Archive for the ‘niger delta’ Category

Japan’s Earthquake, MENA Unrest and the Global Energy Market

Japan which imported about 80% of its primary energy requirement in 2008, is the world’s largest importer of both coal and liquefied natural gas (LNG) as well as the third-largest net importer of crude oil. The shallow-focus earthquake (which registered 9.0 on the Moment Magnitude Scale) off the country’s coast last week, generated three-meter high tsunami waves, rendering about 25% of the country’s nuclear power generating capacity offline. Market response ranged from initial stock-selling frenzies through re-evaluation of the nuclear power option but oil and gas supply-demand re-balancing, even if on a regional basis is also expected. While long-term outcomes may be currently unclear, certain trends are indicated:

Oil and Gas

Japan has an interesting energy mix: about 30% of its power needs are met by nuclear capacity, but it also has gas-fired, coal-fired as well as oil-fired power generating installations and is only one of a few countries with the oil-fired variety. With a significant proportion of its nuclear as well as some gas-fired installations offline, it is expected that fuel oil and crude oil will be in greater demand for the short- to medium-term. Increase in LNG demand is also anticipated. Outages at three of the country’s major refineries would mean that an immediate drop in crude oil demand for refining throughput would be offset by an uptick in its demand for power generation. Preliminary estimates of the increase in demand range from 200,000 barrels per day (bpd) to 340,000 bpd, which figures are not likely to strain global supply. According to the Center for Global Energy Studies, CGES, Japan’s dependence on oil as a primary energy source has decreased from 78% in 1973 to its current value of 43%. The country has seen increasing productivity with relatively less use of energy. Figure 1 below for example shows that while Japan’s GDP grew by about 15% between 1999 and 2007, its Energy Use per unit of GDP decreased by about 12%.

The challenge however may be in securing adequate grade fuel oil, specifically, Low Sulfur Fuel Oil (LSFO) which is more suited to its boiler configurations; and prices have already seen anticipatory upticks. Heavy, low-sulfur crude oil grades may therefore be in higher demand.

In 2009, almost 80% of Japan’s 4.4 Mbpd crude oil consumption came from the Middle East while about two thirds of its LNG came from Asian suppliers in 2010. Some European LNG cargoes are set to be diverted to Japan and this has seen higher European LNG prices. Middle East crude oil supplies however, remain a source of global concern especially with regard to the Saudi spare production capacity. The recent arrival of Saudi troops in Bahrain along with brutal crackdown on dissent, ostensibly to protect state installations raised the stakes in the current MENA unrest; for example there are media reports that Saudi Arabia’s main export crude oil facilities may come under intense terrorist retaliatory attacks, a situation — depending of course, on the magnitude — that is certain to put severe, sustained upward pressures on global crude oil prices if not outright shocks.

One of the consequences of the current Libyan unrest has been the disruption of crude oil supplies to Europe. The onset of the Libyan unrest which coincided with a six-year low in European crude oil inventories for that period, exerted upward pressures on the European benchmark Brent. Libya’s light, sweet (low sulfur) crude oil grade is better suited to European refining preferences than the heavy, sour grades produced in many other parts of the world. There are reports which are still unconfirmed, that the exploding civil war in Libya has caused substantial damage to oil and gas installations there. If confirmed, Libya’s production could see protracted outage, further straining the global spare production capacity.

Crude oil grades such as Nigeria’s Bonny Light and Forcados Light among others from the prolific Atlantic petroleum provinces of Africa are expected to bridge that supply gap. Contrary to some media reports however, Nigeria’s crude oil production and not Libya’s, is the largest in Africa. Algeria and Angola also produce more oil than Libya (See Figure 2 below).

Angola, which became a member country of the oil group Organization of the Petroleum Exporting Countries, OPEC, in 2007 has since ramped up its production above Libya’s.

The year 2011 is an election year in Nigeria with increased threats of sabotage attacks on the country’s main oil and gas production facilities in the Niger Delta region; these had led to force majeure declarations on oil cargo deliveries in previous years. There is already a report of explosions at a flow-station operated by a major Integrated International Oil Company, IOC. Production outages in the Niger Delta have correlated with spikes in global crude oil prices; with the Libyan production outage, supply disruptions in the Niger Delta could further tighten Europe’s light crude supply, putting even stronger upward pressures on prices.

