Skip navigation

 Login or Register | Member Centre

Devon Energy sails away from Equatorial Guinea

Norval Scott, 08/04/08 at 1:26 PM EDT

Unusual news from Africa today. Devon Energy – a mid-size U.S. independent, that has a large Canadian subsidiary – has sold off its assets in Equatorial Guinea as part of a divestiture strategy, getting $2.2 billion (U.S.) for them. So far, so normal.

But, there are two weird things about this deal. The first is the buyer – GEPetrol, Equatorial Guinea's state oil company. It's pretty abnormal for a national oil company (NOC) in sub-Saharan Africa to make such an acquisition – in fact, it's hard to think of one similar.

The second is the price: $2.2-billion is a lot of money to pay for Devon's assets, which consist of a minority stake in one oil field and two undeveloped oil blocks. Total production – 20,000 barrels of oil a day. So GEPetrol is paying $110,000 per flowing barrel, which seems pretty high; the going rate in Canada for conventional oil is somewhere over $50,000 per flowing barrel.

Yes, oil is at over $100 a barrel. And if you are GEPetrol and you have money to spend, you have few alternatives but to buy what assets come up in Equatorial Guinea's territorial waters – likely inflating the price that Devon could charge. And another factor is tax: while the headline price is $2.2-billion, after tax Devon will only receive $1.7-billion. So that's $500-million that presumably won't leave Equatorial Guinea at all.

Nevertheless, this is an unusual incident. African national oil companies have an unrivalled reputation for corruption and incompetence, and it's extremely rare to see one actually spending substantial amounts of money on expanding its domestic portfolio of assets. It's even stranger to see it happening in Equatorial Guinea, the poster child for squandered African oil wealth.

For example, in 2004, a U.S. Senate investigation into Washington D.C.-based Riggs Bank, showed that Equatorial Guinea President Teodoro Obiang Nguema – who has a rather unsavoury reputation - and his family have siphoned off millions of dollars from the country's oil revenues.

Where did the missing dollars go? Well, in part, towards funding the playboy lifestyle of his son, Teodorin Nguema Obiang. According to a 2006 article in the Times of London, Teodorin has homes in Los Angeles, Buenos Aires and Paris, spent over $2-million on cars in Cape Town in a single weekend, and fancies himself as a record mogul, founding his own rap label (TNO Entertainment). He has also dated Eve, the Grammy-award winning singer.

How to kick oil dependency

Shawn McCarthy, 03/04/08 at 3:42 PM EDT

Robert Zubrin is an author of science fiction novels and a proponent of a manned mission to Mars, but he is seized with a more earthly passion: breaking the hold that the OPEC oil cartel has over the United States and other oil-dependent countries.

Mr. Zubrin offers up a simple answer that he says would dramatically reduce the U.S. dependence on imported oil: The U.S. Congress should mandate that all new cars sold be “flex-fuel vehicles,” or capable of running on either gasoline or biofuels.

The slight, intense aerospace engineer spoke in Ottawa and Toronto at the invitation of the Canadian Renewable Fuels Association to promote his book, Energy Victory: Winning the War on Terror by Breaking Free of Oil.”

The Coles Notes version: OPEC is led by Saudi Arabia, which is becoming ever more obscenely wealthy by controlling energy prices, and which uses its petro-wealth to finance the spread of the extreme branch of Islam that is responsible for much terrorism.

The United States is jeopardizing its national security, its economy and the global environment by remaining addicted to high-priced OPEC oil. Even harder hit by the run-up in prices are poor Third World countries.

Both the U.S. and the rest of the world can break that stranglehold by substituting biofuels for gasoline, not in small increments envisioned by current 10 per cent renewable fuel standards, but in a wholesale manner.

The technology exists for the commercial production of both ethanol and methanol, using sugars, grains, agricultural waste, forestry waste and other biomass. And unlike oil, where reserves are concentrated in a few countries, the availability of biomass is spread around the globe, though less so in the deserts of the Middle East.

Detroit could easily convert its fleet to accept either gasoline or biofuel - much more cheaply than it would cost to dramatically increase fuel economy.

What's missing, he says, is the incentive for companies to construct a distribution system for biofuels that would rival the vast gasoline infrastructure. By mandating flex-fuel vehicles, Mr. Zurbin argues, Congress would ensure that entrepreneurial Americans would build the necessary infrastructure to deliver ethanol and methanol to consumers.

With widespread marketing of biofuels, he expects crude prices would recede to about $50 (U.S.) a barrel - the level at which he figures ethanol and methanol can compete.

