• Arsenal FC: Will Arsène Wenger Rue Another Botched Transfer Window?

    Arsenal FC shieldArsenal FC won the Football Association Cup as well as the Community Shield for the 2013/2014 season in the United Kingdom; but that would be the first time in about a decade that the club would win any trophy. Since winning the English Premier League title in the 2003/2004 season, Arsène Wenger, who has managed the club since 1996 embarked on a controversial business model which placed much greater emphasis on youth development.

    While youth development is certainly a critical part of building and sustaining a football team, it must be balanced with experienced and proven players. In the past ten seasons of the Barclays English Premiership, for example, 5 of the titles have been won by teams [Chelsea FC (3) and Manchester City FC (2)] which have invested significantly in proven and experienced players. The other 5 were won by a club (Manchester United FC) that had a critical balance of youth and proven experience.

    Arsene Wenger 2

    In addition, the tendency is for developed players that are neither winning titles nor earning commensurate wages to seek better prospects with other clubs. For Arsenal FC, the cases with Gaël Clichy, Samir Nasri, Cesc Fabrégas and Robin van Persie among others stand out. In the case of van Persie, the sale to Manchester United FC arguably facilitated that club’s Premier League title at the expense of Arsenal.

    True, Mr. Wenger has led the club to 17 consecutive years of qualification for the UEFA Champions League competition. He has even introduced a trademark fanciful gamesmanship to the club’s play but l dare add that most fans of the club would rather have titles and trophies.

    Three issues need to be addressed if the club must return to winning ways: Continue reading  Post ID 195

  • Shale Resources: Prospects For Global Oil and Gas Supply

    TRF Thumbnail 2The United States in the last few years witnessed a massive increase in crude oil and natural gas production from shale formations. That increase, according to the Energy Information Administration, EIA, has put the country on course to leapfrog Saudi Arabia and Russia to become the world’s largest producer of crude oil while reducing the domestic price of natural gas by about two-thirds. The shale boom, as the breakthrough has been termed, was made possible in the main by two processes, namely hydraulic fracturing (or fracking) and directional drilling.

    Given the formidable challenges facing oil and gas production from many shale formations, questions have inevitably arisen about the sustainability or longevity of the whole shale boom phenomenon. While skeptics hold that the sheer number of wells necessary just to maintain production is impracticable, proponents estimate that the boom will endure for between three and nine decades. A proper evaluation of the prospects is therefore informative.

    One characteristic of production from shale formations is the rather steep initial production decline rates (Figure 1) which in some cases are in excess of 50% (typically 60% to 70%) after just one year of production.

    Typical Natural Gas Production Curves For Selected Shale Formations

    Conventional resources in the main, show decline rates of about 55% after two years and thereafter taper off gradually. The implication then is that for shale formations, many newer wells would have to be drilled just to maintain production. According to the International Energy Agency for example, North Dakota’s Bakken shale formation will require 2,500 new wells drilled a year in order to sustain production of crude oil at 1 million barrels per day; a measure many conventional fields can accomplish with as little as nine-tenths less .
    Another production concern in shale formations is low recovery rate. Shale resources show a lot of lateral variability. For example, a 100-meter thick oil-laden formation may in just over a kilometer away thin out to zero, impacting the general yield rate.

    Of greatest concern to shale producers however, is the cost factor. According to reports by Oil and Gas Journal, there have been assets write-downs of nearly US$35 billion among the 15 largest shale resource producers since the beginning of the shale boom; the report also cites 6 years of “progressively worsening financial performance” among 35 U.S.-focused independent companies involved in shale gas and tight oil plays. The high-positive correlation between shale production costs and product prices leaves little wiggle room for profitability. Some analysts estimate that this year, drillers for shale oil and gas resources will spend US$1.50 for every US$1.00 they earn from sales of their output. Clearly, cash flow, positive inflection point is still some time away. Continue reading  Post ID 186

  • The Middle East* And Global Petroleum Supply

    The lack of any significant effect on global crude oil prices by the current Middle East conflicts is perhaps indicative of the region’s declining importance in the global oil and gas industry. The Middle East has for decades dominated the supply of crude oil and natural gas and any unrest ― such as the Arab Springs ― in the region has tended to cause spikes in energy prices.
    The current spat in the region involves Israel and Hamas on one hand and ISIS on the other. Since the current crises began and through 11 August, the two major metrics for global crude oil prices, namely Brent and West Texas Intermediate (WTI) have declined (Figure 1).

