Monday, September 08, 2014

China’s thirst: A few 'crude' notes from Shanghai

The Oilholic finds himself in Shanghai, the financial capital of China. Home to some 24 million people, this bustling metropolis, and what makes it tick, explains away the country’s consumption pattern of hydrocarbons, colossal state-owned oil & gas companies and a progressive lurch forward in the world of finance.

China uses more energy per GDP unit than any other country in the world, and factored in that equation is Shanghai which burns more hydrocarbons that any other major Chinese metropolitan area. While savouring the glitzy lights of the Shanghai waterfront, should the haze and weather permit, most visitors either fail to notice or attach importance to oil tankers frequently passing up and down the Huangpu River (see above left, in the darkness below the Oriental Pearl TV & Radio Tower).

China is the world’s largest net importer of crude oil, and its financial gateway is also its gateway for imported crude to be processed and moved. The city’s Pudong district alone has 240,000 barrels per day (bpd) of refining capacity. According to a distillates market commentator, plans are being spearheaded by Sinopec to take old creaking facilities offline and replace them with a new cleaner low carbon refinery with a whopping 400,000 bpd processing capacity at Caojing Industrial Park, some 50 km south of downtown Shanghai.

The capacity would have to be whopping, catering to Shanghai's Yangshang Port which overtook Rotterdam in 2004 to become the world’s busiest container port by volume and cargoes. Of the city's two main airports – Pudong International – is the world’s third-biggest mover of air cargo. Then with an area of 6,340.5 sq km, Shanghai is the world’s largest city and China’s most populous. 

Its growing, and growing fast. In 2001, the Oilholic remembered watching a BBC report on the city’s construction drive. Much of it was focussed on Pudong’s financial district which resembled something of an urban metallic mess. As yours truly came out of the Lujiazui Metro Station on Friday afternoon to see for himself, the said urban mess has in fact progressed to a sprawling skyscrapered representation of Chinese economic prowess in less than a decade.

Furthermore, yet more skyscrapers keep springing up. A trader correctly pointed out that the Oilholic has arrived to witness the party a bit late. Guilty as charged, more so as flat macroeconomic data has taken some (but not all) of the fizz out of late. Nonetheless, the inexorable eastward movement of importers’ petrodollars is manifestly apparent, more so as Chinese imports (and refining capacity) rises, while US imports decline and conditions for OECD refiners remain challenging.

To provide some context, Wood McKenzie notes that by 2020, US crude oil imports would have fallen below 7 million bpd thanks to shale and lower demand, while China’s would have risen above 9 million bpd. Bearing the wider market dynamic in mind, Chinese regulators are trying to bolster Shanghai’s clout in the wider commodities and financial markets.

For instance, three reliable financial sector sources expressed confidence that the domestic market regulator will introduce options trading over the fourth quarter of this year. A spokesperson for Shanghai’s International Energy Exchange says it will commence the trading of crude oil futures this year. It must also be noted that Shanghai’s commodities exchanges are backed-up by those in Dalian and Zhengzhou.

As for corporate deal flow, propped up by state-owned enterprises, it’s a case of more said the better. A Reuters report suggests spending by state-controlled oil & gas majors is likely to rise over the coming months, led by Sinopec and PetroChina, as the industry recovers from a government probe into industry graft allegations.

Some market commentators here in Shanghai are forecasting an overall annualised jump of over 45% in the total value of mergers and acquisitions (M&A) by Chinese companies, with oil & gas majors leading the way. It can’t be said for sure whether that’s a fair assessment or an overoptimistic take by local commentators, but it is in line with empirical evidence from elsewhere. 

For instance, Mergermarket recently noted that China was, perhaps unsurprisingly, the biggest market for M&A deals in the region, with deals worth US$128.4 billion over the first half of the year. Recent studies by EY, PwC and Deloitte have also noted the Chinese clout in terms energy sector M&A deals.

There’s potential for foreign direct investment as well. For instance, a stake, possibly as high as 30%, is up for grabs at Sinopec Sales, the company’s retail and marketing unit, which could be worth Yuan 100 billion (£10.04 billion, $16.29 billion) in terms of market valuation. It has attracted 37 bidders, including international participants and joint consortiums, according to local media.

