The Monitoring Team: Lina Nagell, Henrik Vorloeper
Long-term implications of energy industry cutbacks
Oil prices below USD 30 per barrel in January 2016 and rising stockpiles of oil have led to unprecedented cutbacks in activity and spending of energy companies worldwide. As a result costs for companies have come down, stemming partly from currency depreciation in oil producing nations and partly from cutbacks in service companies. The later has the potential to promote efficiency through more challenging competition. For example Russian firms reduced costs by 20 per cent because of the falling ruble, whereas U.S. tight oil producers could negotiate 30 cost reductions in average. The world average stands at 20 per cent reductions. However, despite cost reductions, oil prices remain below the average break even prices, so that it becomes more difficult to suggest if cut backs remain cyclical or will have a structural impact on the energy markets for the coming years.
Amrita Sen and Virendra Chauhan, 2016. Oil producers retool for lower prices. Financial Times, 01 February 2016. http://www.ft.com/cms/s/0/5c54bf8c-c8c1-11e5-a8ef-ea66e967dd44.html#axzz3yvGGTHzC
Major oil companies report great losses, Companies with activity in the North Sea especially hit.
This week some of the world’s biggest oil companies unveiled some of their worst-ever results, clearly showing the effects of the drops in oil price. BP suffered a loss of $5.2bn in 2015, ExxonMobil announced a 58% drop in profits and a 25% reduction in capital spending for the next year. Royal Dutch Shell reported a decline of 56% in earnings in Q4 of 2015 compared to Q4 2014. Companies active in the North Sea are particularly affected, as it is one of the world’s most expensive oilfields. Facing challenging times many of the companies have taken up debt to keep themselves funded, while the total debt at companies with North Sea operations was just over $90bn five years ago, today it has increased to $133. This is also shown by the example of Statoil’s reported loss this week, estimated at a 44% decline in Q4 2015 compared to Q4 2014. Energy consultants at Wood Mackenzie stated that oil companies were likely to halt output at 140 offshore UK fields during the next five years, even if crude rebounded from $35 to $85 a barrel. Taking into consideration cost associated with stopping the extraction of oil in the North Sea, estimated at around $1ml, there are many concerns facing oil companies operating in the fields.
Kiran Stacey, 2016. North Sea oil companies in danger amid debt spillage. The Financial Times, February 5, 2016. http://www.ft.com/intl/cms/s/0/e67e4dac-ca76-11e5-a8ef-ea66e967dd44.html#axzz3zIw6cdHC
Christopher Adams, Kiran Stacey and Chris Tighe, 2016. Collapse in crude brings North Sea fields near end of production. Financial Times, February 2, 2016. http://www.ft.com/intl/cms/s/0/1269ec82-c69e-11e5-808f-8231cd71622e.html#axzz3zIw6cdHC
Holly Ellyatt, 2016. Shell, Statoil earnings decline as oil price rags. CNBC, 4 February 2016. http://www.cnbc.com/2016/02/03/shell-statoil-earnings-decline-as-oil-price-drags.html
Middle East Prepares for a post-oil era.
As oil prices remain at a low level, petroleum exporting countries in the middle east are looking to reform their economies so to better weather the shock of lower oil revenues towards their highly oil-dependent economies. Diversification strategies to move away from oil-dependency has been put in place in the UAE, involving diversifying the source of energy and income. Six gulf oil-producing countries (Saudi Arabia, Kuwait, Bahrain, Oman, Qatar and UAE) are planning to introduce a sales tax for the first time in facing the lower price level. Long standing fuel subsidies, specifically in the UAE has also been removed.
Holly Ellyatt, 2016. Middle East prepares for a post-oil era. CNBC, 22 January, 2016. http://www.cnbc.com/2016/01/22/the-middle-east-after-oil.html
Oil prices lower than China’s growth
Despite the lowest economic growth in China for decades, the low oil prices of January 2016 tempted the Chinese market to increase its oil imports to the highest since 2011, coming from different sources, including Africa, Russia and the North Sea. However, as it appears that China has become a “price taker”, since slowing demand from China has been seen as one of the main driver for low prices, demand in China might only partially being driven by prices below USD 30 per barrel. First, China increased its storage capacities, which needs to be filled preferably when prices are low. Second, China’s economy is still growing and as a rather long-term trend, China has increased its refining capacity for gasoline to meet the demand in its automobile sector.
Rupert Rowling, 2016. China Can’t Resist $30 Oil, Bloomberg Business, 01 February 2016. http://www.bloomberg.com/news/articles/2016-02-01/china-can-t-resist-30-oil-as-african-north-sea-cargoes-surge
Oil prices rallied after news of increased crude inventory levels, could this mean that oil has bottomed?
Wednesday 3rd of February data from the Energy Information Administration showed that crude oil inventories rose by 7.8 million barrels the week before, more than the forecasted 4.8 million. Despite oil prices initially dipping and stocks tumbling, crude prices were spiking higher, stocks following, around mid-afternoon. The rally in oil after news that inventories are at record highs is counterintuitive, and could suggest that the oil price have indeed bottomed. This analysis was put forward by Rich Barry, a Floor Governor of the New York Stock Exchange. Other analysts argue that although the increased oil inventory came as a surprise, a sizable increase, possibly exceeding the forecast, has been expected for some time. Another point is the forecasted decline in the shale oil supply, which would offset the half million barrels Iran is expected to bring to the market.
