A Bloomberg analyst pointed out that the recent share market rally in Singapore was underpinned by stocks of ship and oil rig-makers, despite the sectors’ fundamentals being weak. The rally, he concluded, was floating on a bit of foam.
Since the crash of oil prices in late 2014, the Singapore offshore services and engineering industry has been hit hard. Anticipating that the good times would continue – always a fallacy – all the capital expenditure and debt incurred from oil’s boom over 2009-2014 came back to haunt the sector after upstream work dried up in the past two years.
Singapore, being the nexus of much of the rig-building, offshore vessel and mechanical engineering contracting in Asia, has been hit the hardest. It came with a delay; the hope was that oil prices recover in 2016 after plunging in early 2015, but that never came. So when Swiber Holdings declared bankruptcy last August, it was a surprise to no one in the industry. In such a downturn, there are always casualties, and other companies – Swissco, Ezion Holdings, KrisEnergy – were also facing critical times. Debt holders of these companies, mainly Singapore banks, had to take a haircut. In response, the financial industry tightened up its portfolios while the Singapore government pledged to aid the industry, but stopped short to bailing the companies out.
The saga continued last week. Industry darling Ezra Holdings – once worth US$2 billion – filed for Chapter 11 bankruptcy in the USA. The international filing is unusual, but it does offer legal and enforcement action protection worldwide, as it attempts to restructure. Also declaring Chapter 11 are related entities Ezra Marine Services and EMAS IT Solution, and possibly also circling the drain is Ezra Holdings’ debt-ridden subsidiary Emas Chiyoda Subsea, which owes the former some US$170 million. Ezra Holdings’ last published earnings declared losses of US$339.6 million, with US$1.51 billion of liabilities. Court filings show that its 20 largest creditors are owed some US$600 million; one – Norwegian shipowner Forland Subsea AS – has agreed not to pursue to repayment of a defaulted charter payment, but the rest are not being so patient.
As Ezra Holdings battles to survive, new concerns over the health of the industry have been cast. Though some argue that Ezra was poorly managed and over leveraged to begin with, it may not be reflective of all other players in the industry. However, investors seem sanguine for now. The banks, for example, have already identified Ezra as a threat, with DBS moving its US$270 debt owed to ‘non-performing’ while OCBC has been stress-testing the sector since Q32015. The financial industry, by and large, has already reduced its exposure to this murky pool, but turbulence beneath the surface still threatens the industry itself. Analysts and auditors are already looking for the next trouble – with Malaysian vessel builder Nam Cheong, Singapore’s Loyz Energy and Rickmers Maritime named as potential threats. Yet, there are those that are hunting for a bargain – British engineering specialists Subsea 7 has expressed interest in purchasing Ezra Holdings assets, as well as those of its embattled joint venture Emas Chiyoda Subsea.
With oil prices having recovered somewhat, the forecast might be brighter, but brace yourself, there are still squalls to come as the upstream industry further consolidates and reinvents itself. Oil companies are putting a lot more cost pressure across their supply chain, and offshore marine contractors are not excluded from this picture. Previous charters rates will certainly not re-appear in the medium terms at least hence the business model of vessel owners will need serious tweaking. Those willing innovate and put their re-engineering skills to use, may look at diversifying their business into offshore renewable energy and other seabed mining sectors.
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Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January 2019
EIA’s January Short-Term Energy Outlook forecasts that world benchmark Brent crude oil will average $61 per barrel (b) in 2019 and $65/b in 2020, an increase from the end of 2018, but overall it will remain lower than the 2018 average of $71/b. U.S. benchmark West Texas Intermediate (WTI) crude oil prices were $8/b lower than Brent prices in December 2018, and EIA expects this difference to narrow to $4/b in the fourth quarter of 2019 and throughout 2020.
EIA expects U.S. regular retail gasoline prices to follow changes to the cost of crude oil, dipping from an average of $2.73/gallon in 2018 to $2.47/gallon in 2019, before rising to $2.62/gallon in 2020. Because each barrel of crude oil holds 42 gallons, a $1-per-barrel change in the price of crude oil generally translates to about a 2.4-cent-per-gallon change in the price of petroleum products such as gasoline, all else being equal.
EIA estimates that global petroleum and other liquid fuels inventories grew by an average rate of 0.4 million barrels per day (b/d) in 2018 and by an estimated 1.0 million b/d in the fourth quarter of 2018. EIA expects growth in liquid fuels production in the United States and in other countries not part of the Organization of the Petroleum Exporting Countries (OPEC) will contribute to global oil inventory growth rates of 0.2 million b/d in 2019 and 0.4 million b/d in 2020.
