Archive for February, 2009

Total continues emerging markets investment & expansion

total-oil-logo1Total SA (NYSE – TOT), France’s largest company, announced the highest annual net profit in French corporate history last week, sounding a rare positive note in todays grim financial meltdown. In 2008 the firm made a profit of  €13.9 Bn ($18.0 Bn) thanks to record oil prices in the first half of the year, which helped offset the second half collapse in oil prices. Profits began to fall in the fourth quarter of 2008 as the credit crunch hit demand, sending crude prices tumbling. Total is now preparing for the future by investing in increased capacity in new fields, especially in Africa & the Middle East, whilst putting the brakes on production in Canada & the North Sea.

“Unprecedented volatility marked the 2008 market environment,” said Total chief executive Christophe de Margerie, noting that oil had peaked at about $150 a barrel last year before plunging to as low as $35

With regards to its North Sea operations, Total has reviewed its capital expenditure for 2009 due to the fall in oil prices. Senior vice president for Northern Europe, Michel Contie, remarked that an oil price of $40 per barrel was required to realistically develop new fields in the North Sea, as many new offshore discoveries are “not economic today.”  The Joslyn & Surmont heavy-oil ventures in the Canadian Athabasca project are among the “building blocks” for boosting output from 2016, the oil sands projects are expected to provide Total with almost 300,000 barrels a day of production capacity by 2020, as reported by Bloomberg : Total is “reevaluating costs, technologies, structure and timing of Canadian projects”

In a recent aggressive move, Total has offered to buy Canadian oil-sands explorer UTS Energy Corp for $ 617 million Canadian ($505 million), which rejected the bid as “inadequate.”  UTS has advised shareholders that the bid should be rejected, as the book value of the company is pegged at twice the unsolicited offer. Total reiterated today that oil sands need crude prices at $80 a barrel for investment, which to my mind displays that they are looking to bank up potential reserves for a time when oil demand will flip to the upside. Until then, Total looks as though it is banking on emerging markets to provide the spur to growth for the forseeable future.

In Nigeria, Total is the lead company in the Apko offshore oil field, where it is partnered with MSV’s favourite oil firm, Petrobras (NYSE – PBR) & state-owned Nigeria National Petroleum Corporation, the field is estimated to have reserves of up to 1.6 billion barrels of sweet crude in reserve. In order to help fund the project, the three existing shareholders agreed to auction off a 45% stake in the field to Indias state controlled ONGC for an estimated $2 Bn.

In Yemen, Total will soon start shipping liquefied natural gas from the Gulf of Aden, bringing into operation a $4 billion project begun less than four years ago. The shipments will make Yemen the newest member of the world’s small club of gas exporters & should earn the government as much as $50 billion in tax revenue over the next 25 years.

In Angola, as discussed in a previous post, Total is set to continue with a $9 billion investment to raise production, despite the huge drop in crude prices since July last year. In a joint venture with Chevron (NYSE – CVX) & others, the Tombua-Landana oil field is expected to come online, contributing a further 120,000 bpd to Totals existing operations. Meanwhile, Total’s third production hub in Angola’s offshore Bloc 17, is expected to begin pumping oil from depths of up to 1,200 metres,beginning in 2011, according to the company’s website. Presently, Total is the third biggest oil producer in Angola after Exxon & Chevron, pumping over 500,000 barrels per day.

During his presentation lat week, CEO  de Margerie stated that Total is also interested in entering the upstream sector in Brazil, particlualrly in offshore projects such as the Santos basin and is also eying new acreage in Venezuela.

“We have had discussions with Petrobras and told them officially that we would be interested either in entering existing discoveries or taking part in the next bids on new acreage,” de Margerie told reporters at a briefing in London.

He stressed that Petrobras needed financing to develop the reserves in the offshore basin, but that Total was not interested in merely becoming a financial partner in Brazil. De Margerie also said Total would be interested in bidding for new exploration acreage in the extra heavy crude oil Orinoco Belt in Venezuela.

“There is room for additional development  & we will be one of the companies to get access to the bid data, and we may bid,” he said. “We need to operate in Venezuela in good conditions, but it is an important target in terms of acreage” .

