• Three Critical Investment Issues For The Current Oil And Gas Market

    The precipitous fall in global crude oil prices over the past nine months has led oil and gas companies as well as investors to strategically appraise their operations and portfolios respectively. While oil and gas companies have been restructuring ― paring capital expenditure, divesting assets, laying off staff, deferring or cancelling projects, etc ― investors have been mulling over stocks for value optimization. At present, there is some disconnect between oil and gas company stocks and global crude oil prices: for example, a recent Financial Post report shows that stocks on the Standard and Poor’s/TSX Energy Sector Index are priced at an all-time high of 65 times expected earnings (more than double those for their United States peers); and according to World Oil (3/25/2015):

    Since Dec. 15, stock values in an index of 20 U.S. producers have bounced back an average 7%, even as oil fell another 15% to $47.51/bbl on Tuesday.

    With global oil prices key to such appraisals, three critical issues will most probably define oil and gas investment in the near term:

    1. Oil Supply

    The recent oil price slip has been driven in the main by a surplus in global production of, and a weak global demand for the commodity; the greater proportion of this surplus derives from unconventionals in the United States (shale) and Canada (oil sands). Many shale operators in the United States hedged their production and this has led to continued output in spite of the slide in oil prices. In Canada, the Canadian Association of Petroleum Producers, CAPP, expects oil sands production for 2015 to exceed that of 2014.

    Weekly U.S. Ending Crude Oil Stocks In the United States, after ten consecutive weeks of stock buildup, estimates of the current oil imbalance (excess of output over consumption) stand at between one and two million barrels per day, most of which is being put away in storage facilities; but with stock levels testing the capacities of these storage facilities, the imminent shutdown of refineries for spring maintenance will further increase that oil imbalance, exerting further downward pressures on oil prices.

    2. Availability of Capital

    According to a report by Pricewaterhouse Coopers, during the seven years to 2012, unit capital productivity Continue reading  Post ID 295

  • Why Crude Oil Price Rebound May Be Slow

    Global crude oil prices have fallen rather steeply over the past six months. The international benchmark Brent plunged from US$109.07 per barrel (bbl) on 02 June 2014 to US$51.08/bbl on 05 January 2015, and the West Texas Intermediate, WTI, from US$103.07/bbl to US$50.05/bbl over the same period (Figure 1).

    Brent, WTI PricesThe impact on producing companies and countries is becoming severe and current concerns are about the depth and duration of that price decline. Some analysts have cited the fairly rapid rebound of oil prices after the spike of 2008 in their expectation of a quick rebound from the current slump. Such expectations however, may be misplaced. The oil price shock of 2008 had very little to do with market fundamentals; in 2008, prices rifled higher even while the market was well-supplied, peaking by the middle of the year and then crashing by three quarters by the end of that year. Prices more than doubled about six months later. Continue reading  Post ID 284

  • Effects of Falling Crude Oil Prices Begin to Bite

    Global crude oil prices, driven largely by weak demand and oversupply, have plummeted since the beginning of the year, reaching five-year lows just a few days ago. The marginal increase in supply has come primarily from unconventional producers in the United States (shale) and Canada (oil sands).Figure 1. Crude Oil Prices - WTI, Brent (Spot, FOB)

    The decline was exacerbated by the resolution at a meeting last month (driven in the main by Gulf States) of the Organization of the Petroleum Exporting Countries, OPEC, not to reduce supply. While OPEC has maintained supply within a narrow band around 30 million barrels per day for a few years, unconventional oil producers largely account for the 6 million barrel-per-day increase in global supply that contributed to the current glut; and in a stroke aimed at punishing the (higher-cost) unconventional producers, the government of the United Arab Emirates, recently revealed that OPEC would not reduce production even if prices declined to US$40 per barrel.

    In this sheikh-versus-shale staredown of sorts, the fallout has been reverberating. Continue reading  Post ID 268

  • Crude Oil Prices: Let The Turf Wars Begin

    Petroleum resources, at present, constitute the dominant energy form used to propel the wheels of the global economy. When prices of crude oil or natural gas begin to tumble, economies are therefore affected, whether negatively or positively. For example, while some oil-producing countries reel from current price levels, consumer-countries such as the United States have seen low gasoline prices ― and just in time for the thanksgiving driving holidays ― as well as a spike in demand for SUVs.