Rather unusually, Sinopec Chairman Fu Chengyu also told media outlets that new stakeholders could be offered seats on its board. As with everything in China, it’s not done till it’s done. However, should such a level of holistic reform at regulatory and corporate levels go through to fruition, this blogger can see two major Asian commodities and financial markets – i.e. Hong Kong and Singapore – really feeling the heat.

Yet, there are stumbling blocks in Shanghai’s march forward. Red tape is a big one, for everything is described by spokespeople as “imminent” but with no verifiable timeline for execution or a firm date. While one can sense the positive intent for reforms, that alone won’t lead to end-delivery.

Another is pollution in the city, which is making residents restless about new refinery capacity, and rightly so. Shanghai’s horrendous traffic jams pose another problem though a fantastic metro, mass rail transit systems and not to mention the world’s first commercial magnetic levitation railway line do make residents and visitors’ lives a significantly easier.

Finally, the biggest stumbling block is the Yuan, which isn’t a fully convertible currency. The Oilholic thinks it’s probably why Shanghai's Free Trade Area (FTA), due to celebrate the first anniversary of its establishment this month, has largely turned out to be a dud so far. The 28.78 sq km zone in where else but Pudong was supposedly modelled on a mini Hong Kong.

The FTA found promises of attracting a wider range businesses and looser custom intervention easy to deliver along with swanky logistics and construction work. However, a full convertible Yuan and a market-based interest rate mechanism have proved to be anything but deliverable.

While the authorities have permitted companies in the FTA open “special accounts” facilitating cross-border capital flows, transactions between these and overseas accounts can hardly be described as “free transfers” in a British or American business sense. It’s also difficult to envisage how the creation of 8 spot trading platforms for commodities ranging from iron ore to cotton would work in the FTA, as is being planned, without a convertible currency.

All in all, and to be quite honest, FTA fans expecting a fully convertible Yuan were perhaps being overoptimistic. The Chinese will find their currency pathway at their convenience and in their own time. Nonetheless, crude reality is that the Chinese juggernaut will roll on, and in the context of the commodities market, dominate the discourse for some time yet.

That’s all for the moment from China folks as its time to bid a sad goodbye to Shanghai! It was great being here to get a first hand feel of the Chinese oil & gas sphere rather than commentating on it from the comfort of a desk in London. Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2014. Photo 1: Shanghai Huangpu River Waterfront. Photo 2: Pudong Financial District. Photo 3: Flag of the Peoples Republic of China. Photo 4: East Nanjing Road. Photo 5: Traffic Jam, Shanghai, China © Gaurav Sharma, September, 2014.

Friday, September 05, 2014

That need for speed: Meet Shanghai’s Maglev

After years of wanting to, months of planning, waiting, visa applications and what have you, the Oilholic has finally made it to China, via Shanghai’s sprawling Pudong International Airport.

Before even entering the city limits, you get a sense of expansiveness, development, progress and a country in overdrive, despite Chinese economic data being less than flattering of late. It’s all capped by a general desire for getting things done, something that’s epitomised by one project in particular – the Shanghai Maglev Train, acknowledged as the world’s first commercially operated magnetic levitation line.

The Americans, Brits, Germans, Swiss and Japanese, have all flirted with magnetic levitation. Birmingham and Berlin even had low-speed pilot maglev trains before being abandoned owing to costs and other permutations. That’s where China is different – they wanted it done, wanted to spend towards that need for speed and the end result is splendid.

The Oilholic got from Pudong International to Longyang Road Metro Station, close to Shanghai’s financial district some 30.5km from the airport, in 8 minutes and 10 seconds at a speed of 301km/hr (see right), according to the speed indicator in one’s carriage.

Had yours truly travelled earlier in the afternoon, when the Maglev does 431 km/hr, it would have taken 7 minutes, a Guinness Book World Record land speed for public transit carriage. A non-commercial scientifically monitored journey on November 12, 2003 saw the maglev hit 501km/hr. Now beat that!