Although EIA forecasts that oil prices will remain lower than during most of 2018, the forecast includes some increase in prices from December 2018 levels in early 2019 in order to keep up with demand growth and support the increased need for global oil inventories to maintain five-year average levels of demand cover. EIA expects crude oil prices to continue to increase in late 2019 and early 2020 because of an increase in refinery demand for light-sweet crude oil, which is the result of regulations from the International Maritime Organization that will limit the sulfur content in marine fuels used by ocean-going vessels.
Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January 2019
EIA expects global oil production growth in 2019 to be led by countries that are not part of OPEC, particularly the United States. EIA expects non-OPEC producers will increase oil supply by 2.4 million b/d in 2019 which will offset forecast supply declines from OPEC members, resulting in an average of 1.4 million b/d in total global supply growth in 2019.
In 2020, EIA expects oil production to increase by 1.7 million b/d because of production growth in the United States, Canada, Brazil, and Russia, while overall OPEC crude oil production is expected to remain flat. EIA forecasts global oil demand to grow by 1.5 million b/d in 2019 and in 2020. In both 2019 and 2020, China is the leading contributor to global oil demand growth.
Headline crude prices for the week beginning 7 January 2019 – Brent: US$57/b; WTI: US$49/b
Headlines of the week
At some point in 2019, crude production in Venezuela will dip below the 1 mmb/d level. It might already have occurred; estimated output was 1.15 mmb/d in November and the country’s downward trajectory for 2018 would put December numbers at about 1.06 mmb/d. Financial sanctions imposed on the country by the US, coupled with years of fiscal mismanagement have triggered an economic and humanitarian meltdown, where inflation has at times hit 1,400,000% and forced an abandonment of the ‘old’ bolivar for a ‘new bolivar’. PDVSA – once an oil industry crown jewel – has been hammered, from its cargoes being seized by ConocoPhillips for debts owed to the loss of the Curacao refinery and its prized Citgo refineries in the US.
The year 2019 will not see a repair of this chronic issue. Crude production in Venezuela will continue to slide. Once Latin America’s largest oil exporter – with peak production of 3.3 mmb/d and exports of 2.3 mmb/d in 1999 – it has now been eclipsed by Brazil and eventually tiny Guyana, where ExxonMobil has made massive discoveries. Even more pain is on the way, as the Trump administration prepares new sanctions as Nicolas Maduro begins his second term after a widely-derided election. But what is pain for Venezuela is gain for OPEC; the slack that its declining volumes provides makes it easier to maintain aggregate supply levels aimed at shoring up global oil prices.
It isn’t that Venezuela doesn’t want to increase – or at least maintain its production levels. It is that PDVSA isn’t capable of doing so alone, and has lost many deep-pocketed international ‘friends’ that were once instrumental to its success. The nationalisation of the oil industry in 2007 alienated supermajors like Chevron, Total and BP, and led to ConocoPhillips and ExxonMobil suing the Venezuelan government. Arbitration in 2014 saw that amount reduced, but even that has not been paid; ConocoPhillips took the extraordinary step of seizing PDVSA cargoes at sea and its Caribbean assets in lieu of the US$2 billion arbitration award. Burnt by the legacies of Hugo Chavez and now Nicolas Maduro, these majors won’t be coming back – forcing Venezuela to turn to second-tier companies and foreign aid to extract more volumes. Last week, Venezuela signed an agreement with the newly-formed US-based Erepla Services to boost production at the Tia Juana, Rosa Mediano and Ayacucho 5 fields. In return, Erepla will receive half the oil produced – generous terms that still weren’t enough to entice service giants like Schlumberger and Halliburton.
Venezuela is also tapping into Russian, Chinese and Indian aid to boost output, essentially selling off key assets for necessary cash and expertise. This could be a temporary band-aid, but nothing more. Most of Venezuela’s oil reserves come from the extra-heavy reserves in the Orinoco Belt, where an estimated 1.2 trillion barrels lies. Extracting this will be extremely expensive and possibly commercially uneconomical – given the refining industry’s move away from heavy grades to middle distillates. There are also very few refineries in the world that can process such heavy crude, and Venezuela is in no position to make additional demands from them. In a world where PDVSA has fewer and fewer friends, recovery will be extremely tough and extremely far-off.
Infographic: Venezuelan crude production: