Wrapping up Volume Six of Our Economic Commentary
As with previous editions, this annual compilation assembles into one single volume – the sixth of its kind – all issues of the Commentary published during 2011. This offers the opportunity to highlight the key insights gained from our research activities. In addition, we expect the compilation to provide a concrete sense of our efforts that can help take stock of progress as we prepare for another challenging year.
In the course of its progress the publication has benefited from valuable comments and feedbacks from many readers around the world. To them and to all those that helped in one way or another, we would like to express our thanks and best wishes for a festive season and a happy new year. …[Details]
Economic Commentary Volume 6 No 11/12 – November/December 2011 : Global and MENA Energy M&A : An Investment of Choice or of Last Resort?
The recent wave of large-scale mergers and acquisitions (M&A) in North America, to acquire sizable stakes in shale plays, opens interesting avenues of research and thus raises many questions. Does for instance the $41bn ExxonMobil acquisition of XTO Energy, a leading US unconventional natural gas producer, in 2009, signal a paradigm shift of strategy that validates shale oil and gas, or does it underpin the perception of limited organic growth opportunities in less risky and more rewarding conventional hydrocarbons? Similarly, but in a different context and on a relatively modest scale, questions arise within MENA when considering for instance the €4bn ($5.4bn) takeover of Spain’s Cepsa by Abu Dhabi’s International Petroleum Investment Company (IPIC) in 2011. While such a move validates IPIC’s mandate to invest in the energy sector across the globe, does it suggest limited organic growth prospects at home?
With the above interrogations in mind, this commentary represents a preliminary attempt to bring a fresh perspective and contribute to better informed discussion on M&A in the energy sector with a focus on the MENA region.
The commentary is too concise to draw firm conclusions. However, emerging from the analysis are four interesting findings that need further pondering:
• The current global trend in energy M&A tends to confirm the limited organic growth opportunities for IOCs in low cost conventional hydrocarbons.
• Within MENA, inbound energy M&A remain mostly restricted as a result of the strategic nature of oil and gas resources and the preference for the prevailing partnerships and alliances.
• Domestic energy M&A is embryonic and further progress ultimately depends on the stance of closed family-owned businesses.
• Surplus oil and gas revenues permitting, MENA outbound M&A will only thrive once restrictions on acquisitions in some target countries are relaxed. Otherwise, such investment may well be relegated from an investment of choice to that of last resort. …[Details]
Economic Commentary Volume 6 No 9/10 – Septmber/October 2011 : MENA Energy Investment : Broken Momentum, Mixed Outlook
As usual during this period of the year, the commentary presents APICORP’s main findings of its rolling five-year review of energy investment in the Middle East and North Africa (MENA). The immediate context of the 2012-16 assessment is the still unfolding political turmoil in parts of the region and the resulting negative perceptions of the overall investment climate. From a global perspective, as oil demand is declining with slower world economy, the review assumes that OPEC will be able to offset any downward pressure on prices. Given the wide dislocation between the major oil price benchmarks, this is expressed by the value of OPEC Basket crudes bounded above $90/bbl (compared to $75/bbl assumed in the 2011-15 review). Investment climate permitting, this should encourage implementation of the remaining oil based projects put on hold under the aftermath of the global financial crisis. For natural gas, however, the option to wait may still have value for project sponsors as they continue facing higher market uncertainty. Gas prices, which have greatly deviated from oil parity, are expected to keep diverging between markets: $4-5/MBtu in fully liberalized markets with abundant domestic supplies to $12-15/MBtu in markets relying on imports under traditional long term contracts.
Against this setting our review points to a broken momentum, yet mixed outlook. On the one hand, driven by the oil downstream and the power sector the anticipated investment of $525bn is higher than the actual capital requirements found in the last review. On the other hand, such a level remains well below the potential investment identified on that occasion. Whatever the interpretation of these findings is, one thing is clear. Project sponsors will continue to face many of the same challenges, ie cost uncertainty, feedstock availability and fund accessibility, with the latter becoming more critical than any time before.
