Talking Refinery Infrastructure on CNBC

This week marked the culmination of almost a month and a half of my research work for Infrastructure Journal on the subject of oil refinery infrastructure and how it is fairing. Putting things into context, like many others in the media I too share an obsession with the price of crude oil and upstream investment. I wanted to redress the balance and analyse investment in the one crucial piece of infrastructure that makes (or cracks) crude into gasoline, i.e. refineries. After all, the consumer gets his/her gasoline at the gas station – not the oil well. The depth of Infrastructure Journal's industry data (wherein a project’s details from inception to financial close are meticulously recorded) and the resources the publication made available to me made this study possible. It was published on Wednesday, following which I went over to discuss my findings with the team of CNBC’s Squawk Box Europe.

I told CNBC (click to watch) that my findings suggest activity in private or public sector finance for oil refinery projects, hitherto a very cyclical and capital-intensive industry currently facing poor margins, is likely to remain muted, a scenario which is not going to materially alter before 2012.

The evidence is clear, integrated oil companies have and will continue to divest in downstream assets particularly refineries because upstream investment culture of high risk, high rewards trumps it.

Growth in finance activity is likely to come from Asia in general and surprise, surprise India and China in particular. It is not that margins are any better in these two countries but given their respective consumers’ need for gasoline and diesel – margins become a lesser concern.

However, in the west, while refiners’ margins remain tight, new and large refinery infrastructure projects would see postponements, if not cancellations. In order to mitigate overcapacity, a number of mainly North American and European refiners or integrated companies will shutdown existing facilities, albeit quite a few of the shutdowns will be temporary.

Geoff Cutmore and Maithreyi Seetharaman probed me over what had materially changed, after all margins have always been tight? Tight yes, but my conjecture is that over the last five years they have taken a plastering. On a 2010 pricing basis, BP Statistical Review of World Energy notes that the 2009 refining average of US$4.00 per barrel fell below the 2008 figure of $6.50 per barrel; a fall of 38.5%. In fact, moving away from the average, on an annualised basis, margins fell in all regions except the US Midwest last year while margins in Singapore were barely positive.

Negative demand has in effect exasperated overcapacity both in Europe and North America. BP notes that global crude runs fell by 1.5 million bpd in 2009 with the only growth coming from India and China where several new refining capacities, either private or publicly financed, were commissioned. Its research further reveals that most of the 2 million bpd increase in global refining capacity in 2009 was also in China and India. Furthermore, global refinery utilisation fell to 81.1% last year; the lowest level since 1994.

In fact does it surprise anyone that non-OECD refinery capacity exceeded that of the OECD for the first time in 2009? It doesn’t surprise me one jot. I see this trend continuing in 2010 and what happens thereafter would depend on how many OECD existing refineries facing temporary shutdown are brought back onstream and/or if an uptick in demand is duly noted by the OECD nations. A hope for positive vibes on both fronts in the short to medium term is well...wishful thinking.

Refineries were once trophy assets for integrated oil companies but in the energy business people tend to have short memories. Alas, as I wrote for Infrastructure Journal (my current employers) and told CNBC Europe (my former employers), now they are the unloved assets of the energy business.

© Gaurav Sharma 2010. Photo 1: Gaurav Sharma on Squawk Box Europe © CNBC, Nov 10, 2010, Photo 2: Oil Refinery Billings, Montana © Gordon Wiltsie / National Geographic Society

Life After the Gulf Spill for Dudley & BP

I had the pleasure of listening to Robert Dudley this morning in what was his first major speech since taking over from Tony Hayward as the group chief executive of BP and there were quite a few noteworthy things to take away from it.

Speaking to delegates at the UK business lobby group CBI’s 2010 annual conference, Dudley said BP had learnt from the Gulf of Mexico tragedy of April 20 and added his own apology for the incident to that of his predecessor and colleagues.

He said that earning and maintaining trust is central to BP’s licence “to operate in society”, as for any business. Crucial to that was re-establishing confidence in BP and its ability to manage risk. “I am determined for BP to succeed in both,” he added emphatically.

Dudley opined that a silver lining of the event is the significant and sustained advance in industry preparedness that will now exist going forward from the learnings and the equipment and techniques invented by necessity under pressure to contain the oil and stop the well.

