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ExxonMobil Changes Tune on Climate Change

June 19, 2007

Analysis of:ExxonMobil 'never doubted' climate risk | www.upstreamonline.com

Whatever your view on climate change (and there are many differing views, reflecting the complexity and uncertainty of the issue) it is still possible to recognize the change in position that ExxonMobil is currently engineering.  We can expect to see a further softening of ExxonMobil's stance in the coming months, starting with better presentation of ExxonMobil's environmental credential's (which are actually pretty good) and culminating in participation in internationally sponsored initiatives to address climate change.  What has precipitated such a change by ExxonMobil?  It is now clear that the momentum is with those who believe in global warming due to carbon dioxide emissions and wish to do something about it.  Sometime this year we reached a tipping point (perhaps the G8 summit, where President Bush signalled his policy change).  Whatever ExxonMobil's true beliefs, they must have a seat at the table to influence important, upcoming policy decisions.

Russian Majority Control is the End Game for Putin

June 5, 2007

Analysis of:Russia still pressing for a gas monopoly | www.iht.com

BP is very likely to have its Kovykta gas field license revoked by Russian authorities in a move reminiscent of similar action taken against Shell in their Sakhalin project.  Such action will be a prelude to majority control by Gazprom. International Oil Companies (IOCs) like nothing more than predictable political and fiscal conditions when they are making their investment decisions.  Events in Russia have been anything but predictable during the Putin years and this must have left many oil execs wondering whether the political scene in Russia was a risk too far. However, we are now able to see a pattern emerging in Putin's actions and it's now becoming clear that Russian state owned entities must have majority control of gas projects with IOCs and other private investors welcome, but with a minority share.  Outsiders may have operatorship of projects (as Shell has continued to do with Sakhalin), but it's clear that Putin puts a low price on outside capital and know how.

Investors Beware: National Oil Company Internationalization Full of Risk

May 25, 2007

Analysis of:Petrobras to explore off Portugal | www.offshore-mag.com

Petrobras, which has signed an exploration agreement in Portugal, makes a good case study in the rather mixed bag of NOC internationalization efforts. Petrobras neatly illustrates the 2 key success factors for NOC internationalization: 1. Exploit competitive advantages. For Petrobras these are holding deep water technology developed through its domestic operations and the ability to trade acreage in Brazil as a part of its efforts to access foreign assets. 2. Compelling business and political drivers. For Petrobras it was simply economics and portfolio management: Brazil does not have sufficient oil resources to support its ambitions for Petrobras to become a major world player. The political will to see Petrobras grow is large, and the changes made include: a large chunk of Petrobras was sold off in a privatization; the Brazilian constitution was changed to allow foreign access to domestic oil; and support for IOC entry to Brazil as part of Petrobras's foreign access efforts.

OPEC Has Power - Learns from Past, But Future Less Certain

May 14, 2007

Analysis of:Oil Market Is `Well-Supplied,' OPEC President Says | www.bloomberg.com

Mohamed al-Hamli, OPEC President, has every right to feel smug. OPEC has learned the lessons of its past and now has oil prices where it wants them. OPEC's cut backs in 1973-74 proved that demand and supply of oil is very inelastic in the medium term. New supplies took time to come on stream, and an economic boom in Europe and the US ensured that short term demand remained high. Add in political unrest in the Middle East, and the result of OPEC's action was a quick and dramatic price increase. When the Iranian revolution sent oil prices sky rocketing even further at the end of the 1970s, OPEC must have thought there would be no end to the party. The hangover for OPEC duely came when high oil prices induced a deep recession (1980s) in consuming nations, and consumers found alternative energy sources (e.g. gas and nuclear). There's no sign of that this time around.  Ironically the biggest risk is that OPEC's capacity increases will not keep pace with further hikes in the oil price.

