The world oil order is becoming dangerously more polarised and politicised. Fresh battle lines are being drawn across geographies and long-established political and commercial relationships are being dramatically redefined.
While a strong underlying bullishness from tightening global oil supply and thinning spare capacity persists, the bears are looking at potential economic headwinds from trade battles erupting almost daily between the US and the rest of the world, and starting to unpick the oil demand growth story.
Even the unprecedented OPEC/non-OPEC cohesion of the past 18 months has wobbled. Under rising pressure to cool down prices, the group of 24 has split into the haves and have-nots of sustainable production capacity.
Iran and Venezuela asked that OPEC formally denounce US sanctions against them at its ministerial meeting in Vienna June 23, but failed to have their way.
US President Donald Trump once again demanded that OPEC act to cool down oil prices in a tweet on July 4, this time pointing out that the US “defends many of their [OPEC’s] members for very little $’s.”
Oil is also in the crosshairs of tit-for-tat tariffs between the US and China that took effect just past midnight Washington time, 12 noon Beĳing time, on July 6. Though US crude is not on the initial list of the $34 billion worth of goods on which China imposed 25% retaliatory import tariffs, it has been included in the second round of an additional $16 billion worth of products that will attract import duty, possibly in two weeks’ time. That would snuff out US crude exports to its second largest market after Canada.
In March, the US levied 25% duty on steel imports that not only hurt China, but also its own oil industry, which needs the metal for new pipelines being built to carry the growing tight oil output to domestic refiners and export terminals.
The US-China face-off is drawing Venezuela and Iran, major oil producers targeted by US sanctions, closer into Beĳing’s orbit. The China Development Bank this week threw Venezuela’s embattled state oil company PDVSA a $5- billion loan lifeline.
Beĳing is digging in its heels over US demands to distance itself from Iran. Not only is China Iran’s largest crude buyer, but it is also a major investor in various sectors, including the giant South Pars gas development project.
Neighbouring South Korea, in contrast, Friday said it was suspending all crude loadings from Iran starting this month, as it negotiates a sanctions waiver with the US. It imported about 315,000 b/d of Iranian crude over January-April.
China’s relationship with Saudi Arabia, its largest crude supplier for decades until it was displaced by Russia two years ago, is under some strain. In a surprisingly audacious move, state trading giant Unipec slashed its term Saudi crude imports by 40% over May-July and went on to announce it publicly. It can’t be a mere coincidence that China is deepening its ties with Iran while re- evaluating its equation with the latter’s political arch-rival, Saudi Arabia.
Saudi Aramco this week announced a change in its decades-old crude pricing marker for term sales into Asia to an average of Platts Dubai assessments and Dubai Mercantile Exchange’s Oman quotes, starting from October. The DME Oman component replaces Platts Oman. Aramco said it was “rebalancing [its] Asia marker to ensure that it is underpinned by a broad and vibrant marketplace.” Could it be that the Saudi switch was partly aimed at countering Chinese pressure on Middle Eastern producers to use the recently launched Shanghai crude futures contract for pricing their crude? It’s a possibility.
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Now that Occidental Petroleum has beaten Chevron to the acquisition of Anadarko Petroleum – and the strategic assets it holds in the prolific Permian Basin – one would think that the deal is cut-and-dry. Not so. The fallout of the massive US$57 billion deal has begun, and it pits one legendary billionaire against another legendary billionaire.
The Occidental purchase of Anadarko had all the signs of a classic takeover battle, swooping in after Chevron and Anadarko’s boards had approved their own US$48 billion deal. It was made only possible by Oxy CEO Vicki Hollub making a quick private plane trip that resulted in a last-minute US$10 billion capital injection from Warren Buffet’s Berkshire Hathaway that was contingent on the Anadarko purchase working. It did. And with the US Federal Trade Commission approving the deal, Anadarko will become part of Occidental by the end of 2019.
But not everyone is happy about the situation. Some investors and shareholders of Occidental believe that it badly overpaid for Anadarko, and were rankled by the deal bypassing a shareholder vote on the matter. The chief critic of this is activist Carl Icahn, who owns a US$1.6 billion stake in Occidental, who slammed it as ‘misguided’ with the CEO and Board ‘betting the company to serve their own agendas’. Icahn has already filed a lawsuit demanding access to Occidental’s books and records, and has just take the fight to a new level.