De Margerie said Total was right to stay in Venezuela despite the nationalization by President Hugo Chavez of large swathes of the country’s oil industry in 2007. Chavez nationalized oil fields when crude prices were on what looked like an unstoppable bull run, and as a result ExxonMobil and ConocoPhillips left Venezuela and are still runiing legal battles over disputed projects. It was reported earlier this year that Venezuela is now looking for new bids to develop fields from both global majors and state-run oil companies. Total which saw its stake in the Sincor project reduced from 47% to 30.3% in Chavez’s ambitious move remains committed to the project.

“We have to make sure our existing Sincor project delivers–this is still a real challenge,” he said.

Looking at Total from an independent viewpoint, it is obvious the management are playing a canny game. We have seen them exit or scale down high cost projects, such as Saudi Arabia, UK & Canada, whilst at the same time, investing heavily in emerging market prospects, as is clear from this article. What also impresses me about this company is its track record of working well with IOCs such as Chevron as well as local state entities & as long as it continues with this “nimble” approach along with a prudent focus on legacy operations, the future looks very bright indeed.

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the Bear & the Dragon shake hands on $25Bn energy deal

siberianpipeline1Whilst having previously discussed the Byzantine workings of Russia’s energy players in previous articles & also the direction that China has taken recently in securing strategic reserves, it was only a matter of time befiore the Dragon & the Bear came to an accord together. During a visit to China this week, Russian Deputy Prime Minister Igor Sechin has succeeded in bringing together a massive deal for Russian oil producers in Siberia.

On Tuesday (17/02/09), Russia and China signed  an intergovernmental agreement on the construction of a branch of the East Siberia-Pacific Ocean (ESPO) oil pipeline toward China. Under this agreement, Russia will supply 15 million metric tons (300,000 barrels per day) of crude oil annually for 20 years to China, in return China via state owned China National Petroleum Company (CNPC) will extend a total of $25 billion in loans to Russian state-controlled crude producer Rosneft and pipeline operator Transneft at 6% per annum in exchange for the long-term oil supply. Transneft plans to start building a Chinese leg of the East Siberia-Pacific Ocean later this year and to commission it in 2010, Russia’s monopoly pipeline operator said in a statement on Tuesday.

“The construction of the leg should be synchronized with the construction of the first line of the ESPO pipeline,” the statement quoted the company’s vice president, Mikhail Barkov, as saying. Barkov also said that China’s $10 billion loan to Transeft would primarily be invested in the construction of the Chinese leg. “In addition, there are projects that will contribute to the functioning of the entire eastern pipeline and this leg in particular,” the Transneft official said.

The pipeline’s first leg was launched in October 2008 in the reverse direction, running westwards. The construction of the pipeline, designed to bring Russian oil to the lucrative Asia-Pacific market, is due to be completed later this year, which will enable ESPO to pump its first oil eastwards. The terms of the agreement stipulate that China will extend a $15 billion loan to Russian state-run oil giant Rosneft against the guarantee of oil supplies, while Transneft’s $10 billion would be granted with the infrastructure as collateral. Currently Rosneft, which is expected to be the main oil exporter via the pipeline, supplys around 10 million tonnes of oil a year to China by railway under the terms of a deal signed in 2004.

The ESPO was originally conceived in the mid-90’s by now disgraced Yukos Chairman, Mikhail Khodorkovsky, as a private pipeline. Following the “collapse” of Yukos, state owned Transneft picked up the baton & began construction of the first leg in 2006, which completed last year. The pipeline is supplied via spurs from the Tomsk Oblast & Khanty-Mansi Autonomous Okrug oil fields in Western Siberia, Transneft’s existing Omsk-Irkutsk pipeline has also been connected, allowing Rosneft to pump up to 22 million tons of oil annually into the pipeline, whilst smaller competitor Surgutneftegas will contribute around 8 million tons.

Anglo-Russian or Russo-Anglo (depending on which side of the political fence you sit on) TNK-BP is also involved in this project, having began supplying oil to the pipeline in October 2008. TNK-BP in a joint venture with Rosneft has extensive operations in the Verkhnechonskoye field, which has proven reserves of 409 million barrels of oil equivalent.