The need for this speed does not require the ‘crude’ stuff, but it doesn’t come cheap either. It’s almost certainly why the Brits and Germans abandoned projects after initial efforts. That sort of thing however doesn’t hold the Chinese back. This high-speed thrill ride cost US$1.33 billion to build entering commercial service in January 2004.

While yours truly was indeed enjoying the thrill ride, one got an acute sense that there were more thrill seekers onboard than regular commuters. There’s a reason for that; unlike the Oilholic, not everyone likes to get off an airplane head straight to the financial district!

So you still have to get on the Shanghai Metro at Longyang Road to go further, which you could have done earlier in any case since the metro line actually goes to Pudong International Airport. The tickets are pricey by local standards going at RMB85 (US$13.80, £8.50) for a return ticket and day-metro pass, RMB80 for a return and RMB50 for a single-journey. While this blogger, felt it was worth his while for the experience, the roughly 30% average carriage occupancy rate suggests that average Shanghai dwellers don’t in the main.

Nonetheless, that’s not something to knock the Maglev down with. You’ll get a similar occupancy dynamic if you compared the Heathrow Express and the cheaper option of taking the London Underground’s Piccadilly Line from the airport. Except, that in the case of Shanghai Maglev, it’s not an express – it’s a super-cool super-express. Having used mass transit and public transport systems from 67 airports (and counting) and many rail/seaport hubs, the Oilholic can safely say nothing beats this experience; not even the TGV or Shinkansen.

The initial train set was built by a joint venture of Siemens and ThyssenKrupp. Since then, under a limited technology transfer deal, the first Chinese built four-car train has also gone into service. 

Nonetheless, the Shanghai Maglev remains a demonstration project. Costs and other factors have delayed expansion beyond Shanghai. Most analysts and local media commentators here reckon the Pudong- Longyang Road Maglev Line will probably be it for the foreseeable future if not forever. If the Chinese reckon the Maglev is turning out to be difficult in terms of feasibility and affordability then there sure as hell isn’t much of chance for the rest of us.

If that’s the case, this blogger is privileged to have ridden on the “fastest ground transport toll in the present world” to quote the Guinness Book. And whatever the economics, it’s a pretty slick train ride into town.

Righty, enough of gawking and admiring a mass transit system that’s unlikely to take-off in Europe and time to get down to the dynamics of the oil & gas market. That's all for the moment from Shanghai folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2014. Photo 1 (click on images to enlarge) : Shanghai Maglev Train. Photo 2: Carriage interior at 301km/hr speed. Photo 3: Shanghai Maglev's Guinness Book Record Certificate. Photo 4: Shanghai Maglev Train arrives at Longyang Road Metro Station. Photo 5: Illustration of magnetic levitation technology at SMT museum, Shanghai, China © Gaurav Sharma, September 2014.

Thursday, September 04, 2014

Bright lights, energy finance & PE in Hong Kong

It is jolly good to be back in Hong Kong after nearly a decade and half. The city is home to some 7 million souls who live, work and sleep mostly in high-rise buildings given it is one of the world’s most densely populated places and space is at a premium.

Having soaked in the dazzling lights, magnificent views from the Victoria Peak (see left) and the ubiquitous Star Ferry ride from Central pier on Hong Kong Island to Tsim Sha Tsui in Kowloon, the Oilholic decided to probe what’s afoot in terms of energy sector finance, and the market in general, in this part of the world. 

The timing couldn’t be better as the Hang Seng Index recently soared to a six-year high and that can only bode well for the 48 companies on there who account for 60% of market capitalisation of the Hong Kong Stock Exchange. While Alibaba.com might have opted to list in New York, rather than here, CGN Power Co, mainland China’s largest nuclear power producer by operational capacity, has decided to file for a US$2 billion initial public offering in Hong Kong.

For regional energy companies, Asia’s self-styled capital of finance has always been a key destination for equity finance, even though real estate and services stocks understandably dominate the market. In CGN Power’s case, the move is part of its strategic goal to turn-on more nuclear reactors and turn-off coal-fired power plants. The listing will see it in the company of China Resources, CLP Holdings, Hong Kong and China Gas Company, Hong Kong Electric Holdings (Towngas), Kunlun Energy (formerly CNPC Hong Kong) and of course trader SS United Group Oil & Gas Company to name a few prominent players. 