Last week, Icahn filed regulatory paperwork to call for a special shareholder meeting where he hopes to oust four of Occidental directors and modify the company’s charter through stockholder consent from ever engineering a similar takeover. Icahn wants Spencer Abraham, Eugene Batchelder, Margaret Foran and Avedick Poladian out from the Board, holding them responsible for the ‘fiasco’. He has, of course, nominated his own preferred replacements, including one of his portfolio manager’s Nicholas Graziano, his general counsel Andrew Langham, former Jarden finance chief Alan LeFevre and former president of Shell John Hofmeister. While Icahn has publicly acknowledge that the Anadarko takeover will probably go ahead, his aim is for the new Board to oversee ‘future extraordinary transactions to ensure that they are not consummated without shareholder approval where approval.’
Will it work? Before the proxy fight can go ahead, Icahn must get at least 20% of shareholders to agree to a meeting. That’s a tall order, given that the current crop of directors and Boards were re-elected at the May annual meeting, although with lower support. But there is certainly some appetite, given that Occidental’s stock has dropped nearly 17% since the initial April hostile takeover, reflecting market mood that it had bitten off more than it could chew.
All of this is playing out against a backdrop of pessimism in the Permian. Although the shale revolution had brought American crude production to record highs and sent its crude exports to a new record of 3.3 mmb/d in June, there are now cracks showing. With limited infrastructure, low prices and over-exploitation, the Permian boom is slowing down. Once an investor’s darling, financing has now become far tougher for Permian players, as the high production fall off rate means that companies have to spend more and more money to just maintain production. It’s a situation that is particularly negative for the small, nimble players that powered the initial shale revolution who lack the deep pockets to optimise shale assets over a longer production period. All across the Permian, independent players have lost between 50-100% of their market value, making them ripe for acquisition by majors and supermajors. Deals like the Anadarko one make sense in this context, but with the financial risk increasing, these blockbuster deals may never lead to blockbuster returns. Carl Icahn may not be able win his battle for the Occidental board, but he is certainly making a serious – and very valid - point.
The Occidental-Anadarko deal:
According to the Nigeria National Petroleum Corporation (NNPC), Nigeria has the world’s 9th largest natural gas reserves (192 TCF of gas reserves). As at 2018, Nigeria exported over 1tcf of gas as Liquefied Natural Gas (LNG) to several countries. However domestically, we produce less than 4,000MW of power for over 180million people.
Think about this – imagine every Nigerian holding a 20W light bulb, that’s how much power we generate in Nigeria. In comparison, South Africa generates 42,000MW of power for a population of 57 million. We have the capacity to produce over 2 million Metric Tonnes of fertilizer (primarily urea) per year but we still import fertilizer. The Federal Government’s initiative to rejuvenate the agriculture sector is definitely the right thing to do for our economy, but fertilizer must be readily available to support the industry. Why do we import fertilizer when we have so much gas?
I could go on and on with these statistics, but you can see where I’m going with this so I won’t belabor the point. I will leave you with this mental image: imagine a man that lives with his family on the banks of a river that has fresh, clean water. Rather than collect and use this water directly from the river, he treks over 20km each day to buy bottled water from a company that collects the same water, bottles it and sells to him at a profit. This is the tragedy on Nigeria and it should make us all very sad.
Several indigenous companies like Nestoil were born and grown by the opportunities created by the local and international oil majors – NNPC and its subsidiaries – NGC, NAPIMS, Shell, Mobil, Agip, NDPHC. Nestoil’s main focus is the Engineering Procurement Construction and Commissioning of oil and gas pipelines and flowstations, essentially, infrastructure that supports upstream companies to produce and transport oil and natural gas, as well as and downstream companies to store and move their product. In our 28 years of doing business, we have built over 300km of pipelines of various sizes through the harshest terrain, ranging from dry land to seasonal swamp, to pure swamps, as well as some of the toughest and most volatile and hostile communities in Nigeria. I would be remiss if I do not use this opportunity to say a big thank you to those companies that gave us the opportunity to serve you. The over 2,000 direct staff and over 50,000 indirect staff we employ thank you. We are very grateful for the past opportunities given to us, and look forward to future opportunities that we can get.
Headline crude prices for the week beginning 15 July 2019 – Brent: US$66/b; WTI: US$59/b
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