Nuclear Energy Swap

A cloud of nuclear uncertainty is gradually swirling around the globe, in the wake of Japan’s nuclear mishaps. In Germany for example, a moratorium on nuclear energy has been quickly emplaced, while many European nations have called for a radical re-evaluation of the nuclear power option. China however, with the highest number (27) of nuclear plants under construction, has vowed to press on, even if with an evaluative pause. Stocks in some major nuclear energy companies such as Areva were down in intra-day trading on Thursday. But if the truth must be told, Japanese nuclear power installations in the main, withstood the Sendai quake. The associated tsunami was the major culprit, knocking off auxiliary generators used for pumping reactor cooling fluids, in the absence of which radiation would spread. In addition, the magnitude of a given earthquake is not the sole determinant of the degree of structural damage; it is possible for lower magnitude quakes to produce higher peak ground acceleration (necessary for structural damage) than higher magnitude quakes. According to records for example, Chile’s 2010 was a magnitude 8.8 and had a peak ground acceleration of 0.78g; the Christchurch (New Zealand) quake earlier this year on the other hand, had a magnitude of just 6.3 but a peak ground acceleration of 2.2g.

Following these global concerns about the safety of nuclear power installations, global demand for natural gas as alternative power generation fuel would likely increase as would pressures for an end to oil-indexation of natural gas prices. This could be added incentive for mega gas projects such as Chevron’s Gorgon works in Australia. Royal Dutch Shell also has significant liquefied gas capability. Japan which holds extensive methane hydrate reserves in its exclusive but undisputed offshore zones may then need to commence exploitation. Strident objections (which cite energy independence issues) to the export-licensing of the increasing U.S natural gas production, would in the short- to medium-term likely see no substantial increase in prices there.

The events may give fillip to renewable energy roles in the global energy mix, as calls grow for more environment-friendly energy.  Renewable energy companies also stand to benefit from some energy re-balancing. For example, due to plant outages in Japan, Asian demand for PVC has turned to the United States where export prices are expected to increase substantially.

Japanese Reconstruction

Japan is not new to reconstruction. The aftermath of Kobe’s massive 1995 earthquake (then listed as “the costliest natural disaster to befall any one country”) is testimony to that. But the current reconstruction efforts may hold added problems. For example, if there is substantial pollution from radiation — and authorities are seemingly at their wits’ end as to management of the nuclear risk — not only would costs escalate steeply, but swathes of the productive eastern part of the country could be shut in for some time. This may translate to lower productivity as well as lower energy demand. Some companies such as General Motors in the U.S. have according to media reports, announced temporary production delays due to unavailability of automotive parts from Japan.

In terms of funding, a massive influx of insurance payouts is expected; in addition, there is reportedly an estimated US$2trln in external holdings which may be repatriated. This pullout could potentially impact some countries. The rapidly-strengthening yen, which recently reached a post world war II high against the U.S. dollar however, may be a disincentive to domestic manufacturers; though the G7 countries have just announced intervention plans, the nature of that planned intervention is still unclear.

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National Oil Companies: The Challenges Ahead

National Oil Companies, NOCs, are seemingly set to define the future of global crude oil supply (and therefore price) levels. Major International Oil Companies, IOCs, have over the past decade, witnessed an increasing difficulty to profitable reserves growth and most have resorted to a series of staff rationalization and divestment. The recourse to severely challenging prospects such as some in the Gulf of Mexico, is a response to dwindling access to acreages especially in the reserves-rich but unstable or less agreeable regions. Revised regulations arising from the recent explosion on a rig operated by the oil major BP in the Gulf of Mexico, may add to deep offshore production costs.

NOCs, however, with easy access to state funds on terms that are more favorable than for the IOCs, as well the increasing domiciliation of national reserves with them, have shown rising dominance in the global oil and gas industry. For example, according to PFC energy, in the 2009 financial year, NOCs outperformed IOCs, having gained an average of 66% in market value compared with 1% for the six largest IOCs. In addition, a Chinese NOC became the world’s largest energy company by market capitalization.

