Business of Energy Exam 2
concerns related to RMP
-Harvard: law is vague in essential parts and lacks details necessary for sufficient oversight -Chad govt. realized it was necessary for WB support, but had little intention of allowing it to impact local practice -attacked as an infringement of sovereign rights -most likely beneficiaries are oil companies and private banks -case where private sector risk is cushioned by public funds intended to help the poor; emerges as a case of corporate welfare
vertical integration
-IOCs compete in all major segments of the industry from exploration to retail
reasons against vertical integration
(Sam Van Vactor) -captive suppliers have no incentive to innovate -too much complexity and lack of skills to run multiple businesses (focus on what you do best) -internal transactions subject to disputes about transfer pricing -market is more efficient than internal transacting
Dominion: profitable project
-$600 million NPV: 600 million $1 shares -$200 million net operating profit by 2018 -expensive: 24% of capital expenditures for the next 5 years
Saudi Arabia facts
-1/5 of world's proven reserves and 10% of total production -pop: 27 million -absolute monarchy -97% muslim (mostly sunni) -lacking basic freedoms, women especially -10% of GDP expended on military -arab spring protests and islamic terrorism
global production
-101 million barrels of oil per day -3,768 billion cubic meters, 62.8 boe
ExxonMobil Outlook for Energy
-2 billion more people, 28% increase -Global GDP doubles -China and India lead growth in energy demand -oil and gas supply 60% of energy mix -natural gas surpasses coal as second leading source -60% increase in electricity demand -co2 plateau and decline
SEC reserve standards
-2010 SEC reserve definitions for oil/gas traded on NYSE or who issue bonds in US -updated definition of proved reserves recognizing technological advancements -enable oil and gas to more easily recategorize 2P to 1P
What happened to the Chad-Cameroon project? C
-Construction begins 2000, completed 2003 a year ahead of schedule with no issues -Chad receives $32 million in revenue in 2004 and $420 million deposited in Chads London account by 2005 -nearly 150 projects; 100 for infrastructure -criticism from CRS and BIC our lack of transparency, no control over indirect revenue, and law applied to only the 3 original oil fields -govt. criticizes agreement because not getting benefits of higher oil prices -govt. experiencing budgeting problems -Chad plans to amend RMP to double the funds to govt. can allocate without oversight -breach of original contract: +WB suspends new loans and grants +halts $124 million in previously approved loans +Froze Chad's escrow account at Citigroup
What happened to the Chad-Cameroon project? B
-June 2000: WB and partners approve project -Chevron and Petronas pay Debt $25 million as planned, but he spends $4.5 million on military -renewed criticism from activist groups; no guarantee the money is spent on poverty alleviation measures -private sponsors remain positive
certification of oil reserves
-Netherland, Sewell, & Associates, Inc. -Ryder Scott Company -Small number of other consultants
What happened to the Chad-Cameroon project? E
-Petronas and Chevron pay $282 million in taxes in 2006 -Chad gets 57% of total payments as opposed to the original 8% -cost overruns total by $1.1 billion -continuing civil war, Deby take control of oil revenue in breach of RMP -WB backs out of deal and Chad pays outstanding loan balance of $66 million
What did the WB do to mitigate potential adverse effects?