With such legislation, Mr. Zubrin proclaims with the conviction of a prophet, “The U.S. Congress would destroy OPEC with the stroke of a pen.” Not to mention the oil-based economy of Alberta.

Mr. Zubrin rejects the notion that food inflation is resulting from biofuel demand and points instead to demand from rapidly developing countries and from rising oil prices themselves. He noted that fish prices are rising and no one uses fish for biofuel; rice prices are rising, and no one uses rice for biofuel.

The Kremlin reconsiders

Shawn McCarthy, 31/03/08 at 12:07 PM EDT

Russia is a real energy superpower, with the world's largest natural gas reserves and second only to Saudi Arabia in oil production and the willingness to use its energy riches for political advantage.

But its awesome potential as an energy producer is frustrated by punitive taxation that discourages investment.

Now, it appears the Kremlin is reconsidering its taxation policy for crude oil, one that takes 90 cents for every dollar of profit when crude prices are above $30 (U.S.). And some analysts say the move would result in better stock market returns for laggard Russian oil companies.

In a note issued yesterday, UBS analyst Dmitry Loukoshov says the impact of the prohibitive tax regime is only starting to show, as Russian oil productions fails to respond to the sharp run-up in world prices.

Russia produced close to 9.9 million barrels per day last year, a mere 2-per-cent increase from the previous year. And many analysts have said production could flat-line in the coming years.

Russia is a real energy superpower, with the world's largest natural gas reserves and second only to Saudi Arabia in oil production and the willingness to use its energy riches for political advantage.

But its awesome potential as an energy producer is frustrated by punitive taxation that discourages investment.

Now, it appears the Kremlin is reconsidering its taxation policy for crude oil, one that takes 90 cents for every dollar of profit when crude prices are above $30 (U.S.). And some analysts say the move would result in better stock market returns for laggard Russian oil companies.

In a note issued yesterday, UBS analyst Dmitry Loukoshov says the impact of the prohibitive tax regime is only starting to show, as Russian oil productions fails to respond to the sharp run-up in world prices.

Russia produced close to 9.9 million barrels per day last year, a mere 2-per-cent increase from the previous year. And many analysts have said production could flat-line in the coming years.

But the government may move soon to ease the burden on the oil companies, now that Parliamentary elections are over.

 “We expect disillusioning operating results from Russian oil fields which would provide a clear and comprehensive argument for government action,” Mr. Loukashov wrote. He added that the Finance Ministry has already floated to a proposal to cut that Mineral Production Tax by some $4-billion (U.S.).

And he said the revamping of the tax regime should lead to a “repricing” of Russian oil companies in the market place, where they have lagged the valuations of their international peers.

The analyst likes companies such as OAO Lukoil, OAO Rosneft and the Russian-British firm, TNK-BP Holding. But he fails to mention political risk that threaten oil companies in Russia, particularly TNK-BP which is facing an tax-evasion probe, immigration problems for its foreign workers and pressure to sell out to state-owned OAO Gazprom.

The value of a loonie

Norval Scott, 25/03/08 at 12:29 PM EDT

One of the cris de coeur heard from Canada's oil patch last year was that while companies were enjoying the benefits of higher oil and gas prices, a lot of their profits were being eaten up by the strong Canadian dollar. While it's probably too strong to describe the loonie as a petro-currency, there's little doubt that it has increased in value as oil prices have soared.

The problem for Canadian companies is that oil and gas are mostly priced in U.S. dollars, and so when the Canadian currency is strong, they get comparatively less for what they sell. On the flip side, a higher Canadian dollar means that it's cheaper for Canadian companies to buy equipment overseas.

But how much of an effect does this have? Well, on Monday, Petro-Canada – one of the country's biggest energy companies – released its annual report, and in among the detail it runs through its economic sensitivities.
According to the report, the higher oil prices in 2007 meant Petro-Canada realized extra net earnings of $52-million, while higher-than-expected natural gas prices saw it make an extra $30-million.

Conversely, it lost $40-million from its upstream net earnings because of the higher Canadian dollar, and another $11-million from its downstream. So, despite the record high prices last year, the company is  actually only up $31-million so far – until you factor in that the stronger Canadian dollar also means you have to re-evaluate the company's long-term U.S. dollar-denominated debt. Which adds another $10-million or so to net earnings.

Still, in summary, record high oil prices, and healthy gas prices, only really added $41-million to Petrocan's bottom line in 2007. In fact, where the company really cleaned up in 2007 was in the downstream sector, where better crack spreads (basically, refinery profit margins) than expected added $72-million to net earnings – a much larger impact than that from the headline oil and gas prices.

