The Peakist

Wed 12 Jul 2006

Money no object as the big players grab what is left of a diminishing resource

Terry Macalister reported in the Guardian on the huge prices oil companies are now paying for exploration rights - yet another signal of the unfolding depletion crisis and the shifting sands of global geopolitics as China positions itself for the oil end game and the producer nations gain unprecendented economic leverage.

The decision by Sinopec of China to pay $1bn for the right to explore for oil in deep water off Angola has shocked the west, which fears it could be left behind in a global scramble for resources.

Similar oil prospects off the coast of the impoverished African country were selling for $35m (£19m) less than a decade ago, when western oil giants such as BP and Shell had the field almost to themselves.

The rising power of oil companies from fast-developing and energy-hungry nations such as China and India have contributed to soaring oil prices. This week, they hit record highs of $75 a barrel, dipping only slightly yesterday.

“It’s just like the British housing market. You have a lot of people chasing a few opportunities. The difference with oil is the companies have huge amounts of cash,” said Derek Butter, an analyst at energy consultants Wood Mackenzie, based in Edinburgh.

And it is not just Angola that is benefiting. The Nigerian government has just sold 16 exploration licences in deep water areas for $500m and secured promises that the buyers will spend a further $20bn on new infrastructure projects such as gas-processing units. Licences have been offered almost everywhere recently: from the Gulf of Mexico to Brazil to Libya. It is only in fast-declining areas such as the North Sea that few of the large companies are really interested, although drilling activity has risen here, too.

The oil grab is also triggering a merger and acquisition bonanza. China National Petroleum Corporation recently bought PetroKazakhstan for $4.2bn, while China National Offshore Oil Corporation (Cnooc) caused panic in Washington last year when it tried to buy the US oil group, Unocal.

In the past, the forthcoming stock market float of controversial Russian giant Rosneft - expected to be valued at $80bn - might have been avoided by respectable western companies fearing damage to their reputation. But BP and others say they might not be able to turn down such an opportunity if the price is right, partly because it would offer vital access to an increasingly protected Russian market.

The Russian president, Vladimir Putin, opened the door for BP to buy Moscow-based TNK, but has since made it almost impossible for anyone to do a follow-up deal. Most governments in the oil-rich Middle East are even more wary of foreign oil firms.

The growing power of leftwing but nationalistic governments in South America is forcing western firms to pay more or leave. Bolivia has just requisitioned assets from Repsol YPF of Spain and has increased gas export prices to neighbouring Argentina by 45%.

With oil prices continuing to bubble along at just under $75 a barrel yesterday, oil industry experts are increasingly convinced there will be a $40-plus price environment for the foreseeable future. This compares with a $20 expectation barely two years ago.

BP made a £3bn profit in the first three months of this year and looks set to easily beat this in the second quarter, having built up a mountain of cash from record earnings in recent years.Billions of pounds have been given back to shareholders at BP, Shell and ExxonMobil, but large oil companies worldwide are also desperately pouring money into trying to replenish their reserves.

The bidding war that has driven up the price of exploration rights in Angola was not just the work of Sinopec. Total of France spent $670m on a 40% stake in the assets next door on block 17.

And national oil groups such as Sinopec will be more flexible on how they structure deals. The Korea National Oil Corporation has recently won an area in Nigeria through a barter deal under which fellow Korean conglomerate, Daewoo, will build a shipyard and railway link. Similarly, the Oil and National Gas Corporation of India has teamed up with local steel group Mittal to offer a range of services to Kazakhstan in return for oil rights.

Saudi Arabia tried a similar move some years ago when it said it would allow western oil majors to explore on condition they helped build gas plants and desalination plants. BP and others turned this down on the basis that it was outside their expertise, although Shell has started a more limited drilling programme in the Empty Quarter.

The race for assets has even included territories formerly shunned by the west, such as Libya. The Libyan government attracted better tax terms from western firms than anyone expected, and Mr Butter believes the Iraqi government should be able to do the same once peace prevails.

