. Why, You may ask yourselves. Two reasons. On one side, a group of scientists who had advised the ministry and the industry that “climate change would create one of the warmest winters of the last hundred years”. On the other, the view that would have “radically hot and dry” winter(The Guardian, July 2010) due to the effect of La Niña.

Additionally, the Uk decided to play “commodity trader”, and clung to the estimates of CERA (Cambridge Research) and Wood Mackenzie about a bubble of gas in Europe from 2010 to late 2012 . According to these estimates, the Qatari government was going to flood Europe with cheap liquefied natural gas, the Russians were going to get nervous and cut prices aggressively, and the Norwegians would have to sell below cost price. Even agreeing that the gas market has spare capacity, and I have written about it several times, is very imprudent to take a bet on prices to fall, not to secure supply, when the price can move dramatically depending of many factors.

Of course, today at 2 degrees below zero, the British gas system is in deficit of between 15 and 25 million cubic meters (see graph). Of course, the “scientists” were wrong by as much as 170% in their projections of climate, and thus gas consumption. Of course, gas producers have not foolishly flooded the market. And nothing happens here, no one said it had been wrong, while England and the continent are desperately trying to buy more gas …. 41% more expensive than three months ago.

UK Gas vs Henry Hub

In Europe we have spent more than a year complaining about the oil-linked formula of long term gas contracts with Gazprom and Statoil. Of course, when gas has decoupled aggressively from oil, as gas demand growth has slowed down dramatically, we have seen governments and E.On-Ruhrgas, GDF-Suez ENI and others force the machine to renegotiate their contracts with major gas producers. Perfectly acceptable.

Anecdotally, I remember the CEO of Gazprom say in London that for eight years, when long-term oil-linked gas contracts were very competitive compared to spot gas, no one complained. And he said if it was not possible to renegotiate the contracts but with retroactive effect, ie, all they had lost between 2002 and 2008 subtracted from what buyers have lost between 2009 and 2010.

Well, now that they have renegotiated up to 20% of contracted volumes to be linked to the price of spot gas… Surprise. The spot price ($8.8/MMBTU) exceeds the long term, compared with the price of Gazprom ($7.8/MMBTU) and Statoil ($7.5/MMBTU). These things happen. And of course, solar and wind energy can not cover the difference in consumption, and the bill of the average consumers in the UK, for example, will rise by 20% when it would have only risen 9% if the measures had been taken to ensure supply and maintain the reserves filled in summer with gas prices 41% lower.

Of course, they forgot that the gas market is also global and is one of the most rapidly adjusted given supply is focused in very few countries. And the liquefied gas, LNG, and especially the spot part, which is still less than 12% of total gas, is sent to that market that pays the highest. Asia, in this case. So again, companies and politicians, instead of worrying about security of supply and proper planning, decided to play the market. A lesson to be learned by all European countries.

The Independent states that despite the low temperatures and having been a 346% wrong in their estimates of 2002 about the melting of the Arctic, global warming is a looming problem that will cause one million deaths in 2030. With this track-record of successes, I can not help but tremble.

Iraq, A New Frontier And A Few Question Marks

Global Economy, On the cover, Sin categoría

IRAKWe’ve talked on other occasions of the difficulties that big oil companies find to grow. The reserve replacement ratio is still disappointing.

In my opinion, the true hope of the sector is Iraq, one of the largest proven oil reserves in the world, 145 billion barrels of oil, behind Saudi Arabia, with 264 and above Iran’s 138 billion barrels of oil.

Iraq is presently outside the normal OPEC system, which is based on reserves, and given it currently produces around 2.5mbd they have stated they will not discuss a quota until output reaches 4mbd (in line with Iran). So the increase in estimated reserves can be viewed cynically as a way of preparing itself ahead of an OPEC quota.

Currently the geopolitical environment has improved substantially. Service firms are established, but the risks are not negligible, with nearby local elections, conflicts with the Kurdish minority and the gradual withdrawal of U.S. troops. For example, it remains unclear if the city of Kirkuk, home to a giant oil field, belongs to the Arabs or the Kurds, which prevents investment there.

The local government has advanced rapidly, licensing 11 fields in the last year. After a false start in which the license auction was declared void (except the Rumaila field, BP-CNPC) because the conditions imposed by the government were too onerous, between the second half of 2009 and 2010 the government has auctioned licenses to operate up to 60 billion barrels in estimated reserves, with a national strategy to increase production from 2.5 million barrels per day today to a very ambitious target of 12 million. From BP, Shell, Statoil and ENI, to Russia’s Lukoil, China’s CNPC or Exxon, most big oil companies have participated in the process.

Iraq’s 11 deals with foreign companies should in theory help increase capacity to 12mbd by 2017. From my point of view, the goal of exceeding Saudi Arabia’s production is very ambitious. No one has managed to multiply by 5, as intended, the production of a country in 10 years. And Iraqi production hasn’t exceeded 3 million barrels/day since 1979. I think it’s much more logical to assume that production will rise to 3.5 million barrels per day in 2015, in line with the history of typical production recovery in this region (including Iran).

Of the reserve revision seen this week, the bulk of the increase comes from the West Qurna field, now thought to hold 43bn bbl compared to 21.5bn previously. Exxon signed the PSC for West Qurna development Phase 1, Lukoil for Phase 2. The next largest source of uplift is Zubair (up from 4.1bn to 7.8bn bbl), where ENI is leading the development consortium. On the flipside, Rumalia (BP-CNPC) was revised downwards slightly from 17.8 to 17.0bn bbl, and Majnoon (Shell) from 12.6bn to 12.0bn bbl.

And the problem now is the costs, estimated at $19/barrel (F&D), plus an additional fee of nearly $2/barrel. The contracts allow the oil companies to cover costs up to a minimum production level. Until there is a contract typical of the industry,within what is called a PSC(production sharing contract). And IRRs can vary significantly, but in most cases only surpass 16% if ramp-up is in a straight line.

But if minimum production targets are not met, oil companies will suffer from profits lower than the average cost of capital, or even losses. The Zubair field, won by ENI and their partners, for example, will likely generate an internal rate of return of less than 20% below $55/barrel, while requiring investments in excess of $20 billion over 20 years. In total, the capex will exceed $100bn, and a lot needs to happen in terms of services (still small relative local presence), infrastructure and administration (there is no real government to manage the process and give the approvals).

We see most of the rates of return for the companies involved in the Big Six Iraqi oil fields fall within the 10%-18% IRR range, with higher returns for the pre-existing PSCs and government-owned entities. The key Kurdistan operators get very high IRRs under the Kurdish PSC, which has much more favorable terms than the Iraqi TSC. However, the Kurdistan situation is less than clear, and Iraq still considers all these contracts illegal. It is very difficult to believe that the contracts will be validated after elections.

For Iraq, the increase in gross domestic product, infrastructure and wealth for the country that these projects, neglected or poorly managed so far, will generate, will be a giant leap for the country’s ailing economy. The investments to be carried out are astronomical, nearly $100 billion between 2009 and 2029, including infrastructure, water, schools, hospitals , almost the construction of entire cities. Consider that some of these fields require about 500 workers. And the fact that contracts are aggressive and costly conditions for oil is a minor problem, because for them it is probably the last opportunity to improve their low reserve replacement for once.

Update: Iraq reached 2.75 mbpd production in July 2011, the highest since 2003.