Atlantic Basin is the Hottest Region of a Hot World Wide LNG Market

May 4, 2007

Analysis of:Woodside May Swap Pluto LNG Stake to Enter Atlantic | www.bloomberg.com

Worldwide the LNG market is extremely tight, with supplies already contracted until the 2012-14 time frame.  Rapidly increasing investment costs in LNG (steel prices high, fully booked EPC contractors and labor shortages) and political factors have caused many players to put back liquefaction projects (e.g. Sakhalin II, Tangguh and Gorgon).  Meanwhile, demand for LNG shows no sign of abating, driven by resource hungry China and diversification of supply issues in Western countries.

In these circumstances holders of LNG assets are king and reluctant sellers.  Even cash offers get little shrift - unless, of course, the price is extraordinarily high.  That is why Woodside has set such high expectations for a possible disposal of a part of its interest in the Pluto project, Australia.  One thing that would tempt Woodside is a deal that increased its exposure to the Atlantic Basin.

It's no surprise that Woodside is interested in the Atlantic Basin.  While LNG sales are expected to more than double over the next 7 - 8 years to 350-400MTPA, and all regions are experiencing tremendous growth, most commentators expect the Atlantic Basin to grow the fastest and to reach the same size as the Pacific Basin market by around 2015.

However, growth is not the only attraction for Woodside in the Atlantic Basin region.

Russian bear casts long shadow over Europe - EU needs to get its act together on gas

April 22, 2007

Analysis of:Gazprom expanding even further in Europe | www.iht.com

Gazprom's investment in storage capacity in the EU has been justified by the company in terms of providing swing capacity during cold snaps and mitigating the risk of disputes in transit countries.  These are both laudable business objectives, but in reality the investments are a thinly veiled contribution to Russia's objective of extending its political power.  Whereas in the past Russia's might was exercised through military power, the collapse of the Soviet Union and the failure of communism has forced the country to leverage its natural resources to for political gains.

Europe's increasingly heavy reliance on Russian gas and its willingness to allow Gazprom to control gas infrastructure has highlighted several problems:

*  A failure of EU member states to create and implement a common energy policy
*  A reliance by the EU on a company (Gazprom) that has under invested in exploration and production and will not be able to supply sufficient gas to meet the EU's needs in the future
*  A reliance by the EU on transit countries to transport the gas to Europe (surely the Ukraine incident is still remembered?).

Without a single EU energy policy, Russia's hand gets stronger by the day.  While Gazprom is busy snapping up assets in Europe (ironically, the only fragment of of an EU energy policy is to allow Gazprom to invest, so long as it plays by the rules) Russia is tightening its grip on its resources by restricting foreign investment (e.g. the problems that Shell and BP have had in Sakhalin and Kovykta).  Indeed, Russia recently signed a deal with Algeria to coordinate supplies and is looking at setting up a gas cartel with Qatar and Iran (the 3 countries have >60% of the world's gas reserves).

Gas Cartel Cannot Work - Cooperation Amongst Gas Producers to Take Other Forms

April 10, 2007

Analysis of:Gas Cartel Gains Traction With Alliance Set to Meet | online.wsj.com

News last year that Russia was attempting to set up a "gas OPEC" had Western policy makers scurrying around for analysis.  Of immediate concern was the issue of Russia extending its influence in European gas markets.  But the news that Algeria and Iran (amongst others) were involved prompted a reaction from Nato's economics experts, who sent a study to member states warning against the geopolitical implications of such a cartel.

The Doha meeting of the Gas Exporting Countries Forum this Monday indicated that producers had agreed, amongst other things, to study pricing policies and other issues facing the gas sector.

Some delegates at the meeting suggested that this was the first step in setting up and OPEC style gas cartel, while others played down the idea.

Most likely the pricing study (to be led by Russia) is motivated by the concerns of some producers that the growing LNG industry is eroding their pricing power in local markets.  Russia also has interests in slowing down supply to Asia, a market it has had its eye on but has been slow to supply due to delays to key projects.

The reality is that the structure and dynamics of the gas industry do not lend themselves to a cartel arrangement such as OPEC.  The most that the participants can expect to achieve is long term support for gas prices.  Day to day manipulation of the markets is out of the question.

LNG from Angola? Unthinkable - until now.