Given the structure of capital investment stemming from the review, internal financing would not pose major problems as long as the value of OPEC Basket crudes stays above $90/B. In contrast, external financing, which comes predominantly in the form of loans, is likely to be daunting in face of a combination of collapsing loan supply and persistently high cost. Faced with more pressing social demands, governments may not be able to make up for the funding shortfalls. Their best policy going forward is to attempt to regain private investment momentum….[Details]
Economic Commentary Volume 6 No 8 – August 2011 : READERS’ FORUM – Shifting Business Models and Changing Relationship Expectations of IOCs, NOCs and OFSCs
The relationship between International Oil Companies (IOCs) and National Oil Companies (NOCs) has been a good caption for conferences for some years. These gatherings have generally followed each other with only slight variations in their basic theme of how to ensure cooperative partnerships in the face of global business challenges. The relationship has also been a recurrent feature of studies by management consulting firms. In contrast to open debate, however, most such firms have focused their in-house research on the increasing threats IOCs face as NOCs upgrade their technology and human capital and extend their reach beyond national borders.
To better explore the changing landscape of the oil and gas industry in this regard we have reframed the debate by raising greater awareness of the role and importance of a third industry player: the oilfield service companies (OFSCs). More specifically, we have asked informed readers how they perceive the shift in the business models and relationships of the three players taken together. While all respondents have kept to our terms of reference, some have additionally taken stock of progress achieved by the International Energy Forum (IEF) during its last NOC-IOC Summit and offered forward-looking and viable proposals. They have also suggested, in support of their arguments, a comprehensive typology of the different players which, unfortunately, could not be included in this commentary, because of editorial limit.
As usual, our readers have managed to offer insightful and thought-provoking viewpoints on a complex and challenging topic. The overall impression from their remarks is that the NOCs and, to a lesser extent, the OFSCs are gaining increasing power and influence and that the traditional competitive position of IOCs has indeed come under threat. IOCs need to change their business models, which in turn may require changes in collaborative, cooperative relationships. The IEF’s NOC-IOC Forum of April 2011 called for the development of “principles and best practices” to further such changes. Well-informed readers contend that achieving the relevant objectives will require political commitment and due attention to international business procedures and practices….[Details]
Economic Commentary Volume 6 No 6/7 – June/July 2011: Financing MENA Energy Investment In A Time Of Turmoil
In the last Commentary from April we examined the extent unfolding events within MENA, since early this year, have affected the energy investment climate. We observed that by challenging the traditional political and socio-economic structures, unrest and protests in parts of the region have resulted in significantly heightened political risk perceptions among investors. Using a “perceptual mapping” we provided a simple quantitative and qualitative assessment of the impact of the turmoil and re-ranked the countries’ investment climate accordingly. However, we stopped short of addressing the consequences on energy investment and financing.In this commentary we discuss how recent trends and patterns in financing projects in the group of industries formed of oil, gas, refining, petrochemicals and power generation, or the ‘energy’ group for short, may hinder investment prospects. The commentary is in three parts. Part 1 outlines the way energy investments are financed in the context of MENA. Part 2 analyzes trends in external financing prior to the region’s turmoil. Part 3 examines the extent to which the turmoil has, so far, affected the supply and cost of funds to infer ominous trends.