Akin Oyedele, 2016. One trader has an interesting theory about why we might be seeing a bottom in oil prices. Business Insider, 3 February, 2016. http://www.businessinsider.com/analyst-on-oil-prices-and-inventories-2016-2
The Week, 2016. Oil price may be sub-$30 at the end of the year. The Week, 5 February, 2016. http://www.theweek.co.uk/oil-price/60838/oil-price-may-be-sub-30-at-the-end-of-the-year
Oil prices may rise by 50 per cent in 2016
Analysts project that oil prices could climb by USD 15 per barrel in 2016, which is the median value of 17 different estimates. The increase will be spurred by the following two reasons: Shale production will decline in the U.S., whereas the average non-OPEC output will decline as well, mainly driven by Russian output reductions. As this is the reason why prices increase, Analysts at the same time provide three explanations, why prices will balance between USD 46 to USD 48 per barrel. First, Iran will re-enter the market, while OPEC does not seem to significantly change its production rate. Second, shale production will decline, but balance and third, global demand for oil will increase.
Ben Sharples, 2016. Oil Prices Could Jump 50% by the End of 2016. Bloomberg Business, 3 February 2016. http://www.bloomberg.com/news/articles/2016-02-03/oil-seen-surging-about-50-by-fourth-quarter-as-supply-eases
Russia: Germany will agree to build Nord Stream 2 pipeline
The construction of the Nord Stream 2 pipeline (NS 2), between Russia and Germany has become politically controversial in recent months. The project faces opposition from several directions, including Central European “gas-transit” states, the European Commission and members of the German government. Up until now, Germany has been a proponent of the project, but likely due to concerns of losing income from transit fees, German officials ask Russia now to guarantee gas deliveries to Eastern Europe.
Kenneth Rapoza, 2016, Despite Loud Opposition, Russia Believes Germany Will Agree To Build Nord-Stream 2 Pipeline. Forbes, 31 January 2016. http://www.forbes.com/sites/kenrapoza/2016/01/31/despite-loud-opposition-russia-believes-germany-will-agree-to-build-nord-stream-2-pipeline/#519d106f1a8e
Oligarchs may pay 500-800 Billion rubles for Russia’s privatization
Driven by the economic crisis, Russia wants to sell stakes in some of the largest state-owned companies (Rosneft, Bashneft, Sovkomflot, VTB, etc.). The sale is aimed to prevent state-budget deficits and can bring up to 800bln Rubles. But the deal comes with some risk: first foreign participation might be limited because of Russia’s history of disputed property rights. Second, sanctions and low oil prices put the industry into a downturn, in which investment is risky. Third, experienced investors suggest that the state does not want to lose control over its assets and therefore lures oligarchs that are loyal to the Kremlin, who are willing to pay a premium on shares.
Reporting by Margarita Papchenkova, Olga Popova, Zlata Garasyuta, Darya Korsunskaya, Lidia Kelly in Moscow and Karin Strohecker in London; Writing by Margarita Papchenkova and Lidia Kelly; editing by Philippa Fletcher. Russian oligarchs most likely buyers in Putin’s new privatisation plan. Reuters, 3 February 2016. http://www.reuters.com/article/russia-privatisation-plan-idUSL8N15H4V3
Gazprom’s strategic changes
As LNG from the U.S. are expected to hit the market later in 2016, investors believe that Gazprom may adopt a strategy, very similar to that what OPEC does in oil markets: lower the price of gas. Even though this would certainly not be in interest of Russia’s economy, a low gas price would make LNG from the U.S. unprofitable for European markets and secure Gazprom’s market share. A European gas price war could have consequences for the global price structure for gas and also coal. According to Gazprom, the company has still 100 bln cubic meters of gas available, which could compensate for losses caused by lower prices. Gas prices in Europe have fallen in the last year (by 50 per cent on the spot market and contracted prices are following the low oil prices). Gazprom cannot do much against the price drop, but it can fight a “price war” and take advantage of its already existing market share.
Jack Farchy, 2016. Global gas market braced for price war. Financial Times, 3 February 2016. http://www.ft.com/intl/cms/s/2/c9c44750-ca50-11e5-a8ef-ea66e967dd44.html#axzz3zC4McxbR
Shell- BG merger set to take place on the 15th of February, just as sector tanks due to price mechanisms based on falling oil price.
Shell set to massively increase its exposure to the LNG market. BG, former international exploration and production arm of British Gas, will become a part of Shell on the 15th of February in a $35bn merger. BG ramped up its LNG shipments by nearly 60% in 2015, only to see earnings from that side of its business plunge by 67%. Problems facing LNG companies is prices based on long-term supply contracts indexed after oil prices. Shell is already the biggest LNG provider among the large international oil companies, with its output set to rise by a third with the BG takeover.
Terry Macalister, 2016. Shell Massively expands natural gas business- just as sector sinks. The Guardian, February 5, 2016. http://www.theguardian.com/business/2016/feb/05/shell-massively-expands-natural-gas-business-just-as-sector-tanks