    Crude oil prices have fallen by as much as 40% since the beginning of the year due mainly to oversupply and decreasing demand. Crude oil benchmarks Brent and West Texas Intermediate closed at US$69.92/bbl and US$67.38/bbl respectively on Wednesday. Expectations that the meeting last week, of the Organization of the Petroleum Exporting Countries, OPEC, would resolve to cut the group’s oil production proved futile; and with good reason. First, OPEC had maintained official crude oil production rates in a narrow band about 30 million barrels per day (mbpd) for the past few years and has seen its market share fall to about 40%. Secondly, the preponderance of supply glut has come from a massive ramp-up of non-OPEC production (Figure 1), mainly from the United States (shale) and Canada (oil sands). Cutting production would have meant, in addition to revenue losses, ceding further market share to these higher-cost producers.

    Change In Oil Production - OPEC, U.S. & Canada 2006-2013

    With none of the producer-groups willing to cut production in order to shore up prices, the stage is set then for a costly game of brinkmanship between OPEC and non-OPEC producers; and traditional as well as fiscal fundamentals will most probably define the outcome. Continue reading  Post ID 263

  • Global Crude Oil Prices: More On The Uncertainty

    Global crude oil prices have plummeted significantly over the past four months, due mainly to increased supply and a lull in global economic activity. With producers unwilling to rein in supply and stem the falling prices, comparative fiscal disadvantages in their production models will determine the inevitable winnowing process.

    Crude oil prices have fallen significantly over the past four months. The international benchmark Brent declined by 22% and the West Texas Intermediate (WTI), by 21% since the beginning June (Figure 1). The decline took its toll on 3Q results for many oil companies including Total, BP, Eni, Cenovus, Suncor, Rosneft as well as the Chinese majors among others.

    Crude Oil Prices - Brent, WTI

    While a global supply glut and the current lull in global economic activity have been the main drivers for the decline, Abdalla El-Badri, the secretary-general of Organization of the Petroleum Exporting Countries, OPEC, said in a recent oil conference that at a global oil price of US$85 per barrel (about current value), 50% of tight oil production would be in peril. This has dampened expectations of any supply reduction by the group, which meets in the next few days. And just as well: OPEC supplies only about a third of global crude oil consumption and has maintained supply at about 30 million barrels per day since 2008, while the greater proportion of the marginal increase in global supply has been from tight oil, particularly in the United States and Canada.

    As oil prices fall, both intuition and competition theory hold that the higher-cost and inefficient producers will be removed from the market. Falling oil prices will impact tight oil producers, mostly in the United States, Canada and Australia; but it will also impact many conventional producers in the Middle East and North Africa, MENA, region, as well as the producers in the Atlantic petroleum provinces of West Africa. While the former need higher oil prices to ensure profitable production, the latter need certain oil price levels to maintain fiscal sustainability thresholds. With each of these groupings eager to ensure sustainable production, a tenuous price face-off is developing between them, adding to market uncertainty but also exposing their vulnerabilities. Continue reading  Post ID 251

  • The Inevitable Decline Of Big Oil

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    The major International Oil Companies, IOCs, ― Royal Dutch Shell, BP, ExxonMobil, Chevron, Total, ENI and Statoil ― have seen a marked decline in fortune over the past few years. During the late 1960s for example, the group held more than four-fifths of global crude oil reserves; currently, their share is less than one-sixth. In addition, the group has over the past decade and half, grappled with growth challenges, to wit, profitability and reserves addition. The recent dip in crude oil prices to multi-year troughs has only added to such challenges.

    Two principal issues, in the main have driven the change in fortunes:

    1. Resource Nationalism

    Major IOCs operating in oil-rich countries have over the past few years been required by host governments to cede greater proportions of assets and, or production proceeds. In 1979 for example, Nigeria under the leadership of General Olusegun Obasanjo, nationalized the British oil company BP; the action was consistent with the country’s policy of economic nationalism and afro-centric liberation. In Venezuela, assets belonging to ExxonMobil and ConocoPhillips were expropriated in 2007 for their failure to restructure in accordance with the provisions of President Hugo Chávez’s “21st Century Socialism”; Chevron and BP among others relinquished majority shares in their Venezuelan projects. Though there was some financial compensation for the requisitioning, the impact on these IOCs was substantial.