Our analysis points to collapsing loan demand in countries impacted by the turmoil and lower supply and higher cost in those not yet seriously affected. Should these trends take hold, the investment recovery anticipated in our latest revue could be jeopardized. Indeed, a significant financing gap, which is likely to be part of a broader contraction in the region’s loan market, seems certain to occur. Such a gap could only be closed if the countercyclical credit policies adopted in the aftermath of the global financial crisis are extended. But, in a time of many new pressing demands on public funds, such support may not be readily forthcoming….[Details]
Economic Commentary Volume 6 No 5 – May 2011 : WEF’s Repowering Transport Project – Review And Implications
On 4 April the World Economic Forum (WEF) released a project white paper it produced in collaboration with Booz & Company under the title “Repowering Transport”. The white paper is intended to provide a comprehensive and well-articulated framework of key enablers that are critical for deploying the technologies needed to drive diversification and energy efficiency in the transport sector and reduce transport-related emissions. The paper thus identifies the policy measures, types of partnerships and financing mechanisms required to overcome the challenges at each stage of the technology lifecycle.
Repowering the transport system may be characterized as a megatrend likely to have a significant and enduring impact on oil markets in the coming decades. By reviewing WEF-Booz’s study we aim to further our understanding of this megatrend and raise awareness of the challenges facing petroleum-producing countries whose economic prospects are closely bound to the extent oil will continue fueling global transport. The commentary is in three parts. The first presents the project’s context and rationale. The second summarizes the study’s findings and recommendations. The third discusses the likely implications for petroleum producers, as highlighted below.
The energy security/environment nexus stands as the foremost economic challenge for petroleum producing countries, whose long term fiscal sustainability is expected to continue to be overwhelmingly dependent on future hydrocarbon export revenues. The impact of mitigation policies, particularly in the transport sector, which is the mainstay of oil demand, would have far-reaching implications for many of them. The WEF-Booz study convincingly demonstrates that, with better articulated policies, well-adapted cross-partnerships and collaborative financing, this sector can undergo a radical transformation. In this regard, we consider it worth emphasizing that the study’s “rapid deployment” scenario would lead to a significant shift in the energy source mix. In such a case, even though oil will continue to be the dominant fuel for transport over the next 20 years, consumption could well be reduced below today’s level.
The impact would be even greater if we look beyond 2030, which the study did not attempt to measure, as more reductions are likely to occur when grid-enabled vehicles would have moved beyond niche markets. Not to mention the likelihood that hydrogen-powered vehicles (fuel cell type) might emerge as potent successors to these vehicles.
To conclude, we may observe that a structural shift away from oil has already taken place in industry and power generation. As a result, transport remains the sole potential driver of petroleum demand growth. To be sure, there is still a wide spread of opinion about the prospect of penetration of alternative fuels and the resulting impact on oil demand. This, however, should not distract petroleum producers from preparing for the ineluctable. The WEF-Booz study can serve as a timely reminder of the need to factor more forceful trends into their strategic planning. Realigning their long term vision is a priority the implication of which is to give more impetus to their current economic diversification efforts….[Details]
Economic Commentary Volume 6 No 4 – April 2011 : How the Changing Political Landscape in the Arab World Is Affecting Our Perception of the Energy Investment Climate?
APICORP’s Economic Commentary for April is being released under the title “How the Changing Political Landscape in the Arab World Is Affecting Our Perception of the Energy Investment Climate?”. In a way, the turmoil witnessed in the Arab world since early 2011 is not a real “black swan” event: even though unpredictable it was not completely unexpected. Indeed, political economists with enough insight and courage have repeatedly warned of ticking social time bombs across the region, but to little avail. What was surprising was its speed and widespread effects. The political landscape has shifted in a sudden and radical way, already resulting in apparent regime changes in Tunisia and Egypt. More dramatically, in Libya the turmoil has degenerated into a civil war with international involvement. How many more countries are on the skids? At the time of writing, unrest continues to pose major challenges to the ruling factions in Bahrain, Yemen and Syria. As the repercussions are likely to persist, no other country can pretend to be entirely immune to the turbulence and none of all can ignore the call for deep economic and political reforms.
Against this rapidly unfolding backdrop, this commentary examines the extent the turmoil witnessed so far has affected our perception of the energy investment climate in the region. We base our analysis and conclusions on a perceptual mapping of the pre- and current (at the time of writing) events. The commentary is in three parts. Part One introduces the methodology used for such an analysis. Part Two examines how the turmoil has affected the ranking of the countries using several attributes, the key of which is country risk. Part Three infers from a reading of the resulting perceptual maps key changes and trends in country positioning and the uncertainty surrounding these findings.