April 4, 2007

Analysis of:Italy’s ENI reaches agreement to buy stake in natural gas plant in Angola | www.macauhub.com.mo

If you had asked industry observers 10 years ago to rate the chances of Angola supplying LNG to the US, the most favorable would have said unlikely and many would have dismissed the notion as pure fantasy.  And yet, in 2007, Angola LNG is on the cusp of a final investment decision.

10 years ago Angola was ravaged by a brutal civil war, a relic of the cold war.  There was general lawlessness on a grand scale and the prospects for improvement were dim.  Added to that were accusations of corruption and lack of transparency within government and the ruling class.  Meanwhile the vast majority of the population lived in extreme poverty as they watched the country's natural resources (oil and diamonds) being squandered by the fighting factions.

That Angola LNG is about to happen is testimony to the general improvement in conditions in Angola, and to the changing dynamics of an oil and gas industry where NOCs have the upper hand and IOCs are forced to take on greater risks in their efforts to secure hydrocarbons.

The recent departure of ExxonMobil from the project can now be seen as a temporary blip in Angola LNG's progress - clearly Sonangol had already lined up a replacement in the shape of ENI.

BP Puts in a Slick Political Performance in Russia - Extends Lead There

March 27, 2007

Analysis of:BP to bid for stock of Yukos | www.iht.com

BP has shown exemplary political skills in setting up business in Russia.  The original TNK-BP deal had the blessing of both Putin and Blair, as declared at summit held in Moscow just before the deal was consummated.

We now know that Rosneft has won the auction for the Yukos assets, but either way BP was sure to be a winner by entering the contest.  If BP had won, it would have deepened an already useful relationship with Russia's biggest oil firm by market capitalization.  In failing, it has won significant political clout in a Russia's highly politicized oil and gas industry, by legitimizing the controversial sale of the Yukos assets.  Such political capital will be useful, given that TNK-BP is such a big company, with a significant foreign ownership and no state involvement.

Russia already accounts for the largest part of BP's oil production, which is much greater than production from the US.  It is also becoming an important source of reserves replacement.  So it's important that BP avoids, as far as possible, events such as the fate of Shell in Sakhalin.

BP's recent moves will take the pressure off the exploitation of its Kovykta gas field in Siberia, and help to protect its leadership position in Russia.

Mexico Seeks Foreign Investment

March 14, 2007

Analysis of:Output falling in Oil-Rich Mexico and Politics gets the blame | www.nytimes.com

The likelihood of huge potential reserves in the Mexican area of the deep water Gulf of Mexico (GOM) is well known.  This area is largely untested, but the use of the U.S. deep water GOM as an analogue together with limited Pemex exploration efforts would suggest that this is indeed the case (recent U.S. discoveries are right on the territorial sea border with Mexico, and may even cross it).

Also the expanded development of the huge Chicontepec field offers further potential to recovering the Pemex production and reserves decline.

That Pemex needs outside capital and knowhow to progress its opportunities is widely recognized.  What is not commonly known is that Pemex has made serious strides in attracting such investment.

Pemex has already been attracting foreign capital and know how through a series of service contracts called the Multiple Service Contracts or MSCs.  These are risked based contracts rather like those used by Iran, where the third party provides E&P type services and investment (at the investor's risk).  Pemex used the MSC concept to attract outside investment in the Burgoss gas fields a few years ago and now has several such contracts in place.

Additionally, Pemex is in the process of tendering for maintenance and operational services for a large part of its oil and gas pipeline infrastructure.

There have also been public proposals to in the past to extend the MSC concept to other areas, e.g. the Chicontepec field.

Such contracts have been subject to legal challenge in the past, but investors should note that opportunity is already being created by Pemex for involvement in the Mexican oil and gas industry.