-Revenue management plan (RMP) -try to make sure wealth invested to benefit people
Dominion Resources: Cove Point Case major players
-Treasurer: Scott Hetzer -CEO: Thomas F. Farrell II
LNG transport
-about 480 ships -90,000-170,000 m^3 LNG capacity per ship -larger Qatar ships: Q-flex (210,000) and Q-max (266,000) -local shipments: small vessels, road tankers
dutch disease in nigeria
-agriculture sector collapsed, net food importer -weakened civil service and legacy of colonial rule contributes to poor governance -oil revenue stolen and squandered -population boom and net income per capita declined
geological traps
-anticlines, faults, salt domes -unconformities, disconformities
liquid natural gas
-at normal pressure, cool to -260°F -volume reduces by 600 times -clear, odorless, nontoxic, nonexplosive
lubricant markets
-automotive (50%) -marine, railroad, aviation -industrial -metalworking
hydrocarbon formation
-burial, anaerobic decomposition produces kerogen -kerogen: not yet a fossil fuel; from carbohydrates, protein, fats, and lignin -coal from plant kerogen -oil/gas from plants, animals, plankton, algae
chemicals
-commodity products compete on cost -specialty products compete on differentiation and have higher margins
CFRA Industry trends
-competitive environment -operating environment -upstream meltdown -downstream challenges and opportunities -regulatory environment
very complex refineries
-complex refinery plus -coker
WB approach to build support for Chad-Cameroon project
-consultations with supporters and detractors -enlisted advice from 45 scientists and environmental engineers, hosted 145 meetings with 250 international NGOs, held nearly 900 village meetings -public consultation process was extensive -5 years of review, 3000 page Environmental Assessment -Established capacity-building programs in Chad and Cameroon to develop fiscal, regulatory, and managerial infrastructure needed to develop countries' petroleum sectors and minimize project's adverse impacts
simple refinery
-crude distillation -cat reforming -hydrotreating distillates -prefer light crudes
how the industry operates
-cyclical industry -international integration -majors and independents -E&P, midstream, refining
Biggest risk associated with the Chad-Cameroon project
-political risk +Deby is a warlord +state security forces continue to commit extrajudicial killings (torture, beating, rape) +by any measure, Chad is one of the riskiest places to invest +sponsors and banks can't invest without protection against political risk
nigeria facts
-pop: 174 million -democracy modeled after the US but incredibly unstable; 5 constitutions and 7 coups since independence in 1960 -islamic north christian south -OPEC exporter -oil production security issues: theft, violence, pipeline interruptions; $10 billion stolen per year -ethnic violence -gangs, drugs, violence, poverty
Norway - the blessing of oil
-pop: 5 million -world's largest sovereign wealth fund -owns 1.2% of stock worldwide -profits from high taxes on oil/gas drilling -government owns 67% stake in NOC Statoil -free education, free healthcare, retire at 65 at 80% of income -large proven reserves of oil and gas
key industry ratios and statistics
-prices of oil, gas, and refined products -oil and gas inventories -growth in GDP -oil and gas supply and demand
oil and gas recovery
-primary: natural lift (reservoir pressure), artificial lift (beam pump, gas lift, downhole pump) -secondary: water injection, gas injection, co2 injection -enhanced oil recovery: oil viscosity reduction (steam injection)
unproved reserves
-probable reserves attributable to known accumulations (50% certainty) -possible reserves attributable to known accumulations (10% certainty)
how to analyze a company in this industry
-production volumes -reserve replacement -upstream performance ratios -refining and marketing margins -financial statement evaluation: revenues and earnings, operating margin, capitalization and earnings per share (EPS), performance ratios, valuation
economically, how did the Chad project turn out?
-project completed a year ahead of schedule in full compliance with environmental and social requirements -$420 million in Chad escrow account far exceeding $111 million projected revenues -nearly 150 oil-funded projects started by 2005 and 40% completed
IMF
-promotes international monetary cooperation and exchange rate stability, facilitates the balanced growth of international trade, and provides resources to help members in balance of payment difficulties and eliminate poverty -agency of the UN est. 1944
crude reserves
-proved -unproved: probable, possible
crude reserve notation
-proved: 1P -proved and probable: 2P -proved, probable, and possible: 3P
natural gas
-rapid growing consumption: heating and cooking, industrial processes, electricity generation -environmentally attractive -abundant supply -attractive prices -challenge: how to get from well head to users -options: pipeline, LNG
proved reserves
-reasonable certainty (90%) -proved developed (PD) -proved undeveloped (PUD)
sarbanes oxley SOX
-requires CEOs and CFOs certify that financial reports: don't contain untrue statements or material omissions; fairly represent the financial condition and result of operations
how does one ensure corruption does not rule?