“The first shipment of VC crude into the ESPO marks an important event for TNK-BP and for the industry.” commented Chief Operating Officer Tim Summers at the launch. ” We are establishing a major new production center in East Siberia. Application of world—class technology and the timely launch of the ESPO pipeline allowed us to begin commercial development of this project, which has been deemed uneconomic for the past 30 years. The beginning of regular commercial shipments from VC to the ESPO marks the emergence of East Siberia as a new and important oil and gas province in Russia”.

So win-win all round? Certainly for the Chinese in the long term, as we have argued in previous articles, China is on a spending spree on commodities, particularly in the energy sector where it seems almost desperate to secure strategic reserves. Russia also gains, in that with the recent devaluation of the rouble, access to funding in capital markets has been harder to come by, especially for Russia’s energy firms. Do we in the West gain from this ? That remains to be seen, from a persoanl viewpoint, this may well help to stabilise geo-political issues in the region whilst also contributing to oil price stability in the long run.

Militants in Niger Delta … bad for Nigeria, could be good for Angola & Ghana

oilrig_1515_18918777_0_0_7306_300Like many developing nations with vast natural resources, Nigeria has seen a massive influx in Foreign Direct Investment (FDI), particularly in the energy sector. However, civil unrest, particularly in the Niger Delta, may be a catalyst for potential investors to look to other West African Nations as investment opportunities. Added to this are the ever present problems of ineptitude & “graft” within both state & federal government, which has brought some unwelcome news for Africa’s largest economy.

Last week, Russian giant Gazprom (OTC : OGZPY) announced that it was in discussions to inject up to $2.5 Bn into a joint venture enterprise with state owned Nigerian National Petroleum Corp (NNPC), with a view to developing domestic gas production, processing, and transportation.” Nigeria has an estimated 187 trillion cubic feet of natural gas reserves. Industry experts see the deal as a positive move by the federal government to utilize the country’s huge gas resources that have hitherto been wasted, it is estimated that Nigeria flares off as much as 14% (24 billion cubic feet) of global gas wasteage.

The Russian gas company is attempting to become involved with the Trans-Saharan gas pipeline (TSGP). The pipeline, which would connect the Niger delta in Nigeria and Niger, to existing gas transmission hubs to the European Union at El Kala or Beni Saf in Algeria’s Mediterranean coast, is expected to cost $10 billion, of which Gazprom will initially invest $2.5 billion. The project is due to commence in 2009 and isplanned to complete in 2015, when Nigeria hopes it will become one of the biggest sources of natural gas for continental Europe.

Livi Ajounuma, General Manager at NNPC, confirmed that “we have signed a Memorandum of Understanding [MOU]”. He commented further on the deal saying, “It’s a good thing. It means that a giant company like Gazprom can come to Nigeria.”

All is not as rosy as it may seem however, as the Russian Ambassador to Nigeria, Alexander Polyakov, staged a withering blow at Nigerian confidence this week. Polyakov has called on the Nigerian authorities to create a stable environment for foreign nationals who come to work in the country, to continue the flow of foreign investment and development of the economy. Over 200 foreigners and countless Nigerians have been kidnapped in nearly three years of rising violence across southern Nigeria. Some militants claim to be fighting for greater control over the Niger Delta’s oil wealth, however, other gangs of armed, jobless youths make money from extortion and kidnapping.

Polyakov urged prompt release of all hostages, including some Russians,currently being held by militants in Nigeria’s southeast Niger Delta region.”Everybody in the region and the government should play their role to ensure that all hostages are freed,” he said.

There are strong indications that investment inflow to the upstream sub-sector of the Nigerian oil industry has started dwindling as foreign investors now choose Angola and Ghana as preferred destinations over Nigeria. Which in turn, threatens Nigeria’s capacity to grow its crude oil reserves as planned, it is targeting 40 billion barrels proven reserves by 2010. Analysts have identified insecurity in the Niger Delta and weak fiscal policy as key reasons why investors are beginning to leave for more stable business opportunities in Africa. Recently due to militant activity Royal Dutch Shell (NYSE : RDS:A) has seen its production dropping from one million bpd to about 380,000 bpd at its Bonny terminal in the south of the Delta. Exxon has also experienced increased insurgent activity in its Nigerian operations.Last week, local union officials threatened to call a strike which would shut down crude exports from the River state, until such time as the issues are addressed by State & Federal officials. Nigeria is already suffering from production slow down due to militancy, currently the Niger Delta is only exporting 1.8 million bpd, compared with a targetted 2.2 million bpd.