US Coal Power Surges - TXU Plants Fall Prey to Private Equity Politics

March 2, 2007

Analysis of:$45 billion TXU deal is an environmental watershed | www.iht.com

The proposed TXU buyout by KKR and TPG includes a commitment to cancel 8 (out of 11) TXU coal power plants.  This has more to do with KKR/TPG's exemplary presentation skills than an industry move away from coal.  The proposed TXU plants were to use the older "pulverization" technology which, although cheaper to build, are not as clean "clean coal" and "coal gasification" technologies.  Utilities across the U.S., in response to high gas prices, will continue to use the newer coal technologies to build around 100 coal fired power plants.  We may say that this is the end of the use of pulverization technology in coal fired power plants, but it is definitely not the end of coal power.

Oil: Supply Side Pressures Provide Plenty of Medium Term Price Support

February 26, 2007

Analysis of:Eni’s Kashagan oil field hit by delays | www.ft.com

Development of one of the world’s most important new oil fields will be delayed by a further three years and require almost double the investment initially anticipated, Eni, the Italian oil group operating the field, said on Friday.  Kazakhstan’s giant Kashagan oil field will now produce its first oil at the end of 2010 and hit peak production by 2019.

Kashagan, discovered in 2000, lies in the northern part of the Caspian Sea, in a particularly harsh environment.  The field is estimated to have 18 billion barrels of oil reserves and was originally scheduled to be on stream in 2005.

This news comes on the back of a series of well documented project mishaps reported by IOCs in recent years.  The IOC's ability to find, develop and produce new oil in sufficient quantities is under question and this, together with other supply side pressures, will lend support to prices through the medium term.  The best hope for price relief is a relaxation of demand, perhaps prompted by a correction in BRIC countries' economies.

Kazakhs Provide Plenty of Material for Conspiracy Theorists

February 22, 2007

Analysis of:Kazakhs threaten to suspend Chevron Tengiz licence | today.reuters.com

Kazakhstan said on Wednesday it would give the Chevron-led Tengizchevroil joint venture one month to decide how to deal with its vast stocks of sulphur or face licence suspension.  The parallels with Russia's forced sale and purchase of Shell's Sakhalin gas assets are clear.  What's not clear is whether Russia has had a hand in the TCO affair.  That Russia considers Kazakhstan to be a strategic priority (along with the rest of the Caspian region) is well known.  However there are many other explanations internal to Kazakhstan for the recent developments.  Investors will need to watch very carefully as this story unfolds.  While it is extremely unlikely that production will be shutdown, and only slightly more likely that a licence will be revoked, there is a real risk of forced state participation or more burdensome fiscal terms.  Furthermore, Kazakhstan is developing policies that seem to directly go against Russian interests.

Quantum Leap By ExxonMobil on Climate Change

February 16, 2007

Analysis of:Exxon Chief Cautions Against Rapid Action to Cut Carbon Emissions | www.nytimes.com

Rex Tillerson's speech at the CERA conference this week signals ExxonMobil's changing stance on climate change.  The company is moving from denial to grudging acceptance that there is an issue.  We can expect to see a further softening of ExxonMobil's stance in the coming months, starting with better presentation of ExxonMobil's environmental credential's (which are actually pretty good) and culminating in participation in internationally sponsored initiatives to address climate change.

Pelosi and Putin Share Common Ground in Economic Rent

February 14, 2007

Analysis of:Pelosi puts climate change on the agenda | www.ft.com

The Clean Energy Act sponsored by new House speaker Nancy Pelosi is a barely veiled attempt to raise tax revenues from oil companies that are perceived by politicians to be profiteering from unusually high oil prices.  This follows similar moves by Putin (who pushed through the forced sale of some of Shell's gas assets in Russia to a state owned entity), and the UK's Finance Minister, Gordon Brown, who has increased oil company corporation tax from 30% to 40%.

The pressure on politicians to target economic rent at times of high prices can be severe.  And such pressure can be irresistible - after all, targeting oil companies is a good vote winner and relatively easily accomplished.  Also, oil companies can be an effective source of funds to plug government deficits:  they are perceived to have plenty of money and it's easy to collect the tax.

But such moves by politicians can prove to be a double edged sword, and to understand why, we first need to understand the concept of economic rent.  This key aspect of the oil and gas industry should be studied by all who have an interest in the sector.

 

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