    Spot Crude Oil Prices (FOB)_ Brent, WTI 01 July 2014 - 11 August 2014

    In contrast, the Russia-Ukraine crisis has had an opposite effect. The recent report that Russia ―― the third-largest producer of crude oil and with the largest natural gas reserves ―― has sent battle tanks across its border into Ukraine caused crude oil prices to rise. For example, front-month October Brent prices on Friday climbed US$1.46 to settle at US$103.53 per barrel.

    This market response may derive from the region’s fundamentals. For example, the proportion of global crude oil reserves held by the Middle East has been declining significantly over the last decade while that for natural gas has remained essentially unchanged over the same period (Figure 2).

    Middle East_ Proved Oil and Gas reserves As Proportion of World's Total  1980 - 2013

    In addition, the growth in crude oil reserves by the rest of the world has outpaced that of the Middle East. Between the years 2000 and 2013, the rest of the world grew crude oil reserves at an average rate of 3.5% while for the Middle East the average growth rate was only 1.3% (Figure 3).

    For natural gas, while the Middle East’s proportion of global supply has been increasing, the growth rate for its reserves since the year 2000 has declined faster than that for the rest of the world.

    Growth In Crude Oil Reserves_ Middle East vs Rest of the World 2000 - 2013

    The Middle East region presents one of the last remaining “easy-to-get” petroleum provinces; however, major oil and gas companies while still active in the region, have channeled investment in the more politically stable ― even if more geologically complex and capital intensive ― acreages.
    Investors often loathe uncertainty, but prefer the calculated risk in technological or geological challenges over the inscrutable vagaries of less-developed economies. ExxonMobil, Royal Dutch Shell, BP and Statoil are among the majors prospecting for oil and gas in the Arctic. Some other companies in the United States are divesting overseas assets to focus on domestic prospects.

    With the prospective addition to the global inventory, of resources from tar sands, shale (especially in China), as well as the Arctic among others, the strategic importance of the Middle East to the global petroleum industry may be further (even if gradually) eroded.


    *The Middle East region referred to in this post consists of Bahrain, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, Palestinian Territories, Qatar, Saudi Arabia, Syria, United Arab Emirates and Yemen.

  • Major Oil Companies: Restructuring For Profitability

    Nrelate and Default Icon - TRFCrude oil and natural gas exploitation has been progressing into more challenging regimes. These frontiers such as the Subsalt as well as the Arctic among others are more geologically complex requiring enhanced technological applications to exploit; that inevitably means higher costs with implications on the operating companies’ profitability and shareholder returns. The Energy Information Administration in a recent report indicated that among 127 major oil and gas companies, cash proceeds for the year ended 31 March 2014 totaled US$568 billion while cash usage was US$677 billion, or US$109 billion higher.

    Three metrics elucidate this:

    1. Upstream Unit Capital Productivity

    In the seven years to 2012, unit capital productivity among the world’s top 74 oil and gas companies declined in a near-exponential manner from 21.59 barrels of oil equivalent per dollar (boe/$) to 9.56 boe/$ (Figure 1), according to a Pricewaterhouse Coopers report. The report was based on the world’s top 100 oil and gas companies as compiled by Evaluate Energy. Unit capital productivity measures the quantity of oil and gas produced for each dollar of capital employed by the companies. In other words, the quantity of oil produced by the companies per dollar employed has almost halved in the period under consideration. The decline is in spite of massive production increases mainly from unconventionals and is same even among the top performing (upper quartile) companies. Figure 1. Unit Capital Productivity_2006 - 2012 Continue reading  Post ID 143

  • A Brief On The Current Energy Sector Sanctions Against Russia

    Nrelate and Default Icon - TRFThe United States and European Union a few days ago announced a third stage of co-ordinated sanctions against Russia, in response to that country’s annexation of Crimea and its reported complicity with separatist rebels in the shooting down of Malaysia’s flight MH 17 over Ukraine. The current sanctions target Russia’s energy, defence and financial sectors.