-rules, laws, and regulation respected by people -watch dog organizations: WB, environmental groups, NGOs -compliance mechanisms (measuring, reporting, audits) -enforcement mechanisms (fines, penalties)
energy externalities
-security: few countries are self sufficient -environmental: co2, nuclear waste -positive externality correlate energy consumption and quality of life -dealing with externalities = opportunity to capture value and earn high returns
industry structure and new entrant threat
-significant barriers to entry: capital, access to reserves, license to operate, right partners, technology, highly skilled workforce -competition from NOCs moving away from traditional home markets: Gazprom (Russia) discussions with Nigeria; CNPC (China) searching the world for access to crude -reliance (india) building world's largest refinery in Gujarat -new entrants threat to established players -need nonlinear thinking and challenges to conventional wisdom
was the Chad govt. right to amend the RMP?
-significant change in oil prices -contracts are never complete -can never fully specify all contingencies -would hope they would amend it consistent with the spirit of the agreement
complex refinery
-simple refinery plus -vacuum flasher -cat cracker -alky plant -gas processing -prefer heavy crudes
risks if the WB didn't participate in Chad-Cameroon project
-sponsors might abandon project to invest in safer countries -Chad develops oil fields with neighboring countries (Libya and Sudan)
dutch disease
-the economist 1977 -exploitation in exporting natural resources appreciates value of currency and exports become less competitive globally -greatest impact on manufacturing sector
reasons for vertical integration
-to control risks; protect against cyclicality in many segments of industry -due to potential synergies: co-locating refinery and chemical plants; shared managerial processes across multiple segments; technology linkage across segments; use to enter new markets; financial management skills
midstream operations
-trading -transportation and storage -tankers: oversupply in 2011-2012 -pipelines -storage: bulk terminals, refinery tanks, pipeline tanks, barges, tankers, inland ship bunkers, natural gas stored in salt caverns -US strategic petroleum reserve: 695 million barrels
midstream
-transportation, processing, storage and distribution
Bretton Woods Institutions: World Bank and IMF
-twin structures supporting structure of worlds financial and economic order -world bank: promote economic and social progress in developing countries -IMF: manages currency exchange
reserve standards
-two global authorities set standards for reserves 1. society of petroleum engineers (SPE) 2. US securities and exchange commission (SEC)
refinery yield
-ultra-low sulfur distillate: 11 gallons -other distillates: <1 gallon -jet fuel: 4 gallons -other products: 6 gallons -hydrocarbon gas liquids: 2 gallons -gasoline: 20 gallons
nature of political risk in Chad-Cameroon project
-unstable governments could lead to unrest and revolutions, economically jeopardizing pipeline project -reputations of partners could be damaged -could jeopardize possibility for future projects
What happened to the Chad-Cameroon project? D
-unsuccessful coup against Debt -tension between Chad and Sudan: 300,000 refugees from Darfur region -Deby threatens to cut the pipeline and stop flow of oil -WB agrees to release escrow funds; Chad has more discretion over money -Chad forms NOC and wants 60% of oi revenue -Chevron and Petronas told to leave Chad for failing to pay $450 million in taxes
industry characteristics: comparative advantage
-upstream producer of crude is a price taker -upstream producers that control their costs and become efficient are most profitable -efficiency involves cost control, technology, safety, and effective processes -Exxon and BP are most efficient among IOCs
US equity focus
-wealth management -institutional investors -libraries and academics -corporate and professional -financial marketers -individual investors
CFRA
-world's largest provider of institutional grade independent equity research -est 1994 -utilizes battle tested methodologies that consistently identify actionable situations from which clients can gain an investment edge and avoid risk -10/3/16: acquire S&P Global market intelligence's equity and fund research business creating the industry's largest institutional-grade independent equity research team
four criteria for crude reserves
1. discovered through one or more exploratory wells 2. recoverable using existing technology 3. commercially viable 4. remaining in the ground
exploration
3D seismic mapping provides assistance in locating and evaluating natural gas and crude reservoirs
Chad-Cameroon Pipeline
Chad: -General Idriss Deby Cameroon: -President Paul Biya -corrupt -military tribunals
what is dominion?