Near neighbour Angola has now  begun to attract more investments from oil companies as International Oil Companies are making long term expenditure commitments in the African oil ventures. Total (NYSE : TOT) said last week that it would continue with a $9 billion investment to raise production in Angola, despite the huge drop in crude prices since July last year. Total plans to stick to its major investments in Angola, even as it expects crude prices to recover, the company’s top official in Angola said.

“We are living through a crisis that has pushed oil prices to very low levels. Therefore, we are being extremely strict with all our investments,” Olivier Langavant, Director General in Angola, was quoted as saying in an interview with Reuters. “But the big projects (in Angola) like the Pazflor, which is a $9 billion investment, will be maintained.”

Pazflor, Total’s third production hub in Angola’s offshore Bloc 17, is expected to begin pumping oil in 2011 from water depths of up to 1,200 metres, according to the company’s website. Total is the third biggest oil producer in Angola after Exxon Mobil Corp. and Chevron, pumping, on average of over 500,000 barrels per day.

Chevron, Total and Eni are currently developing a $4 to $5 billion liquefied natural gas plant in Soyo, Angola. Whilst in contrast, Nigeria’s flagship Olokola, Brass LNG and NLNG Train 7 projects are yet to take off. Because of the high spend of the oil majors in Angola, oil service companies have begun to win big contracts. BP has awarded Halliburton more than $600 million in contracts for up to four projects in Angola.

Meanwhile, in Ghana, offshore oil finds in 2007 have led analysts to look at the small nation as becoming an “African Tiger”. Three vast blocks off of the West Cape Three Points are believed to hold vast reserves that may well outshine those enjoyed by Nigeria. The Jubilee field, one of West Africa’s biggest oil strikes in years, likely containins recoverable reserves of at least 1.2 billion barrels of oil equivalent, with first output scheduled for the second half of 2010. IOCs are lining up to take advantage, as smaller independent firms such as Kosmos Energy struggle to find capital to devlop proven resources in the area. Kosmos is reputed to have a $3Bn stake in the area up for grabs, according to industry website Rigzone. The current breakdown of partnership/ownership across the three blocs which can be viewed here at AfDevInfo, also includes US independent Anadarko (NYSE : APC)  & the UK’s Tullow (LON : TLW), along with various Ghanaian government run corporations.
This at a time when foreign investors in the Nigerian capital market withdrew some $4 billion from the Nigeria Stock Exchange kick starting a decline of over 50% in three months, according to its Director General, Professor Ndidi Okereke-Onyiuke. Coupled with an ever rising inflation rate, the highest for more than 5 years, is a major setback for Nigeria’s hopes of becoming a local economic giant.

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Chinese raw material companies continue on acquisition trail

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Bolivia’s Lithium quandary

battery-lithium-cr20321In one of the more remote regions on the planet, high in the Andes, lies the Salar de Uyuni, the famed salt flats stretch across more than 4,000 square miles in Potosi, Bolivia, well known for the fabulous wealth in silver extracted there by the Spanish in colonial times. Now a new age of mining could bring a 21st century El Dorado for the impoverished South American nation, as geologists believe that more than half the world’s reserves of lithium may  lie under the salt pans.

Government officials claim that Bolivia possesses the world’s biggest lithium reserves, and they also believe the country is poised to profit from car manufacturers which are driving to develop electric cars that will run on lithium ion batteries.

“Bolivia will become a big producer in six years of batteries,” Luis Alberto Echazu, the minister of mining and metallurgy, said in an interview. He ticked off three companies that he said have expressed interest in investing in the government’s lithium venture: Sumitomo, Mitsubishi and Bollore, a French company.

Lithium is the lightest metal and the least-dense solid. It’s typically extracted from beneath salt flats, currently about 70% of the world’s supplies come from Chile and Argentina. The U.S. Geological Survey says 5.4 million tons of lithium could potentially be extracted in Bolivia, compared with 3 million in Chile, 1.1 million in China. Independent geologists estimate that Bolivia may have further lithium deposits at Uyuni and its other salt deserts, though high altitudes and the quality of the reserves could make access & extraction difficult.