But he says it is wrong to blame national companies from China and India for the inflation that has also hit the price of rigs and staff as shortages develop. He says US-based Anadarko Petroleum has just made a $21bn bid for local rivals Kerr-McGee and Western Gas Resources, while ConocoPhillips bought another American oil firm, Burlington Resources, for $35.6bn in December.

“Whilst it is true the international expansion of the Asian national oil companies has increased competition for opportunities in some areas, we question the conventional wisdom that they are unfairly dominating the upstream sector and indulging in a ‘win at all costs’ strategy,” says Mr Butter. But even he struggles to see how Sinopec can explain the cost-competitiveness of spending $1.1bn in Angola.

Bruce Evers, oil analyst with Investec Securities in London, says asset prices are likely to continue to increase. “It’s absolutely staggering what companies are forking out.”

http://www.guardian.co.uk/oil/story/0,,1814785,00.html

2 Responses to “Race to the world’s energy hotspots”

1. mullah Says:
   July 12th, 2006 at 6:29 am

   Same issue, financial pages are talking about $100 a barrel again:

   “North Korea’s propensity for test-firing missiles all over the place, along with Iran’s nuclear aspirations, have ratcheted up global tensions and put oil prices back in the spotlight.

   The crude price has added around $5 a barrel over the past couple of weeks, although there was a slight slippage yesterday from its record $75 level. The dip came after US figures showed gasoline stocks rising unexpectedly by 700,000 barrels last week, as against a forecast fall of 1.1m. But conversely, crude stocks dropped more than expected, down by 2.4m barrels against an expected 1.9m. So with worries about security of supply and little sign of slowing demand, there is once again talk that oil could reach $100 a barrel in this current run.”

   http://business.guardian.co.uk/story/0,,1814482,00.html

2. mullah Says:
   July 12th, 2006 at 8:09 am

   Salil Tripathi examines the impact of rising oil prices on developing countries in the near future

   Wednesday June 21, 2006

   The Venezuelan president may think he has nothing in common with Wall Street economists, but they share a bleak outlook on oil prices.

   When Hugo Chávez visited London last month, he predicted oil prices to rise above $100 (£54) per barrel if current instability continued. He wasn’t the first to say so. A year ago, Goldman Sachs foresaw “a super spike” up to $105 a barrel.

   The Greens may see such an escalation as a mouthwatering opportunity to promote alternative fuels. Other nay-sayers may predict economic doom, forecasting steeper interest rates which would grind the global economy to a halt.

   But unlike previous oil shocks, rich countries have so far managed to keep inflation in check. This is mainly because a huge production base worldwide has shifted to China, which reins in the costs of every product.

   In 2004, the average oil price was $40 - today it is nearly $70. It isn’t all because of the Iraq war. Refining capacity is limited and Asian demand, particularly in China and India, is rising.

   Also the cost of oil from the Niger Delta remains volatile; Chávez sends prices higher each time he throws a tantrum at the US, and Americans continue to accept having to pay more to maintain their way of life.

   Not to be ignored

   While costlier oil curbs growth in wealthy countries, its effect on poor, oil-importing countries can be too catastrophic to ignore, as a report published last month by the African Development Bank (AfDB) reveals.

   To be sure, some African countries export oil, and three have recently flexed their muscles. Chad told the World Bank that it would not honour all parts of its groundbreaking oil revenue management agreement, under which it would spend the money only on agreed developmental targets and keep the rest overseas in an escrow account.

   Sudan now has more resources to continue supporting the Janjaweed, who terrorise people in Darfur. And in Angola, where every $10 increase in the price adds a third to its gross domestic product (GDP), oil companies are offering astonishing premiums to secure oil deals. After the last round, Angolans took home $3.1bn, $2.2bn of which came from China, in effect allowing Angola to scuttle nascent efforts to bring about transparent revenue management. On the positive side, Nigeria has been able to pay off its debt to the Paris Club.