Not looking too overwhelmed by the task at hand, Dudley also defended BP’s position noting that it found that no single factor caused the tragedy, and that the well design itself, despite what “you have heard”, does not appear to have contributed to the accident. This has been further verified by recent retrieval of equipment.

Predictably there was much talk by Dudley about winning back trust and restoring the oil giant’s reputation. BP new American chief executive said “British Petroleum” was a part of the American community and would not cut and run from the US market. For good measure, he added that there was too much at stake, both for BP and the US.

“The US has major energy needs. BP is the largest producer of oil and gas in the country and a vital contributor to fulfilling them. We also employ 23,000 people directly, have 75,000 pensioners and have ½ million individual shareholders. Our investments indirectly support a further 200,000 jobs in the US. We have paid roughly US$25 billion in taxes, duties and levies in the last several years. These are significant contributions to the US economy,” Dudley explained.

Moving away from defending his own company, Dudley then launched a robust defence of offshore drilling. “The fact is that until this incident, over 5,000 wells had been drilled in over 1,000 feet of water with no serious accident. BP had drilled safely in deep waters of the Gulf of Mexico for 20 years. As business people are telling political leaders all the time, we cannot eliminate risks, but we must manage them,” he concluded.

He also had a pop at the media – noting that while BP’s initial response was less than perfect, for much of the media the Macondo incident seemed like the only story in town. Overall, a solid performance by the new boss of BP in front of what can be safely regarded as a largely sympathetic audience.

© Gaurav Sharma 2010. Photo 1: Aerial of the Helix Q4000 taken shortly before "Static Kill" procedure began at Macondo (MC 252) site in Gulf of Mexico, August 3, 2010. Photo 2: Robert Dudley, Group Chief Executive, BP © BP Plc

Third Time Lucky for OMV?

OMV’s takeover of Turkey’s Petrol Ofisi A.S. should be applauded for the Austrian company’s sheer persistence in its attempts to acquire strategic assets, if nothing else. It has a mixed record at best when it comes to takeover attempts, as I was joking with my old colleague CNBC’s Steve Sedgwick at the OPEC summit in Vienna ten days ago.

OMV was successful in acquiring Romania’s Petrom in 2004 but failed spectacularly in its takeover attempt of Hungary’s MOL which was swiftly and successful rejected by the Hungarians in June 2007. As I had just arrived in Vienna from Budapest, Steve said, as only Steve can, that I’d been "MOL"-ing over OMV’s fortunes in the wrong city. The failed bid for MOL aside, OMV also tried and failed to acquire utility Verbund.

In a statement on Friday, OMV said the Turkish acquisition, slated at €1 billion ($1.4 billion) is a further step in its growth strategy and aims at "positioning Turkey as a third hub, besides Austria and Romania."

OMV would now own 95.75% of the Turkish company after buying out Dogan Holding's stake of 54.17% stake in it; formalities are set to be completed within the next three months. The companies have also agreed to pay a dividend to Petrol Ofisi shareholders prior to that.

Ahead of the announcement, ratings agency Standard & Poor’s noted that Petrol Ofisi's credit profile would benefit were OMV to become its majority owner. It placed the Turkish company’s 'B+' long-term corporate credit ratings on CreditWatch with positive implications.

Per Karlsson, credit analyst at Standard & Poor's, said, "The positive implications of the CreditWatch placement reflect our view that should such a transaction materialize we are likely to raise the ratings on Petrol Ofisi by one notch or more."

As for takeover attempts – looks like OMV has been third time lucky!

© Gaurav Sharma 2010. Photo: Photo: OMV Petrol Station, Austria © OMV

Performance of Russian Oil Co’s Remains “Robust”

A recent report by ratings agency Moody’s suggests that Russian integrated oil and gas companies demonstrated financial robustness during the economic downturn, as "certain key features" acted to support their operational and financial profiles.

It notes that negative effects of low oil prices were mitigated by a devaluation in the Rouble and favourable changes to the Russian tax system, which along with cost-containment initiatives and good access to funding boosted the companies' resilience to market turmoil. In fact, the ratings agency said outlook for the sector is stable.