While estimates vary widely, some geologists say electric-car manufacturers could draw on Bolivia’s lithium deposits for decades. More importantly, the US is estimated to have less than 400,000 metric tonnes available for expoloitation within its borders. While lithium batteries don’t currently power hybrid vehicles, analysts think that the fuel-efficient electric cars of the future likely will use them. With an estimated 20,000 tons of lithium carbonate expected yearly from the salt flats, a rising demand for lithium for electric car batteries, and with the price of a ton of lithium up from $350 in 2003 to $3,000 this year, a potential bonanza beckons for socialist President Evo Morales. 

“There are salt lakes in Chile and Argentina, and a promising lithium deposit in Tibet, but the prize is clearly in Bolivia,” Oji Baba, an executive in Mitsubishi’s Base Metals Unit, said in La Paz. “If we want to be a force in the next wave of automobiles and the batteries that power them, then we must be here.”

Mitsubishi is not alone in planning to produce cars using lithium-ion batteries. Ailing car manufacturers in the United States are pinning their hopes on lithium. General Motors (NYSE – GM)  plans to roll out its Volt in 2010,  pairing a lithium-ion battery along with a petrol engine. Nissan, Ford and BMW, among other carmakers, have similar projects.

Demand for lithium, has climbed as makers of batteries for BlackBerrys, iPhones, laptops & other electronic devices use the mineral. But the automotive industry holds the biggest untapped potential for lithium, analysts say. Since it weighs less than nickel, which is also used in batteries, it would allow electric cars to store more energy and be driven longer distances.

However, President Evo Morales & Bolivias powerful popular movement are suspicious of foreign companies & have a track record of arbritary dealings with foreign concerns, as Brazil found out in 2006, when Morales nationalised all natural gas concerns in Bolivia, including operations by UK producer BP (NYSE – BP). The end result being that foreign companies have halted all investment in Bolivian opportunities.

“There are fairly significant barriers to developing the resource in Bolivia,” said Timothy McKenna, vice president of investor relations at Rockwood Holdings, one of the three major lithium producers in Latin America.

At the La Paz headquarters of Comibol, the state agency that oversees mining projects, Mr. Morales’s vision of combining socialism with advocacy for Bolivia’s Indians is prominently on display. Copies of Cambio, a new state-controlled daily newspaper, are available in the lobby, while posters of Che Guevara, the leftist icon killed in Bolivia in 1967, appear at the entrance to Comibol’s offices.

“The previous imperialist model of exploitation of our natural resources will never be repeated in Bolivia,” said Saúl Villegas, head of a division in Comibol that oversees lithium extraction. “Maybe there could be the possibility of foreigners accepted as minority partners, or better yet, as our clients.”

A potential model may already be in place, India’s Jindal Steel & Power signed a $2.1 billion deal in 2008 for the exploitation of iron reserves in south-eastern Bolivia, near the border with Brazil. This will allow Jindal, India’s leading steel producer, to develop 50% of El Mutun, widely believed to be the biggest untapped iron ore deposit in the world, along with steel making facilities. With an estimated 40 billion tons of iron ore reserve, El Mutun is expected to generate $200 million a year for Bolivia, plus up to 21,000 jobs when the commercial production of steel begins in 2010. It is heavily rumoured that Jindal won the concession due to its environmental track record. In 2007, Jindal was awarded India’s National Energy Conservation Award in the Integrated Steel Plants Sector for its success in protecting the environment by adopting eco-friendly processes and activities.

The opportunity to enrich the nation is there & a careful balance between foreign technological & financial assistance in developing the deposits, whilst providing an economical & ecological bias for Bolivia is obviously required. The real question is can Morales walk the tight rope between populist politics & reality ? My opinion, he will get there, as has recently been seen, collapsing oil prices have had a major negative effect on Venezuela  & Hugo Chavez influence in the region & beyond. So one route for Foreign Direct Investment looks to be closed. Morales is a sharp operator & I can see him letting foreign firms into partnership with Comibol, but definitely on Bolivian terms.