generation: 52% -merchant and regulated electric power generation assets energy 27% -natural gas transmission, gathering, distribution, and storage pipeline and gas storage network dominion Virginia power 21% -regulated electric distribution and electric transmission ops in Virginia and N.E. north carolina
industry characteristics: IOCs
international/integrated oil companies -ExxonMobil* -BP* -Royal Dutch Shell* -Total (france) -Chevron* -ENI (italy) -ConocoPhillips *merged from original seven sisters: Exxon, Mobil, Shell, BP, Chevron, Gulf, Texaco
example benchmark crudes
light crudes: -Louisiana sweet -nigerian (bonny) light medium: -West Texas sour -arab light -isthmus (Mexico) heavy -mayan -arab heavy -venezuelan
shale gas and oil
low permeability shale can be rich in organic materials - gas, condensate, light crudes
deep water exploration
main opportunities -gulf of Mexico -south/Central America -west africa main challenges -high cost of drilling -inaccessible equipment on seabed -technical challenges
downstream competition
refining: -depends on efficiency and cost control -difficulty in controlling major cost (crude) and market sets price on major products -recently, tight supply has improved US profit margins, but refining is still highly cyclical chemicals: -commodity products compete on cost -specialty products compete on differentiation and have higher margins retailing: -profit only a few cents per gallon -convenience stores because profit margin on snacks and drinks is higher than fuel -competition from retailers
Cove point is fully subscribed
toll processor -not required to take ownership of LNG -fits regulated like growth focus
Chad Revenue Management Plan
-desire to use revenue to reduce poverty and improve standard of living -Chad to receive $1.8 billion in taxes, royalties, and dividends +govt. discretion over income tax revenues as long as used for general development purposes +remainder deposited in special petroleum revenue account and majority used to finance development programs related to education, health, and social services, rural development, infrastructure, environment, and water resources -oversight +WB and govt. annual approval of expenditure plan +9 member oversight committee includes one NGO and one trade union rep. +linked govt. performance to future WB funding -actions by Chad govt. +passed law supporting key elements of plan +privatized 45 out of 50 SOEs, cut army in half, and reallocated public expenditures to support development plans
peak oil issues
-disagreement and debate over if we've reached peak -reserves determined by technology, price, and politics -peak oil is a secondary issues; CO2 emissions is a primary issue
Dominion: credit rating
-downgrade inevitable: examine 4 year projects -key ratios: FFO-to-debt, debt-to-EBITDA -as regulated business, needed to maintain EPS growth otherwise stock price would suffer -equity issuance = EPS dilution and share price decline -change in credit rating would decrease price of outstanding bonds
dutch disease generalized
-encourages rent seeking: most important business becomes getting a share of governments oil revenue -entrepreneurship, innovation, and competition all negatively impacted -economy becomes inflexible
drilling
-exploration wells: find oil and gas -appraisal wells: asses reservoir size, quality, flow rate, etc. -production wells: extract oil and gas -development wells: infill or extent field, increase production efficiency
upstream
-exploration, field development, production operations
Dominion Case: Central Issue
-financing the dominion resources $3.6 billion Cove Point LNG project -optimal mix of debt and equity -impact upon dominion's credit rating and existing stock and debt holders
moving from simple to complex to very complex
-gasoline and product yields increase -residual yields decrease
World Bank
-goal to end extreme poverty within a decade and boost shared prosperity -founded with IMF in 1944
other industry issues
-government involvement -high risk, but IOCs can manage well (IOC beta near 1) -financial performance is pretty average across all industries, but cyclical -NOCs (national oil co.) and GSEs? play by different rules (state capitalism) -environmental issues -poor reputation in developing countries -finite resources
crude quality assay
-gravity, viscosity, pour point, sulfur content
IOC
-independent oil company -financial resources -project management skills -technology leadership -training and collaboration