    With the expropriation of the group’s assets came the establishment of wholly-owned National Oil Companies, NOCs, in which acreages and other petroleum assets were vested. These assets, in addition to seemingly limitless state-funding without the restrictive shareholder accountability, set up these NOCs as formidable competitors. Some of the NOCs such as Brazil’s Petrobras and Columbia’s Ecopetrol have since listed in stock exchanges, having restructured and boasting high operational efficiencies as well as cutting-edge technological proficiencies. 

    2.  Spiraling  Costs

    Access by IOCs to production acreages in these oil-rich countries, has largely been through Production Sharing Contracts, PSCs, and Joint Venture Agreements, JVAs, and at very high costs. Production Sharing Contracts in general, require the IOCs to bear exploration ― even where there are no discoveries ― and production costs and then share production proceeds with host countries if and when discoveries are made. However, such proceeds often come under very steep, royalty and other tax regimes sometimes as high as 80% to 90%; and since they are on a sliding scale, usually indexed to oil prices, rising global crude oil prices offer no relief to the IOCs.

    Selected Comparative Indices_ IOCs vs NOCs

    Joint Venture Agreements have become rare. A recent licensing round for Iraq’s massive onshore oil acreages was for service contracts; one of the winning bids, a partnership between Royal Dutch Shell and Petronas was for a mere US$1.39 per barrel of marginal production increase, to the great delight of the host government. Continue reading  Post ID 236

  • Chelsea 2-0 Arsenal: Arsène Wenger Needs New Ideas To Exit That Specialist-In-Failure Tag

    Arsenal FC shieldIt was Week 7 of the Barclays Premier League and Arsène Wenger and his boys were at Stamford Bridge on a redemption mission against José Mourinho and the Blues. The Chelsea team under Mourinho meted out a 6-0 drubbing of Wenger and his boys last season, and that, on a day Wenger was marking his 1,000th game as manager. Even more riling, Mourinho had referred to Wenger as a specialist in failure, for the latter’s inability to win a Premier League title in almost a decade. Wenger’s frustrations may have led to the altercation with Mourihno during the match. While Mourinho may have been uncharitable, few would disagree that Wenger has not made the best of a club with so much potential.

    Again, deficiencies in Wenger’s business model meant Chelsea came out victorious on the day. It was the usual story. Arsenal had all the fanciful possession but no final third capability and of course, the defensive lapse that conceded the contest.

    The reasons are not far-fetched. First, since the departure of Thierry Henry, Arsenal have had, arguably, in Robin van Persie’s last season, just one competent striker; and then he was sold to rivals Manchester United to help them win the Premiere League title. The rest of the strikers have shown rather low chance conversion ratios. As shown in Table 1, Arsenal did not have even one shot on target throughout the match against Chelsea.

    Match Statistics

    The implication then is that against the top Premiere League teams, where goal-scoring chances would be few, Arsenal would be unable to get winning results; and that was the case at Stamford Bridge. Against the top 7 premier League teams of the 2013-2014 season, Arsenal could only win 3 games, losing 5 and drawing 4.

    Secondly, Arsenal’s defensive midfield and backfield capabilities have been unimpressive since the “Invincibles” team of 2004. Eden Hazard, Chelsea’s Belgian winger rode roughshod over the Arsenal midfield and backfield, scoring the first goal of the match. Didier Drogba, during his first-term at Chelsea, had a field day against Arsenal, scoring quite easily in just about every game he played against the club.

    All said, Mr. Wenger’s business model really needs a review. His vision of buying promising youngsters and developing them has not translated to title-winning teams and his preference for players of certain physical attributes upon whom he imposes a certain play-pattern has left him with one of the worst injury lists in the Premier League.
    Table 2 shows the total number of injury days for first team players in the Premier League for the 2010-2011 season through 2013-2014.

    Barclays Premier League_ Total Player-Day Injury Loss (First Team)
    In three of those seasons, Arsenal either topped that table or placed in the top three. Last season, Arsenal had a total of 1,716 days without its first team players, almost 300 more than the second-placed team, Tottenham; it was also more than three times that of Chelsea and almost double those of Liverpool and Manchester City. All three teams finished above Arsenal on last season’s Premier League table. The 2014-2015 has barely begun and already, Arsenal is saddled with long first-team layoffs in Olivier Giroud, Mesut Ozil and Mathieu Debuchy, while Laurent Koscielny, Mikel Arteta, Aaron Ramsay and Theo Walcott are out for unspecified periods. Abou Diaby is seemingly permanent on that log.