That said, most of these NOCs face in the main, three, broad challenges, even if in varied degrees:

State Interference

First is the excessive meddling by their respective states. The recent history of Petróleos de Venezuela S.A., PDVSA, which manages that country’s petroleum resources, is informative. A 2002 strike by the employees of the company, protesting the country’s leadership style resulted in the dismissal of thousands of them (including highly rated professionals) amid reports of torture. The company subsequently became an instrument of president Hugo Chávez’s “21st Century Socialism”. The latter involved nationalization of companies in the petroleum, electricity and communications sectors as well as massive wage hikes and other ambitious projects funded from proceeds of an inappropriately managed petroleum sector. With severely reduced revenues (crude oil accounted for about 90% of export earnings in 2008), a series of crises ― spiraling inflation, successive currency devaluations, acute power and water shortages, political turmoil, etc ― rendered the country nearly dysfunctional.

Prior to the submission in 2008, of a Petroleum Industry Bill to her legislature, transactions in Nigeria’s crises-ridden oil and gas sector were notoriously opaque, seemingly shrouded in cultic secrecy. The bill, which is still pending, is expected to usher in a regime of transparency to the industry and a complete reorganization of the state-owned company, the Nigerian National Petroleum Corporation, NNPC, which largely manages the country’s petroleum resources. However, records of the country’s petroleum proceeds have been the subject of much contention. For example, the Central Bank of Nigeria would render its own account, as would the Ministry of Finance, the Revenue Mobilization and Fiscal Commission and the NNPC, each at variance with the others. Inability of previous regimes to account for significant proportions of these proceeds, as well the accusations of inequitable distribution of wealth have been sources of internal strife, especially recently in the Niger Delta region, where some correlation was seen between oil production breaches and global crude oil prices. With total crude oil proceeds estimated at nearly US$600 billion, about 6 out of 10 people in Nigeria live on less than a dollar a day, only about 4 out of 10 have access to adequate electricity, less than 5 out of 10 have pipe-borne water, infant mortality is high and educational standards are poor.

By contrast, a few NOCs such as Malaysia’s Petronas, Brazil’s Petrobras and the parastatals, Statoil of Norway and Sonangol of Angola have fared much better. For example, at Petronas an internationally respected CEO that put in fifteen years was strident about the company’s autonomy and accounting standards. He is credited with keeping the company’s finances from state incursion and leading the company to global prominence with a significant proportion of its reserves held internationally. The company was successful in various bids in the recently concluded second bidding round for Iraq’s massive fields as was Sonangol.

Development Funds

Second, is the ability to generate the requisite funds for the massively, capital-intensive projects, especially with state revenues dipping in the wake of a global economic slump. Perceived risks associated with a restrictive investment environment, often impede capital inflow. The case with Iran is particularly informative. According to the U.S. Energy Information Administration, EIA, Iran is the world’s fourth highest producer of conventional crude oil and holds the world’s third largest reserves. If the country’s political past has been unfavorable to the influx of international investment, the current regime of international sanctions is asphyxiating both her oil and gas industry and her economy. (For example, Iran has to import 30% to 40% of her domestic gasoline needs.) It is crippling the country’s efforts at a much-touted program for a twenty percent increase in domestic crude oil production – necessary for addressing both the surging domestic energy demand and foreign exchange requirements.

In Russia, licences for the development of the country’s sorely-needed offshore fields have been effectively limited to two companies (and both are NOCs, Gazprom and Rosneft), but the capex capability of these companies may be grossly inadequate for proper development of the fields. The country’s natural resources ministry has made proposals for attracting foreign investment for development of the country’s fields. The minister, according to Platts, recently said, “The amount of money that the two companies (Rosneft and Gazprom) have been investing today in the development and exploration of offshore fields is not enough to develop them within any real time frame”. Development of strategic reserves in Russia has been limited largely to companies in which the Russian stake exceeds 50%, but the grueling experience of the oil major BP with the Russian company TNK remains a source of concern for many a foreign investor.