Away from public listings, the search for liquidity and capital raising exercises bring many mainland, regional and (of late) Western energy firms to the doors of Hong Kong’s Private Equity (PE) players, a trend that’s now firmly entrenched here and continues to rise. According to a local contact, there are currently just under 400 major PE companies operating in Hong Kong. The Chinese special administrative region (SAR) and former British colony is Asia’s second largest PE centre, second only to mainland China.

The energy sector (including oil & gas and cleantech), one is reliably informed, comes third in terms of PE finance after real estate and regional start-ups. A striking feature of PE funding flows originating in Hong Kong is the depth of international investment. The Oilholic noted oil & gas investments in Australia, India, Japan, South Korea and of course mainland China.

Furthermore, synergy and happy co-existence with PE groups based in mainland China is seeing funding stretch to jurisdictions previously untouched by them with the sizing up of international assets well beyond Australasia with oilfield services companies and independent E&P companies being the unsurprising targets (or shall we say beneficiaries).

For instance, Denise Lay, Chief Financial Officer of Tethys Petroleum, a London and Toronto-Listed oil and gas exploration firm, recently told yours truly in a Forbes interview about her company’s decision to sell 50% (plus one share) of its Kazakh assets to SinoHan, part of HanHong, a Beijing, China-based private equity fund.

Some notable PE players on everyone’s radar for oil & gas investments include Affinity Equity Partners, Baring PE Asia and Silver Grace AM. The funding pool, according to three local analysts is set to expand. One even complained of there being too much investment capital around and not enough deals, which is causing assets to go for inflated prices.

“But amid the synergy and seamless funding flows, there’s a bit of competition as well between SAR Hong Kong and China. For instance, the Hong Kong local administration is unashamedly pro-PE. Part of its overtures to attract more PE funds to be domiciled in Hong Kong includes amendment and extension of the current offshore fund exemption,” adds another.

Away from PE, most state-owned Chinese oil & gas firms have approached Hong Kong’s capital markets although the extent of their presence varies. While it’s a view that is not universally shared, for the Oilholic, the SAR with a convertible Hong Kong dollar (unlike the Yuan RMB which isn’t) serves as a good base for regional expansion and overseas forays for these guys.

On an unrelated note, one isn’t trying to establish any connect between gambling and the preferred currency, but the Hong Kong dollar is also the  legal tender of choice in the casinos of nearby Macau. 

The Oilholic discovered it the hard way this afternoon, having paid a visit to the Wynn Casino and trying to insert a Macau pataca note into the slot machine only to be told to use Hong Kong dollars. 

As of last year, gambling revenue in the former Portuguese colony and another Chinese SAR of US$45.2 billion, seven times the total of the Las Vegas strip, has made it the world’s largest gambling destination. Since photography is not permitted inside casinos, even with the presentation of an international press ID as the Oilholic did, here’s the exterior of the Wynn Casino with rival MGM in the background.

According to the World Bank, Macau’s GDP per capita came in at US$91,376 last year. That makes it the richest country globally after Luxembourg, Norway and Qatar. Mainland money flowing around Macau is pretty apparent, but not sure how much of it is filtering through to the masses.

There have been repeated calls of late for a better wages by casino workers facing higher inflation. It is a soundtrack gamblers from many countries ought to be pretty familiar with - wages not keeping pace with inflation. That’s all from Hong Kong and Macau folks! It’s time to head off to Shanghai. Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2014. Photo 1: Hong Kong evening sky as seen from the Victoria Peak, Central, Hong Kong. Photo 2: Wynn Casino & Resort with MGM in the background, Macau © Gaurav Sharma, September 2014.

Wednesday, September 03, 2014

Geopolitical loving: When Abe met Modi

The Oilholic finds himself roughly 6,000 miles east of London in Tokyo, Japan. While yours truly is here for cultural and ‘crude’ pursuits, another visitor was in town to firm up a crucial strategic tie-up. It was none other than India’s recently elected Prime Minister Narendra Modi, who popped in to see Japanese counterpart Shinzo Abe.