   But only 16 African countries produce oil and only 13 of those are exporters. While north African states like Libya and Egypt have deep oil reserves, most sub-Saharan producers will benefit from the oil bonanza only for two decades, as their reserves are limited. As many as 39 African countries, including some producers, import oil.

   For the importers, even the most minor increase in oil price causes budgetary pain. As the AfDB points out, cash-strapped African states will not be able to meet their energy needs at these prices.

   Increases in oil prices affect everybody. Only wealthy countries have resources to combat that. Well-managed central banks can adjust interest rates that the markets will respect, and give a safety net in the form of social security benefits for those who lose jobs.

   For poor countries, the crisis is far worse. Their institutions lack credibility and cannot afford such safety nets or make macro-economic adjustments easily. Their use of energy is also inefficient. On average, oil-importing developing countries use more than twice as much as OECD countries to produce a unit of economic output.

   For example, if OECD members use 100 units of oil to produce 100 units of GDP, Africa needs 234 units of oil for the same output. Sub-Saharan GDP will therefore decline by more than 3% at these prices.

   Practical implications for Africa

   The AfDB calculates that unless oil prices drop, 14 of the 19 oil-importing heavily-indebted poor countries (HIPC) will have to pay more than what they have saved from global debt relief efforts. Sub-Saharan inflation will rise by 2.6%.

   This will have a cascading effect. Input costs will rise, forcing struggling companies to hire fewer workers, invest less, import fewer capital goods (with significant adverse impact on industrial growth) and reduce output. Consumers will have to spend more on fuel, which means they will spend less on other goods, reducing their purchasing power. It will cost farmers more to transport their produce to markets.

   Governments will find their balance of payments strained. Oil accounts for more than 10% of total imports for 28 of the 47 African countries AfDB surveyed. Unless they can borrow at reasonable interest rates, they will have to reduce domestic consumption, stretching the fiscal budgets.

   Tax revenues will therefore decline, as companies will produce less and make smaller profits. Joblessness will rise, and consumers will have less to spend, lowering sales tax figures.

   On the other hand, governments will face demands to increase fuel subsidies.

   Governments often subsidise kerosene at such times because it is the fuel the poor use, but the AfDB argues that it is difficult to prevent those who are not poor from consuming kerosene. And once provided, it is almost impossible to reverse a subsidy, making the entitlement a permanent drain.

   Cause for optimism

   However, it is not all gloom. For one thing, Africa’s debt burden has reduced from $74.8bn (£40.6bn) in 2001 to $50.4bn (£27.4bn) in 2005, and if the G8 states keep their promises, aid flows should ease this further.

   As many African countries are commodity exporters, they have benefited from the increase in the prices of strategic minerals as well.

   But not all countries are in the position of Ghana, for example, which has minerals to pay for fuel.

   One possible solution is for African countries to leap-frog technologies by moving beyond fossil-based fuels, just as mobile telecommunications spread across the continent before fixed lines could be installed in every home.

   That would mean focusing on geothermal power, which promises to meet a tenth of east Africa’s energy needs. The AfDB also supports blending petroleum with ethanol, following the Brazilian model. Some parts of Africa use Jatropha oil as a substitute for kerosene, it says.

   Furthermore, the AfDB has backed two solar power projects. Solar-powered pumps operate water supply in parts of rural Madagascar, and 26 rural schools in Uganda get energy from solar power. These are small but important initiatives.

   But the rich world can do more. Global energy security is an important agenda item for G8 leaders meeting next month in St Petersburg. Once again, Africa will deserve attention - this time for relief from what it cannot control.

   · Salil Tripathi, a former economics correspondent in East Asia, is a writer based in London.

   http://business.guardian.co.uk/comment/story/0,,1802729,00.html#article_continue

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