independents and service companies
-independent producers/marketers/refiners: specialists focus on a particular sector -oilfield services companies: technical expertise and task execution -shipping and pipeline: shared resources for oil and gas transportation -commercial market participants: trading, finance, and risk management
CFRA less emphasis
-industry financial metrics -sector overview -ETF market flows and landscapes -industry reference -competitive company analysis
CFRA more emphasis
-industry trends -how the industry operates -key industry ratios and statistics -how to analyze a company in this industry -glossary
industry characteristics: capital
-investment decisions long term in nature -need for scale (sufficient capital for major upstream projects) -capital intensive -partnerships manage risk and raise large amounts of capital
approach used to limit political risk in Chad-Cameroon risk
-involvement of many different sponsors -a variety of controls
why was the WB involvement important in Chad-Cameroon project
-largest source of development assistance in the world -bank felt project was commercially viable -best and perhaps only opportunity for Chad to reduce severe poverty -fairness: bank responsible for ensuring that host countries receive returns commensurate with their risks -could play an important role in protecting environment and indigenous people
downstream
-manufacturing, refining and Petro-chemicals, wholesale and marketing
oil sands
-mixture of sand, clay, water, and extra heavy oil -canada: northern Alberta -venezuela: orinoco belt
crude oil basics
-most crude oil is sour -most quoted benchmark prices are light and sweet crude (WTI, Brent, Tapis/Oman)
NOC
-national oil company -state owned; privileged access to resource -major source of external revenue -not necessarily commercially motivated
tight gas
-natural gas trapped in impermeable rock -non-porous sandstone or limestone -usually found at depths greater than 10,000 ft
what could be the worst impact of the Chad-Cameroon Pipeline project?
-negative environmental impacts -harm to indigenous people -revenue used for personal benefits of leaders -no positive impact on poverty
general concerns about project
-no example in Africa where oil has lead to development -Sierra Club, Friends of Earth, Rainforest action network: environmental concerns -social activists: no specific agency to oversee social issues as required by WB policy
CFRA Executive summary
-outlook positive (from neutral in 2017) -upstream improves with oil price gains and focus on returns -bullish because of Venezuela, Iran, US E&P
CFRA industry financial metrics
-overview -revenues -profit margins -earnings -balance sheet -valuations
curse of oil
-paradox where countries with an abundance of natural resources tend to have less economic growth and development -aka revised Midas touch
crack spread
The "crack spread" is the difference between cost of crude oil and price of a refined petroleum product, usually using gasoline and distillate fuel. Both single and multi-product crack spreads are calculated. The most common multi product figure is the 3:2:1 crack spread, calculated by subtracting the cost of three barrels of crude oil from the price of two barrels of gasoline, and one barrel of distillate. Use: Crack spreads are a useful way to look at supply trends and refinery margins in different markets, as it compares a locally priced commodity (wholesale products) to a globally priced one (crude oil). Crack spread futures are used by independent refiners to hedge against adverse price movements.
unconventional resources
conventional oil and gas fields in awkward places -deep water, arctic, gas requiring LNG transport oil and gas trapped in unconventional fields -shale resources, tight gas, coal-bed methane unconventional hydrocarbon materials -oil sands, ultra-heavy oil, acid/sour oil, shale oil
natural gas pipeline transport
extensive infrastructure -upstream gathering network -gas processing plants -transmission pipeline -distribution network shared ownership/access -consortia of producing companies -dedicated infrastructure companies -regulated access to main networks
lubricants
functions -keep moving parts apart -reduce friction -transfer heat -carry away contaminants -transmit power -protect against wear -prevent corrosion -seal for gasses types -mineral oil base (ex. bowling pins) -synthetic (ex. soccer balls)