    According to the Energy Information Administration, Russia is the second-largest producer of dry natural gas and third-largest producer of liquid fuels in the world. However, exploitation of the country’s petroleum resources is largely dependent on the West’s technological expertise and financial muscle; any withdrawal or reduction with regard to these will certainly impact her production.
    The provisions of the current sanctions limiting financial and specific technological investment in the Russian oil and gas sector must therefore be of some concern. For example, production in the country’s older oilfields is only being maintained by horizontal drilling and hydraulic fracturing processes among others provided by western energy companies. In addition, estimated capital expenditure for 2014 by (mainly western) upstream companies was US$51.7 billion according to Barclays Capital Inc. ExxonMobil (U.S.) and Statoil (Norway) have joint ventures with Russia’s state-controlled oil company Rosneft, for the exploitation of Arctic and other geologically complex prospects while BP (UK) holds a 19.75% stake in Rosneft. Igor Sechin, Chief Executive Officer of Rosneft recently revealed that the company has devised ways to circumvent or minimize the effect of such sanctions.

    Oilfield service companies such as Schlumberger, Baker Hughes and Halliburton generate 4% to 6% of their global sales from Russia according to RBC Capital Markets; and while losses at such levels ― should they occur ― would not threaten these companies, they would certainly pinch. Vladimir Putin, Russia’s president may have been counting such a pinch when he defied the West’s calls and pressed on with support for rebel separatist forces in eastern Ukraine; and he may have gotten a reprieve as Russia’s gas works were spared of sanctions, perhaps because they supply about a third of the European Union’s gas consumption.

    While these sanctions may have little or no immediate effect on Russia’s oil production, they will however, if they endure, quicken production decline in older oilfields and lead to extensive delays in the development of new ones. Russia is blessed with a lot of brilliant scientists and engineers who are quite capable of developing their own technology to replace the West’s; but the capital outlay as well as the time frame needed for its development, testing and deployment would suggest a Russian crude oil production decline in the medium-term to long-term.


  • Global Crude Oil Prices: Three Critical Issues To Watch

    Crude oil, albeit in decreasing proportions, will for some time to come remain a dominant form of energy used to power the gamut of domestic and industrial processes around the world. There are however, concerns that supply disruptions may impact the current ― even if sluggish ― economic rebound particularly in Europe, as well as the projected economic growth in emerging markets.

    Geo-political tensions such as those of the Middle East-North Africa (MENA) region can and do impact crude oil supply and therefore prices. There are currently two flashpoints that hold the potential for larger supply disruptions. The first is the Israel-Hamas military conflict which can develop into a full-fledged proxy war in a region that is critical to global crude oil supply; the second is the spat between the West and Russia over the shooting-down of Malaysia’s Boeing 777 passenger jet over Ukraine. It is noteworthy that about a third of Europe’s gas energy requirement is met by Russia and a significant proportion of that through Ukraine.

    While such flashpoints are often tenuous, there are in the short to medium term, three potential drivers for global crude oil prices that need to be kept in view:

    1. Production from Unconventionals
    The massive increase in crude oil production from unconventional sources has come mainly from the United States and Canada. In the United States, about 90% of crude oil production growth comes from tight oil in six shale plays, according to the Energy Information Administration, EIA; and of the six, only two (Eagle Ford and Bakken) account for about 67% of that growth. While operators of these plays welcome such output, the rather high productivity decline rates for the plays has meant that an estimated 6,000 wells must be drilled annually at a staggering cost of about US$35 billion just to maintain production. Many analysts believe this is unsustainable. Tight oil production is projected to rise rapidly (leading crude oil production growth) to 2.6 million barrels per day in 2019 and then decline through 2040 (Figure 1).