And for 2008?

 Well, Petrocan thinks “prices for energy commodities are expected to remain volatile in 2008” – a controversial call! However, the company does make some specific predictions. It says that there is “a lid” on further oil price increases because of concerns of the risk of a U.S. recession spreading around the world, while it adds “questions are being raised” about China's ability to keep up its oil demand growth rates.

It also says that a North American recession in 2008 would challenge natural gas demand, that downstream margins this year are expected to be weaker than last, and that the Canadian dollar will stay strong, which “will continue to erode gains as a result of any strength in commodity prices.”

Erode, but not destroy altogether. While the strong loonie is having a considerable effect on companies, it's clear that conditions still favour the producers right now – just, as ever, not as much as they would like.

How much crude does the U.S. want?

Norval Scott, 19/03/08 at 6:46 PM EDT

Nymex crude futures saw their biggest one-day price drop Wednesday since 1991, falling nearly $5 (U.S.) to close at $104.48 a barrel. While that's down from the $112 seen recently, it's still exceptionally high in historical terms (given that before this year, the record oil price high, adjusted for inflation, was somewhere around $102 a barrel).

So why the big drop?

 The main reason is the U.S. stockpile figures, which indicate that U.S. demand for crude is down 3.2 per cent for the last four weeks, when compared with the year before. When the U.S. is responsible for around a quarter of the world's consumption, that's a pretty significant fall.

While the numbers paint a stark figure for the last four weeks, the fear that traders have is over what they might signify. The unanswered question hanging over the oil market like the sword of Damocles is this: At what point do high oil prices begin to cause demand destruction in the U.S.?

Historically, oil prices have reached tipping points when ever-higher fuel costs spurred U.S. consumers to actually use less oil – by driving less, buying more economical cars or switching power plants to use natural gas (for example). Lower demand means oversupply, and the familiar boom and bust commodity price cycle happens all over again.

Are we now at that tipping point?

 Well, it's too early to tell. But, to the traders, any indication that we are on the cusp of substantial change is enough to create severe jitters.

After all, no one in the market has ever experienced crude prices like we are seeing today. And while it's easy to say that higher Asian demand has changed the market fundamentals forever, no one really knows that we aren't on the precipice of a big oil price crash. For everyone, this is uncharted territory.

Transalta 1, Luminus 0

Norval Scott, 18/03/08 at 3:50 PM EDT

So far in 2008, the Canadian oil patch has seen a surprising number of shareholder/board disputes. Last week, First Calgary Petroleum Ltd. revealed that a consortium of Russian shareholders are trying to oust its chief executive, while Compton Petroleum agreed last month to undertake a strategic review at the behest of its main shareholder.

 It’s also been rumoured that stockholders have pressed Nexen Inc. to look at breaking itself up, although the company says the reports aren’t true.

Another name that’s been under pressure has been Calgary-based power producer TransAlta Corp., whose main shareholder, New York private equity firm Luminus Management LLC, has been pushing for a strategy change and for four seats on the company board.

However, on Tuesday Luminus, which owns 8.4 per cent of TransAlta, withdrew its challenges, saying in a statement that the company “has taken a number of steps to enhance its long-term potential. While there is still more that needs to be done to enhance and protect shareholder value, we are encouraged by what has been accomplished to date.”

In its news release, Luminus states that since the company began its “dialogue” with TransAlta, the firm has refocused on its key North American markets, introduced guidance for future growth, sold its Mexican assets, increased its debt/capital leverage target, announced its intention to repurchase 10 per cent of outstanding shares, and increased its dividend.

However, according to TransAlta, the company was going to do all these things anyway, and Luminus’s challenge hasn’t altered its strategy. In an interview Tuesday, TransAlta spokesman Michael Lawrence said that while the company had listened to Luminus, its direction had changed “not at all.”

For example, said Mr. Lawrence, TransAlta had been looking to sell its Mexican assets since 2006, while the higher dividend has come about because of TransAlta’s investment grade balance sheet – something that Luminus has campaigned against, saying the company should take on more debt and make share buybacks.

“None of these things happened because Luminus asked for them,” Mr. Lawrence said.

 Asked why the shareholder group had withdrawn its challenge, he added that the move appears to “represent [Luminus’s] realization that it wasn’t on the right track and that we were already achieving significant returns for our shareholders.”

Luminus wouldn’t comment beyond the news release. On the surface, it does appear that the group’s push for larger representation and a strategy change has been defeated. On the other hand, TransAlta does now appear to be utilizing a strategy that seeks to look after its existing shareholders a little better – but whether by previous design, or because of Luminus’s pushing, it’s difficult to tell. In any case, the company’s share price is almost exactly back to where it was in December when Luminus started agitating for change.