Our conclusion is that in challenging the political and social status quos, the ongoing turmoil has blurred the energy investment climate in the Arab petroleum-producing countries. Our perceptual mapping provides a clearer picture of the profound changes taking place. However, the mapping is not intended to be static but should rather be expected to evolve with unfolding events. For the time being, we expect these changes to range from Saudi Arabia likely settling near the “ideal point” benchmark, to a significant deterioration of the positions of Egypt, Tunisia, Yemen, Bahrain and to a greater extent Libya. As a consequence, Libya and Egypt break out of the Algerian cluster, while Tunisia and Bahrain break out of the cluster previously formed around Oman. Similarly, Yemen breaks out of the cluster formed of Mauritania and Sudan. The remaining countries are in two contrasting positions. On the one hand, while maintaining their positions within the second most appealing cluster, Qatar, Kuwait and the UAE seem to be moving closer to each other with the UAE regaining its lead. On the other hand, the singly Iraq is still on a bumpy streak, far from the ideal point notwithstanding its huge energy investment potential….[Details]
Economic Commentary Volume 6 No 3 – March 2011: Fiscal Break-even Prices : What More Could They Tell Us About OPEC Policy Behavior?
APICORP’s Economic Commentary for March is published under the title “Fiscal Break-even Prices : What More Could They Tell Us About OPEC Policy Behavior?”
In this commentary we offer a two-step analytical framework for estimating current OPEC fiscal break-even prices, then testing whether, if held constant in real terms, these prices could sustain future stable levels of government spending. In the first part of the analysis we draft a ‘fiscal cost curve’ to highlight OPEC members’ heterogeneous fiscal positions and provide key insight into the challenges and opportunities facing them. What is critical to note is that low oil prices will return to haunt the high fiscal break-even price countries among them.
In the second part we focus on a long term fiscal sustainability and inter-temporal analysis, assuming OPEC countries would be investing hydrocarbon revenues in excess of budget projections into financial assets. In doing so we implicitly admit that all expenditures are current expenditures that yield no long-term return. The consequence is that spending is kept low to enhance future financial returns. If we assume instead that government expenditures contain a non-negligible investment component then spending upfront may be a better course of action, provided returns from domestic social and physical investment are higher than those from financial investment abroad. This is precisely what some OPEC members have committed to: to use hydrocarbon fiscal revenues today to diversify their economies and progressively shift their reliance away from hydrocarbon revenues. Whatever concrete socio-economic plans OPEC members may have, we should expect the resulting spending pattern to affect their fiscal break-even prices and bear on their oil price preferences and production policy behavior….[Details]
Economic Commentary Volume 6 No 1/2 – January/February 2011: APICORP’s Annual Review of the Arab Economic and Energy Investment Outlook:
Still-strong Fundamentals Despite Heightened Uncertainty Our Economic Commentaryfor Jan-Feb is being released under the title “APICORP’s Annual Review of the Arab Economic and Energy Investment Outlook : Still-strong Fundamentals Despite Heightened Uncertainty”.Notwithstanding heightened uncertainty stemming from the ongoing turmoil in parts of the Arab world, we expect global economic and financial fundamentals to continue supporting the resumption of energy investment growth in the region. The impetus for recovery will be strongest in the GCC area despite project sponsors facing many of the same challenges, i.e. cost uncertainties, feedstock availability and funding accessibility. However, access to funding will be most testing in countries affected by the turmoil. While the predicament they face could turn for the better, the likelihood is that of a deteriorating investment climate that could deter both domestic and foreign capital for some time. Meanwhile, faced with more pressing social demands, governments will hardly be capable of funding the resulting shortfalls….[Details]