There’s been something of a political loving between these two heads of state. Abe hardly follows anyone on Twitter; Modi being one of the only four people he currently does follow! The Japanese PM was the first among international counterparts to congratulate Modi following his stunning mandate after elections in India. If you think that’s not a big deal, well US President Barack Obama got a welcoming handshake from Abe; NHK footage of Modi’s arrival in Japan shows one heck of a ‘best pal’ Abe-Modi bear hug. Protocol and formality not required between friends seems to be the message.

It is only Modi’s second and most prominent foreign visit since he assumed office this year; no offence to Nepal which was the first destination of his choice. Both leaders lean right, though the Indian PM’s right-wing credentials are stronger in a strictly domestic sense. The Japanese and Indian media went positively ballistic over the visit, atop giving it front-page stuff prominence. It’s extraordinary for all of this to be related to a bilateral meeting between two heads of state, with no priors, unless there was a collaborative attitude behind the scenes.

Any analyst worth his/her weight would note that at the heart of it is a move to counterbalance China, a country that has an uneasy relationship with both India and Japan. As if to underscore the point, Modi, visibly moved with the superb reception he received, criticised the “expansionist” maritime agenda of certain states. Wonder who he could possibly be referring to with the South China Sea so close-by?

Both countries are wary of China, have similar economic problems (cue inflationary concerns) and remain major importers of natural resources. As if for good measure, throw religion into the mix as Japan’s primary faith – Buddhism – was founded in the Indian subcontinent. So finding common ground or the pretext of a common ground is not hard for Abe and Modi.

Now is the Abe-Modi summit a big deal? In the Oilholic’s opinion, the answer is yes. We’ll come to natural resources and ‘crude’ matters shortly, but hear this out first – Japan is to invest US$34 billion spread over the next five years in terms of deal valuation. The trade between the two is insipid at the moment, either side of 1% of the total export pile in each case with the Japanese exporting marginally more than they’re importing from India. That makes the announcement a very positive development.

Japan, according to both men, could turn to India for its rare earth needs, a market led by China. While claims of India becoming a wholesale manufacturing base for Japanese electronics and engineering giants are a bit overblown, to quote the Indian PM: “We see a new era of cooperation in high-end defence technology and equipment.”

As for exchanging views on inflation - India’s, until recently was out of control and has only just been somewhat reigned in with the country's economy starting to gain momentum. Japan's on the other hand, “Abenomics” or not, has not managed to gain momentum (economy has shrunk in annualised terms last quarter by 6.8%). Inflation, thanks to a sales tax rise which came into effect in April, is not under control either with the country’s Consumer Prices Index (CPI) up 3.4% in July. That's well above the Bank of Japan’s target rate of 2%.

Given both countries are major importers of crude oil and natural gas, even a minor price rise has a major knock-on effect right from the point of importation to further down the consumer chain. At the moment, both are benefitting from a two-month decline in oil prices. Both PMs think they can work together towards the procurement of liquefied natural gas, according to an Indian source. The idea of two major importers strategising together sounds good, but concrete details are yet to be released.

If there was one hiccup, the two sides did not reach an agreement over the transfer of nuclear technology to India. Politics aside, Japan for its part is still grappling with the effects of Fukushima on all fronts - legal, natural and physical. Tepco, the company which operated the plant, is still in courts. The latest lawsuit - by workers demanding compensation - is a big one.

But not to digress, how did the men describe the summit themselves? For Modi, it was an “upgrade” in bilateral relations. For Abe, it was “a meeting of minds”. China would, and should, view it very differently. There is one not-so-mute point. Abe did not take any direct or indirect swipes at China, Modi (as mentioned above) was not so restrained. One wonders if in Modi’s quest for geopolitical rebalancing in Asia, would it serve in India well to improve relations with Japan and let them deteriorate with China?

That’s all the contemplation from Tokyo for the moment folks. The Oilholic is heading to Hong Kong, albeit briefly, after a gap of over a decade. Its a sunny day here at Narita Airport as one takes off. More soon, keep reading, keep it ‘crude’!