Nigeria’s NNPC has also had problems fulfilling its cash call obligations in its joint venture with major IOCs, a situation that stalled various production projects.

In contrast, Petronas was able to attract stakes from large U.S. asset managers, despite the company’s involvement with crude oil projects in Sudan, a country widely condemned for grave human rights abuses.

Chinese integrated energy companies however, currently do not share others’ cash flow problems. With an intimidating financial war chest, they have “forcefully invaded” the Atlantic petroleum provinces of Africa, Canada’s tar sands projects, Australia’s mines as well as those of South Africa and parts of South America; in most of these cases, threatening the hitherto dominance of the majors. Such has been China’s influence that a mere report of domestic financial tightening would send currencies and crude oil prices on a downward slide, even if that drive has tempered somewhat.

Technology

Finally, there are technological deficits to be addressed. Major IOCs, with decades of activity in the full spectrum of oil and gas operations in just about every part of the globe, have developed efficient and specialized technologies for various exploitation processes. Exploration and production activities, for example, are fast moving to the more (geologically, financially and technologically) challenging, ultra-deep offshore regimes and apart from a few (such as Statoil and Petrobras), NOCs generally lag major IOCs in the requisite technologies. Such gaps however, are set to narrow significantly, and rather quickly too. In collaborative synergies (which were also seen in Iraq’s second oil licensing round), NOCs and IOCs have been forming consortia for exploiting both offshore and onshore oil and gas fields around the world: NOCs generally boast vast domestic reserves as well as lower operating (mainly personnel and materiél) costs while IOCs (really struggling to grow reserves) are happy to provide the requisite technological processes. For example, the recent set of agreements between Chevron and Rosneft, one of Russia’s state-controlled oil companies, integrates Chevron’s vast technological and financial resources with Rosneft’s rights for the development of fields in the Black Sea region of Russia.

Sinopec, the Chinese NOC recently announced its discussions with BP, on the use of the latter’s technology for the exploitation of China’s shale gas reserves, believed to be quite significant. (The fate of BP in the wake of the Gulf of Mexico oil well disaster, however remains uncertain). Sinopec aims for a shale gas exploration breakthrough in three years, and industrial development in five. BP recently acquired stakes in Chesapeake Energy, the US shale gas company. In November 2009, the Chinese NOC PetroChina also signed a contract with Royal Dutch Shell for shale gas exploitation in one of China’s fields.

Late last year in Venezuela, a seemingly repentant president Hugo Chávez in conceding financial and technological constraints to PDVSA’s capacity to exploit perhaps the world’s largest (about 513 billion barrels) reserves in the Orinoco (ultra-heavy oil) Belt, auctioned off two major projects to different consortia. Prior to the auction, Chávez offered the consortia guarantees on the safety of their investment; but some analysts have remained skeptical. In both projects (Carabobo 3 and Carabobo 1), the initial provision was for the host NOC, PDVSA to hold a 60% stake while the investing consortia would hold the balance.

Brazil’s Petrobras on the other hand has been in the vanguard of global, ultra-deep offshore well technologies. The company operates a fleet of rigs some of which have drilled wells deeper than BP’s disaster-stricken, Gulf of Mexico Macondo well.

All said, a quick-stepping cluster of just a few companies leads the march of NOCs but, save for any technological (for example oil from algae) or (access to) acreage breakthroughs, even the reserves-rich stragglers will still be relevant in the global crude oil supplies of the future.

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Crude Oil, the Niger Delta Crises and Nigeria’s Oil Sector Reforms