    Continue reading  Post ID 106

  • Nigeria: The Challenge of Petroleum Resources Management

    Petroleum resources constitute a major proportion of Nigeria’s foreign exchange earnings; however, poor management, corruption, slow reserves growth as well as increasing output from new and existing producers, present challenging prospects for the country’s  economy. 

    NNPC TowersNigeria is a member of the Organization of Petroleum Exporting Countries, OPEC, and according to the National Bureau of Statistics, petroleum resources have since 1984, accounted for not less than 90% of the country’s total export value. The country earns a significant proportion of her foreign exchange from petroleum resources but has been far from prudent in the management of such earnings. While the country has earned hundreds of billions of dollars from petroleum resources over the past decades, the CIA Handbook reports that about 70% of its population still lives below the poverty line.
    Nigeria is not the only country challenged with issues of resource curse. A report in the European Economic Review for example, shows that between 1965 and 1998, Gross National Product decreased by an average of 1.3% among OPEC countries compared to an average growth of 2.2% in the rest of the developing world. Figure 1 shows Nigeria’s GDP growth rates for the period 2008 and 2012; while non-oil rates held high positive values, those for oil were negative in three of the five years. Figure 1. Nigeria- GDP Growth Rate At 1990 Constant Price  (2008 - 2012)With her rather ambitious goal of being among the world’s twenty most-developed countries by the year 2020 and the vagaries of global petroleum supply, a proper rethink of her petroleum management policies is informed.

    Major Challenges
    With petroleum resources the mainstay of Nigeria’s economy, two issues in broad terms, are already defining her prospects.
    First is inveterate corruption. Transparency International, in its 2013 Corruption Perception Index ranked Nigeria an abysmal 144 (together with Central African Republic, Iran and Papua New Guinea) out of 175 countries. Namibia (57), Ghana (63) South Africa (72) ranked much more respectably.
    Corruption has meant that many activities in the country’s oil and gas sector over the past decades have been carried out in cultic secrecy while proceeds are brazenly misappropriated. For example, details of the country’s actual petroleum production have over the years been somewhat nebulous; project costs are reportedly hyper-inflated, legislators hold that a proper audit of the national oil company’s books has not been done in decades and petroleum product (mainly gasoline) subsidies are reportedly fraudulent, ballooning to an inexplicable US$8 billion in 2011, representing 30% of government expenditure, 4% of GDP and 118% of capital budget.
    Countries such as the United States and the United Kingdom have met great resistance in their attempts to get their respective corporate nationals to disclose details of financial transactions with the Nigerian government. The Petroleum Industry Bill, PIB, which was supposed to address some of the transparency and accountability issues in the country’s oil and gas sector, has been languishing in the legislature for more than six years; and with various versions being bandied about, there are genuine concerns that if indeed a bill is passed, it may be so abridged as to defeat the raison d’être.

    Uncertainties associated with the provisions of the PIB have led to assets divestment and low capital expenditure in the country’s oil and gas sector by International Oil Companies, IOCs; the impact will certainly be heavy on Nigeria’s already blighted growth in proved reserves growth (See Figure 2).Figure 2. Nigeria- Growth In Proved Crude Oil Reserves (2000 - 2014)
    The second and more recent is the growing petroleum output from new and existing producers. The United States has significantly ramped up her natural gas production due mainly to technological developments such as hydraulic fracturing (fracking) and horizontal drilling in shale formations. The country has also increased its crude oil production from liquid-rich shale formations to overtake Saudi Arabia as the world’s highest producer. Angola recently announced that her crude oil production has surpassed Nigeria’s.

    The implication then is that the United States which used to be the highest importer of Nigeria’s petro-products, had in 2012, for the first time in more than a decade failed to import any Liquefied Natural Gas (LNG) from Nigeria; Europe’s share of Nigeria’s LNG exports also fell from 67% in 2010 to 43% in 2012 according to the Energy Information Administration. In addition, 2012 saw the US import of Nigeria’s crude oil fall by 50% over 2011 levels.