While TransAlta appears to have won this one, the brief fight will likely prove a reminder to management not to take anything for granted in a world where U.S. hedge funds are not only becoming increasingly powerful, but also are scrambling around for places to invest, given the current shenanigans in the U.S. economy and credit markets.

The result?

 Unrest in the places where hedge funds are moving their money – like the Canadian energy patch. Traditionally, shareholder battles are rare in Alberta – this year’s fights aside, only a couple (True Energy Trust, and a previous First Calgary fight) come immediately to mind. But hedge funds aren’t passive investors, and as their clout in Canada increases, the likelihood of conflicts like the TransAlta one will increase.

Good luck with Harper government

Shawn McCarthy, 17/03/08 at 5:47 PM EDT

It’s gotten nowhere with the National Energy Board, so now the union representing Canada’s energy workers has petitioned the federal cabinet in its battle against oil sands-export pipelines.

Call it informed speculation, but Inside Energy isn’t expecting the Communications, Energy and Paperworkers Union of Canada to have any more success with Stephen Harper’s government than it did with the Calgary-based board.

(And here we must make what the analysts call full disclosure: Globe and Mail unionized employees, including writers of Inside Energy, are CEP members.)

The workers are complaining about two pipelines that will accelerate the export of raw bitumen from the oil sands of northern Alberta, to U.S. markets where it will be upgraded to synthetic crude before being refined. Better that the upgrading be done in Canada, the union argues.

The Alberta Clipper pipeline will export 450,000 barrels of bitumen per day to the U.S. Midwest, with the possibility of that capacity being nearly doubled, while the Southern Lights line will bring diluents from the U.S. to Alberta, to be added to the bitumen to allow it to flow through the pipe.

Together with the recently approved Keystone pipeline, the industry will have added 1.5-million barrels per day of export capacity.

The CEP complains the pipelines undermine Canada’s energy security, and adds that exporting bitumen to be upgraded south of the border also reduces potential job growth here.

To enhance that security – and presumably, increase employment – the union argues Canada should expand the east-west pipeline to displace oil imports in Ontario and Quebec.

Even some conservative Alberta politicians have argued, from time to time, that the province needs to maintain upgrading jobs within its border, and several companies have committed to new upgraders near Edmonton.

But neither the provincial government nor the federal one have shown any inclination to insist the companies upgrade their bitumen in Canada, or to interfere with the development of a north-south market.

Chad and crude prices

Norval Scott, 17/03/08 at 2:27 PM EDT

One of the more interesting side notes in crude’s run-up to its current exorbitant levels is the extent to which the market has been influenced by incidents in countries that, in previous years, wouldn’t have possibly affected the global oil futures price.

One of those countries is Chad, which suffered an attempted coup last month and where a rebel leader Sunday threatened to attack the country’s oil fields, which are operated by a consortium led by Exxon Mobil.

Speaking to Reuters, Timane Erdimi, head of the Rally of Forces for Change (RFC), threatened to “carry the war to the south” (i.e., where the country’s oil fields are) unless President Idriss Deby opens a dialogue with the country’s rebels.

Mr. Erdimi seems to be following the lead of dissidents in Nigeria: Attack the oil, and you actually get some attention. Chad isn’t particularly well-known as a country, let alone as an oil producer, but it has been producing a pretty fair amount of sour crude from its Doba oilfields – around 160,000 to 170,000 barrels of oil a day – since 2003.
In a market where margins are extremely tight, threatening that supply grabs people’s notice. To this point, the rebels in the country haven’t targeted the oil fields, focusing instead on trying to oust Mr. Deby. Now, it appears they may well do so.

Doba crude has a high acid content, usually trading at a substantial $10-a -barrel discount to benchmarks like Brent, and is often bought up by refineries in the Far East. Even so, any substantial disruption to supply would create further concerns in an already jittery market. In a world where many likely couldn’t locate Chad on a map, the country may be worth watching closely for the next couple of months at least.

A couple of notes of interest on Chad: The country’s production was made possible by the World Bank, which backed the construction of a pipeline from landlocked Chad to the Cameroon coast. As a condition for its support, the World Bank insisted on the implementation of safeguards on oil revenues from the project, meaning that most of the money that Chad receives from oil production was supposed to be either saved up or used on health, education and infrastructure.