Nigeria, a member country of the oil cartel OPEC, was the fifth-highest exporter of crude oil to the United States in 2008. Some correlation has been made between spikes in global crude oil prices and oil supply breaches in the Niger Delta region, Nigeria’s dominant petroleum province. Militant unrest in that region severely reduced her oil production, which in the wake of an amnesty program, has risen to about 1.65 million barrels per day. A presidential amnesty was recently offered the militants on the condition that they renounce (within a 60-day window that expired on October 4 2009) their militance.
The amnesty is one of two major planks on which the country’s oil and gas sector reforms rests. It provides for rehabilitation of erstwhile militants as well as addressing of regional developmental issues. About US$65 million has beeen approved for the initial phase, which has turned in an unexpectedly large cache of militants (about 10,000 so far) and arms. Militant unrest was largely accountable for shutdown of many oil and gas installations, which forced operating International Oil Companies, IOCs to evoke force majeure provisions on oil and gas cargoes, and the government to stepdown the takeoff of a domestic oil and gas development masterplan.
The second is the enabling but pending Petroleum Industry Bill, PIB. It will, if passed be the first major reorganization of the woefully inefficient sector in decades. The bill provides for an increased government take from oil and gas proceeds – an issue that has unsettled IOCs operating in the country, halting capital expenditure – as well as full deregulation among others. It is also expected to usher in a regime of transparency in a sector where transactions are often shrouded in cultic secrecy. Allegations of bribery have trailed the bill in the legislature after revelations that IOCs invited the legislators for “briefing” at a retreat in Ghana.
That said, the proof of the reforms is in the implementation. The country has had quite a few worthy programs but which die at the implementation phase. Nigeria has earned more than US$400 billion from oil and gas but has lost a considerable fraction of it to corrupt officials and their associates. They have morphed into a formidable political and economic cult, which will require superior resources to crush. Some of them were fingered, in the main, as drivers for the militant unrest (which employed grievance about regional underdevelopment as a mask for monumental oil larceny) and would probably loathe any transparency in the sector. They have also been blamed for the very slow (if any) progress in ammendment of the country’s freedom of information and electoral laws, both of which are expected to help usher in proper, public office accountability. Without the latter, it is doubtful if the reforms will succeed.
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Nigeria And Blood Oil

Nigeria is a member of the Organisation of the Petroleum Exporting Countries OPEC, the oil cartel which holds about three quarters of the world’s proven crude oil reserves. The country is also the eighth largest crude oil producer and the fifth largest supplier to the United States. Nigeria’s largest oil and gas fields are in the Niger delta region. Unfortunately, this region has also been plagued by militant unrest. What may have been a genuine quest for economic and socio-political redress has been hijacked by armed hoodlums. Prominent personalities or their family members for example have been kidnapped for outrageous ransom figures and businesses, the subjects of brutal extortion rackets. Some of these militants also act as security forces for oil-pilfering gangs and reportedly use proceeds to finance their operations. The popular reference to “Blood Oil” derives from “Blood Diamonds” in another African country where proceeds from illegal sale of diamonds is used to support criminal gangs.

Oil exploration has had a negative environmental impact on the region. Poor environmental practices by some oil companies as well as weak state regulatory regimes have produced vast swathes of severely degraded land and polluted rivers. Most of the gas associated with oil production in the region is flared and the inhabitants believe this, through acid rain has exacerbated their plight. The communities are in the main, subsistence farmers and fishermen and argue that without viable crop acreage and marine life, their livelihood would be imperiled. This has led to acts of sabotage against the oil companies. Law suits have also been filed in the United States by these communities against some production companies for charges ranging from human rights abuse to environmental pollution. Unemployment is rife in the region and youth continually move into urban areas to look for employment but many end up in gangs and militant groups.

Most of the states that makeup the region are largely underdeveloped. Vast portions are without access to electricity and pipe-borne water. Motorable roads are few. The Federal Government cannot altogether be blamed for such impoverishment. The Governors of these states may even share a substantial portion of the blame. Under a constitutional derivation formula, these states have each received hundreds of millions of United States dollars every year for the past few years but not much it seems has been done with such.

The solution must come from engaging the communities to address legitimate grievances while cracking down on opportunistic hoodlums. Sincerity and commitment will be required of all parties. To a large extent, the Federal Government has set out on a good footing. It has created a new ministry, Ministry of Niger Delta to oversee the peculiar needs of the region, as well as a committee made-up largely of natives to proffer solutions to the regional problems. It has also formed a joint security task force consisting of the army, navy, police as well as other agencies to keep peace and order both offshore and onshore.

Nigeria is a prominent member of the petroleum exporting community and incidents affecting her production are often of concern to oil pricing and supply analysts around the world. Not a few then, wish a speedy resolution of the conflict.
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