    With countries such as Canada (oil sands) and Brazil (subsalt) among others also ramping up production, there are already severe revenue implications for Nigeria.

    The Way Forward

    The nation’s archives are replete with lapsed development plans; not only was there no will to implement them, the processes themselves were mostly flawed. For example in recognition of the inability of existing refineries to meet product demand, licences were awarded for the establishment of eighteen refineries; but about a decade later, not even one so much as received a final investment decision. Issues such as access to feedstock as well as product pricing (which impact refining margins) were never addressed. Refined product prices were fixed below cost while government determined the level of subsidy. A proper management roadmap for the country’s oil and gas sector must then of necessity entail the following:

    1. Political Will
    The principal requirement for restructuring Nigeria’s oil and gas sector is a strong political will to resolutely tackle corruption and institute all necessary sectorial reforms. It is a position that is certain to attract passionate resistance from very powerful and deeply entrenched interests; from the petroleum product importer for whom a functional refinery is anathema, to the product transporter in whose nostrils a viable pipeline system is a stench. Such notoriously inefficient processes must be taken down or the decay will progress even exponentially and posterity will be the worse. Leadership regimes have often adopted a “live-and-let-live” approach in dealing with such bastions of corruption.

    2. Proper Product Pricing
    For a country that imports more than 80% of her refined petroleum product requirements, Nigeria’s petroleum product subsidy regimes as currently constituted are wasteful, inefficient and inimical to capital investment; they need to be reviewed. However, there is a limit to the “corrective shock” an economy can sustain without compounding problems. If Nigeria’s productivity for example, is adversely impacted by a one-step (immediate and total) subsidy removal, then the country could be burdened with more problems than it initially set out to address.

    A better approach would be a phased and benchmarked removal process. Previous attempts at subsidy removal have been met with extreme violence often bringing economic activity to a halt for several days; and that because the trust of the people with respect to proceeds from subsidy removal was squandered. Placing a palliatives horse before a subsidy removal cart would most probably secure the willingness of a greater proportion of civil society groups to join the restructuring agenda. By guaranteeing refining margins to new refineries for example, subsidy will be removed from consumption and placed on production; such subsidy can then be subjected to a stepped (say a 3-step, 30%-30%-40%) removal over a few years depending on the particulars of the refining infrastructure.

    A significant proportion of the country’s oil and gas supply outages derive from ageing infrastructure; operators balk at investment in infrastructure because fixed product prices prevent a proper return on investment. For example, the lack of adequate refining capacity has been a major driver for high product prices. The country’s aggregate refining capacity utilization has been abysmally low (see Figure 3) averaging less than 30% over the past decade; even at 100% utilization, the existing refineries would be unable to meet demand but no operator has been willing to build new refineries due to unfavorable refining margins occasioned by product pricing.
    Figure 3. Nigeria - Average Refining Capacity Utilization (2001 - 2013)3. Effective Regulation and Restructuring
    State agencies in the country’s oil and gas sector need urgent reorganization and refocusing for transparency and efficiency. An effective oversight agency, free of bureaucratic encumbrances is imperative. Issues of corrupt practices and enforcement of standards have gone begging. The requisite matériel and personnel to carry out effective regulation have been inadequate; subjects of regulation have even been relied upon for logistics and critical evaluations. These should not be the case. The country’s national oil company has become inefficient and unwieldy, having been saddled with the conflicting roles of both regulation and operation; the utter collapse of its refining and marketing processes is symptomatic.
    Some of these issues were supposed to have been addressed by the PIB which has seemingly been mothballed in the country’s legislature.

    All said, president Goodluck Jonathan, who hails from the Niger Delta―a region blighted by oil and gas activities―and who may contest for a second and final (therefore politically unencumbered) term of office, should be adequately placed to institute these reforms in the event that he contests and wins. It remains to be seen however, if he can then step up to the plate.