    Without a rethink of this model, it is unlikely the team will return to title-winning ways, leaving that specialist-in-failure tag firmly in place.

  • Global Crude Oil Prices: Why Uncertainty Will Endure

    Global crude oil prices have fallen significantly over the past few months. Brent crude for November delivery for example settled at US$94.67 per barrel, a 16% drop for the quarter and its lowest for 27 months. West Texas Intermediate also last month fell below US$90 per barrel ending 12% lower for the third quarter.
    Such declines however, bear only mixed fortunes. While manufacturers and other consumers may welcome the relief, crude oil producers especially those engaged in unconventional resources (such as shale) and complex terrains (such as the deep offshore or the Arctic) may not be so welcoming; and that is because the falling crude oil prices may test the upper range of breakeven prices for some of these producing fields.

    At present, there are three principal drivers for global crude oil prices:

    The 2008 global economic crises saw a decline in the world’s total petroleum consumption; among member-countries of the Organization for Economic Cooperation and Development (OECD) however, that decline began well in advance, in 2005 (Figure 1).

    Total Petroleum Consumption _OECD, Non-OECD 2005-2013

    A sustained rise in oil prices led to the introduction of higher efficiency and conservation measures such as Renewable Fuel Standards and Fuel Efficiency Standards which further reduced consumption.

    Global rebound from that recession has been modest and that has led to sluggish growth in demand for petroleum, which is still the dominant energy form for powering the world’s economic wheel. In the United States, rebound has been slow and factory activity reports for September indicate an uneven expansion. For the European Union, growth has been fragile and the prospects for 2015 are modest. France and Germany are the two European economic powerhouses but in September, factory activity shrank for the first time in 15 months in Germany while France saw a contraction for the fifth month running. In the United Kingdom, manufacturing activity fell to a 17-month low in September.

    Rising emerging market demand for petroleum was expected to countervail the decline in developed economies, however GDP growth in this economic group has slowed; according to the International Monetary Fund, IMF, GDP growth in emerging markets slowed from 7% during 2003-2008 to 6% during 2010-2013 and is expected to further fall to 5% during 2014-2018. Even the Asian economic giants have seen a measure of slower economic growth. China, on concerns about slowing economic growth, recently cut mortgage rates for the first time since the 2008 crises, in an effort to bolster a flagging housing market. India and South Korea have also witnessed contractions in manufacturing activity.

    The steep rate of crude oil production increase in the United States ― in addition to increases from Organization of the Petroleum Exporting Countries ― has contributed significantly to the current excess global supply. Such is the contribution from producers outside the Middle East that the current ISIS crises in Iraq has had little if any effect on global crude oil prices. According to the Energy Information Administration, total oil supply by the United States exceeded those of Saudi Arabia and Russia to record the highest value for a country in 2013 (Figure 2).

    Total Oil Supply_U.S., Russia Saudi Arabia 2005-2013

    According to Platts, the estimated surplus of global oil supply over consumption for 2014 is currently about 800,000 barrels per day. That surplus is set to increase as OPEC members prepare for a price-reduction battle in order to protect their market share. The net effect of the supply glut has been downward pressures on prices.

    Dollar Rates
    Exchange rates for the United States dollar with regard to major global currencies have also impacted crude oil prices. The U.S. currency strengthened to a two-year high against the Euro and a four-year high against several major currencies. Since crude oil is bench-marked in United States dollars, the effect of that strengthening has been to make the commodity more expensive, exerting downward pressures on demand and hence prices.

    All said, given the current levels of oil oversupply and the phlegmatic rates of global economic activity, oil prices will most probably remain comparatively low in the short to medium term. Some analysts expect a further decline of about US$10 per barrel from current price levels. This will test the profitability of cost-intensive producers. Breakeven prices for tight oil producers in the United States for example are estimated to be between US$65 per barrel and US$85 per barrel. For the Canadian oil sands, the values are US$75 per barrel for steam-assisted gravity drainage projects and US$100 per barrel for mine upgrading capacity projects. The implication is that some ongoing projects may be forced to shut down while some proposed ones may be shelved.
    While these conditions may constitute the necessary spur for a future price rebound, the expected tenure of the current price regime remains uncertain.