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© Gaurav Sharma 2014. Photo 1: Tokyo Bay Waterfront. Photo 2: Narita International Aiport, Japan © Gaurav Sharma, September 2014.

Thursday, August 28, 2014

Brent’s flat feeling likely to linger

It’s been that sort of a month where the Brent futures contract seems to set record low after low in terms of recent trading prices. Earlier this week, we saw the price plummet to a 26-month low and lurk above US$102 per barrel level remaining largely flat. In the Oilholic’s opinion there is room for further connection yet.

The only reason the price has stayed in three figures is down to demand from refineries in India and China, met largely by West African crude. The jury is still out on whether a $100 price floor is forming, something which is not guaranteed. Macroeconomic climate remains a shade dicey and much might depend on how China’s fares.

With the Brent prices falling 5.6% in month over month terms, last week Bloomberg reported that Chinese refiners bought 40 cargoes of West African crude to load in September, equating to about 1.27 million barrels a day. As the Indians bought another 27 cargoes over the biggest monthly drop in prices since April 2013, the total volume purchased lent support to the price or the $100 floor would have almost certainly been breached. Geopolitics is not providing that much of a risk driven bearish impetus, even hedge funds have finally realised that by reducing bullish bets on Brent by 12.5% to just 63,079 contacts in the week beginning August 19, as wiser heads appear to be prevailing of late.

From price of the crude stuff to those trying to make money on it – as some in the UK oil & gas sector have suggested that London-listed exploration and production (E&P) firms might be down the dumps. Investec analyst Brian Gallagher clearly isn’t one of them. In a note to clients, he said the sector should not be feeling sorry for itself. 

“Brent has been above $100 per barrel all year and broadly above $100 per barrel for three years now. Performance of E&P companies generally has just not been up to the mark from an operational and exploration perspective. Unique events have also disrupted narratives. Valuations are however becoming tempting again and we maintain bullish views on Amerisur and Cairn.”

Aside from these two, market valuations are still pricing in exploration barrels, which Investec analysts don’t necessarily disagree with. “Nevertheless, if you want to trade discovered barrels, you’ll have to wait for lower levels in Amerisur, Genel, Ophir and Tullow, in our view,” Gallagher added.

Sticking with corporates, here’s the Oilholic’s latest interview for Forbes with Barbara Spurrier, Finance Director of London’s AIM-listed Frontier Resources on the subject of potential barrels in Oman’s Block 38. Yours truly also recently interviewed Alexis Bédeneau, Head of IT at Primagaz France, a company owned by international conglomerate SHV Group on the crucial subject of cybersecurity and IT process streamlining within the oil & gas sector.

Finally, a Fitch Ratings report titled “European Union has Little Chance of Cutting Reliance on Russian Gas” rather gives away the concluding argument. The agency opines that Europe is unlikely to be able to reduce its reliance on Russian natural gas for at least the next decade and potentially much longer. 

“At best the EU may be able to avoid significantly increasing its gas purchases from Russia. Any attempt to improve energy security by reducing European reliance on Russia would require either a significant reduction in overall gas demand or a big increase in alternative sources of supply, but neither of these appears likely,” Fitch said.

European shale gas remains in its infancy and Fitch believes it will take “at least a decade” for production to reach meaningful volumes. By that point, of course it would probably only offset the decline in production from Europe's conventional gas wells and won’t be a US-style bonanza some are imagining. 

Piped gas imports to Europe from markets other than Russia are also likely to remain limited. Fitch opined that the Trans Anatolian Natural Gas Pipeline is the only viable non-Russian pipeline under consideration. This could provide 31 billion cubic metres of gas per annum by 2026, but that’s not enough to cover the incremental increase in gas demand the agency expects over the period, let alone replace any supplies from Russia!

Additionally LNG supplies will rise, but the market is unlikely to be large enough to gain market share against Russian gas. A candid and brutal assessment, just the sort this blogger likes, but maybe not the policymakers with camera facing soundbites in Brussels. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2014. Photo: Oil tanker in Bosphorus, Istanbul, Turkey © Gaurav Sharma, March 2014.