The report titled "Russian Integrated Oil and Gas Companies: 2009-10 Review and 2011 Outlook", further suggests that since late 2009 and all through H1 2010, the operating and financial performance of Russian players gradually improved post-recession, lifted by relativelyhigher oil prices as the global economy recovered.

Moody’s now feels that the operating performance of Russian oil companies is likely to improve in 2010 and in 2011 on the back of stronger oil prices and ongoing cost-cutting and modernisation initiatives. However, the ratings agency does not believe there will be a major upwards trend in profitability in H2 2010 or in 2011, due to the growing tax burden and inflation in non-controllable costs, notably energy and transportation tariffs.

Furthermore, it must be noted that despite overseas overtures, the current reserves and production bases of Russian companies remain concentrated in their own backyard. This, according to the report, "exposes them to geological and geopolitical risk."

Despite the lack of positive ratings momentum, in 2010, Russian players benefited from greater access to bank and bond funding, with lenders offering longer maturities at lower rates. Moody's expects lending conditions to continue to improve in 2011. In addition, overall free cash flow improved in 2010 and will likely remain marginally positive in 2011 as companies ramp-up capital expenditure on projects that were delayed during the downturn.

Continuing with Russia, on October 22 Moody's assigned a provisional rating of (P)Baa2 to the upcoming Eurobond issue by Lukoil via Lukoil International Finance B.V., its indirect and wholly owned subsidiary. The rating is based on an irrevocable and unconditional guarantee from the Russian company and is in line with the company's issuer rating of Baa2. The outlook is stable, according to Moody’s.

The proceeds are largely expected to be used by Lukoil for general corporate purposes, as well as refinancing of existing indebtedness. Moody's believes the Eurobond issue will support Lukoil's liquidity position.

© Gaurav Sharma 2010. Photo: Photo: Oil Drill Pump, Russia © Lukoil

Nigeria is a Crude Spot with Crude Oil, Says Peel

Nigeria is a complicated country - a confused ex-colonial outpost with a complex ethnic and tribal mix turned into a unified nation and given its independence by the British some five decades ago. Having crude oil in abundance complicates things even further.

Some say the history of crude oil extraction has a dark and seedy side; most say nowhere is it more glaringly visible than in Nigeria. On the back of having interviewed Nigeria's petroleum minister - Diezani Kogbeni Alison-Madueke for Infrastructure Journal, I recently read a candid book on the country titled - A Swamp Full of Dollars: Pipelines and Paramilitaries at Nigeria's Oil Frontier written by Michael Peel, a former FT journalist, who spent many-a-year in Nigeria. He presents a warts n' all account about this most chaotic and often fascinating of African countries shaped by oil, driven by oil and in more ways than one - held to ransom by oil.

The author dwells on how the discovery of black gold has not been quite the bonanza for its peoples who remain among the poorest and most deprived in this world. End result is growing dissent and chaos - something which was glaringly visible between 2006-2009 when the oil rich Niger Delta went up in flames.

Peel's book is split into three parts, comprising of nine chapters, containing a firsthand and first rate narration of the violence, confusion, partial anarchy and corruption in Nigeria where its people who deserve better have to contend with depravity and pollution. Some have risen up and abide by their own rule - the rule of force, rather than the law.

If you seek insight into this complex country, Peel provides it. If you seek a travel guide - this is one candid book. If you seek info on what went wrong in Nigeria from a socioeconomic standpoint, the author duly obliges. Hence, this multifaceted work, for which Peel deserves top marks, is a much needed book.

I feel it addresses an information gap about a young nation, its serious challenges, addiction to its oil endowment and the sense of injustice the crude stuff creates for those who observe the oil bonanza from a distance but cannot get their hands into the cookie jar.

Peel notes that the chaos of Niger delta is as much a story of colonial misadventure, as it is about corporate mismanagement, corruption in the bureaucracy and a peculiar and often misplaced sense of entitlement that creates friction between the country's haves and have nots.

Drop into the mix, an unfolding ecological disaster and you get a swamp full of dollars whose inhabitants range from impromptu militias with creative names to Shell, from terrorists to ExxonMobil, from leaking pipelines to illegal crude sales.

© Gaurav Sharma 2010. Book Cover © I.B. Tauris