  • Religious Conservatism And The Profanation of Christianity

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    For Christians, the Bible is the constitution for earthly living. It refers to Christianity as the “Way”; the way of life. Jesus Christ said of Himself, “I am the way and the truth and the life. No one comes to the father except through me.” (John 14:6; NIV). There is little doubt that true Christians look to biblical provisions to guide their ways of life; however it is in the understanding and interpretation of those provisions that differences have arisen. Issues such as women covering their hair in church, spanking of children, validity of tithing, charity and the Trinity among others have been contentious.

    Of greater concern however, are untenable arguments by professed Christians, citing biblical provisions in support of various social and political positions. Arguments for and against are often deeply entrenched invoking commentaries of many a “biblical scholar” from one theological institution or another and which in the main, place undue emphasis on individual scholarship. According to the apostle Paul:

    My message and my preaching were not with wise and persuasive words, but with a demonstration of the Spirit’s power, so that your faith might not rest on men’s wisdom, but on God’s power.” (1 Corinthians 2:4-5; NIV)

    Biblical expositors must speak as they are carried by the Spirit of God. Since Christians are baptized into one Spirit ― the Spirit of God ― and God is not a God of disorder but a God of Peace (1 Corinthians 14:33; NIV), there should be no disagreement among Spirit-led Christians on any issue. Unity in the body of Christ is one of the thematic elements of Paul’s letters. The fact that inveterate disagreements on various issues subsist, indicates that some positions are not Spirit-led and arise either out of a lack of understanding or for purely self-serving ends.

    Most Christians for example, admit a biblical obligation to extend charity to the poor. In the United States however, Christian conservatives with political affinity in the main, for the Republican Party, hold that such acts of charity should be voluntary and for which state funds should not be appropriated. To them, citizens should not be forced to part with the fruit of their hard labor for the purpose of redistribution; and therefore presenting a ‘biblical” foundation for one of the pillars of a political platform. But the hypocrisy inherent in that position is exposed by its view ― which the bible does not mandate ― that the same fruit of citizens’ hard labor should be appropriated to fulfill other biblical obligations such as protection of the state of Israel. Its self-serving ends are also found in the contention that recipients of state-funded charity are beholden to the other political party, the Democratic Party which upholds it. The Republican Party’s Mitt Romney, in a self-scorching gaffe during his campaign for the 2012 United States presidency ― which he lost to the Democratic Party’s Barack Obama ― claimed that there were 47 per cent of Americans who pay no federal taxes but live off government charity and who would vote for President Obama “no matter what”. That claim which turned out to be wildly inaccurate did nothing to dispel perceptions that his party favors the rich over the poor; and such favoritism may indeed hold dire economic and political consequences. Continue reading  Post ID 218

  • Adrian Peterson, Child Abuse And The Biblical Position On Corporal Discipline

    About a fortnight ago, Adrian Lewis Peterson, a running back for the Minnesota Vikings in the National Football League was indicted by a Montgomery County, Texas grand jury for reckless or negligent injury to a child; the child just happened to be his four-year old son. Peterson reportedly admitted to beating his son with a “switch”, a thin part of a tree branch. Images from the alleged beating are quite graphic.

    Adrian Peterson Child Abuse - Police Photo Evidence

    The running back, in an Instagram message, seemingly sought solace in his standing with God. This, among Christians, elicited arguments for and against corporal discipline or spanking. The arguments have in the main, been based on the following passage from the book of Proverbs in the Bible:

    He who spares the rod hates his son, but he who loves him is careful to discipline him (Proverbs 13:24; New International Version).

    Proponents of corporal discipline hold that the verse is self-evident while opponents are of the view that “rod” here refers to a shepherd’s instrument for guiding (not spanking) the flock. The antagonists also cite several theological scholars and professors of divinity in support of their respective positions.

    The arguments highlight the degree of  “lack of knowledge” among self-confessed Christians; and God speaking in the Bible says “… my people are destroyed from lack of knowledge.” (Hosea 4:6).

    There are three noteworthy elements to the discourse:

    First is the contentious word, “rod”, in Proverbs 13:24. Advocates of child spanking read a literal sense to the word and this, when taken to the extreme, results in such graphic images as those of Adrian Peterson’s son. Continue reading  Post ID 212