That system hasn’t exactly worked as expected. A $4-million (U.S.) advance received by the country on forthcoming oil revenues in 2000 was immediately spent on buying arms, in contravention of the World Bank agreement. In addition, regulators have said that the country simply doesn’t have the infrastructure in place to implement the law that manages the country’s petroleum revenue, and there’s little information showing where the money is actually going.

All this controversy means that the World Bank hasn’t been particularly keen to get involved in other oil projects in the developing world since, for fear of further embarrassment. It also means that Chad hasn’t made much headway on developing the country’s other oil resources (although the country’s civil conflict has probably been more responsible in that regard).

BP's new faith in Canada

Norval Scott, 17/03/08 at 12:36 PM EDT

BP PLC has taken another step towards re-establishing itself as a major Canadian player, as it has struck a deal with Irving Oil Ltd. that could see the British company take a stake in the Eider Rock refinery project in Saint John.
Under the deal, BP will contribute $40-million towards the next engineering and design stage for the proposed refinery, which is expected to cost $7-billion to build. BP and Irving Oil will also look at forming a joint venture to build the new refinery, should the project go ahead.

“We are excited that a company of BP’s calibre sees the potential in our region and in this project to meet the need for a reliable and secure supply of refined products for the Northeast,” Irving Oil chief executive officer Kenneth Irving in a statement.

While privately held Irving Oil has been investigating the construction of a new refinery, it has said that any such project would only go ahead if it could secure a major partner to share development costs and help supply crude to the new facility.

Eider Rock will produce around 300,000 barrels a day of refined petroleum products for export to the U.S. Northeast, creating around 5,000 jobs during construction, and would be completed in 2015. BP and Irving Oil will decide by mid-2009 whether to go ahead with the project as a joint venture.

Irving Oil already operates Canada’s largest refinery in Saint John, producing 300,000 b/d of petroleum products such as diesel and gasoline. As well as the second refinery, Irving is also building a liquefied natural gas import terminal near Saint John with Spanish firm Repsol YPF SA. It’s all part of its plans to build a huge energy hub in the city that would supply energy to markets in the U.S. Northeast.

For BP, the deal comes shortly after the company dramatically increased its position in Canada by acquiring a stake in Husky Energy Inc.’s massive Sunrise oil sands project in exchange for a stake in its Toledo, Ohio, refinery, a deal that appeared to signal a strategic shift back to Canada for the British supermajor. BP is also seeking to refit its Whiting, Ind., refinery to take more Canadian heavy crude.

The Eider Rock refinery agreement is an addition to BP’s other projects, and isn’t intended as a replacement for them, said BP spokeswoman Wendy Silcock. She added that the deal would tie in with BP’s large retail presence in the northeast U.S.

Skunks at the oil boom party

Shawn McCarthy, 13/03/08 at 12:05 PM EDT

Talk about playing the role of smelly rodent at a garden party! Forget about crude prices hitting $110, ignore the recent surge in natural gas prices that have topped $10, never mind that oil companies have been posting record profits in recent quarters.

The skunks at John S. Herold Inc. and Harrison Lovegrove & Co. say international oil companies are facing a storm of factors that could bring the good times to an end for the Western majors.
The two companies released their annual assessment of global merger and acquisition activity in the upstream oil and gas industry this week, and warned of a decline in the quality of potential deals aimed at replenishing reserves.
Over the longer term, they added, the stellar profitability of recent years will erode under increasing global tax take, and rising costs.

In 2007, the value of proven reserves – as reflected in acquisitions of companies and assets – remained essentially flat, despite the steep climb in crude prices over the course of the year. If you include the final disposition of assets from OAO Yukos to Russian state-owned firms at below-market value, reserved values actually fell 22 per cent.
The consultants say Western companies are facing a number of challenges, the decline in the value of assets available, rising costs needed to develop those assets, greater taxation rates, and more competition from sovereign wealth funds, like those from oil-rich sheikdoms in the Middle East.

After years of favourable conditions, “the industry has been facing rough seas,” said Christine Juneau, chief operating officer of John S. Herold, and Martin Lovegrove, vice-chairman of Britain’s Standard Chartered Bank, which owns the company that bears his name.

“Access to opportunities has continued to become more restricted and securing approval for project and deal go-aheads has lengthened,” they wrote to clients in a joint letter that was released this week.

Rising costs are required to squeeze crude from unconventional sources like oil sands and deep-water oil sands. Governments around the world have increased their share of oil revenue to 54 per cent from 44 per cent.

Ms. Juneau and Mr. Lovegrove said the industry had better margins at $30 (U.S.) per barrel oil than it did at the end of 2007 with a price of $96 (U.S.) per barrel.