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Oil and gas producers could wipe billions of dollars off the value of U.S. natural gas assets in the months ahead, analysts said on Wednesday, after Chevron Corp became the fourth oil major to slash its estimates for sector values. A long, steady increase in U.S. gas production – much of it a byproduct of the shale oil boom – has pushed prices for the fuel toward a 25-year low. Nearly half of U.S. gas production is a by-product of oil drilling, and therefore does not change in response to weak prices, analysts said.
(Bloomberg Opinion) -- Along with never invading Russia or getting into a Twitter argument, we can add another golden rule — this one specifically for U.S. oil majors: Never buy a shale-gas business.Chevron Corp.’s $10-11 billion impairment, announced late Tuesday, relates mostly to the Appalachian gas assets it picked up in 2011’s $4.9 billion acquisition of Atlas Energy Inc. Back then, the Permian basin was not a regular topic on the business channels, nor was it a central pillar of Chevron’s spending plans. But now it is, and simultaneously plowing billions into a Permian oil business that spits out gas essentially for free while running a dry-gas business in the Marcellus shale is like flooring it with the parking brake on.Chevron joins the ranks of Exxon Mobil Corp. — which paid $35 billion for XTO Energy Inc. less than a year before the Atlas deal and has been haunted by it ever since — and ConocoPhillips, which bought Rockies gas producer Burlington Resources Inc. way back in 2006 for $36 billion and then wrote most of that off in 2008.But there is far more to this than just mistimed forays into the graveyard of optimism that is the U.S. natural gas market — and not just for Chevron.Big Oil just had a forgettable earnings season. Chevron announced cost overruns on the giant Tengiz expansion project in Kazakhstan. Exxon continued borrowing to cover its dividend. Across the pond, BP Plc and Royal Dutch Shell Plc flubbed resetting expectations on dividends and buybacks. What ties all of these together are weak returns on capital. Chevron’s problems in Kazakhstan are echoed in its impairment of another asset, the Big Foot field in the Gulf of Mexico. This is another mega-project that went awry and, in an era when producers can no longer count on an oil upswing to save the economics, is found wanting. Chevron is also ditching the Kitimat LNG project in Canada that it bought into in 2013.All this is a particularly sore spot for Chevron given its problems with Australian liquefied natural gas mega-projects earlier this decade. CEO Mike Wirth’s decision to clear the decks seems intended in part to signal that, unlike the experience of his predecessor with Australian LNG development, he will drop big assets that don’t make the cut financially.Discovering, financing and developing mega-projects is why the supermajors were created at the end of the 1990s. Today, when investors are interested at all, they’re leery of capital outlays, aware the outlook for oil and gas markets is challenged in fundamental ways. So tying up money in big, risky, multi-year ventures is a good way to crush your stock price.Wirth isn’t abandoning conventional development; Big Foot aside, the Gulf Of Mexico has several new projects in the pipeline, for example. But to offset the drag on returns from the extra spending at Tengiz, he must streamline the rest of the portfolio. This is the story of the sector writ large. “Too much capital is chasing too few opportunities,” as Doug Terreson of Evercore ISI puts it. Conoco, which remade itself radically after the Burlington debacle, set the tone with its recent analyst day, emphasizing the need to get the industry’s long-standing spending habits under control and focus on returns to win back investors who are free to put their money into other sectors. Chevron’s write-offs and shareholder payouts (38% of cash from operations over the past 12 months) are of a piece with this. While the company has laid out guidance for production to grow by 3% to 4% a year, that is very much subject to the returns on offer. Capital intensity — as in, shrinking it — is what counts.Chevron’s move throws the spotlight especially on big rival Exxon. While Exxon has taken some impairment against its U.S. gas assets, that represented a small fraction of the XTO purchase. Exxon also sticks out right now for its giant capex budget (bigger than Chevron’s by more than half), leaving no room for buybacks or even to fully cover its dividend.In the first decade of the supermajors, when peak oil supply was a thing, big projects with big budgets to match were something to boast about. As the second decade draws to an end, only the leanest operators will survive. Chevron won’t be the last oil major to rip off the band-aid, just as we haven’t yet seen the full extent of the inevitable restructurings and consolidation among the smaller E&P companies. On this front, there’s another golden rule: Better to get it done sooner rather than later. To contact the author of this story: Liam Denning at firstname.lastname@example.orgTo contact the editor responsible for this story: Mark Gongloff at email@example.comThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
(Bloomberg) -- Saudi Aramco shares surged after the oil producer’s initial public offering, valuing the company at a record $1.88 trillion in the culmination of a four-year effort by the kingdom to list its crown jewel.The stock jumped the daily 10% limit to 35.20 riyals when trading began at 10:30 a.m. in Riyadh as Aramco board members, Saudi officials and invited guests cheered at a ceremony at the Fairmont Hotel in the kingdom’s capital. The shares stayed there through the market close, putting Crown Prince Mohammed bin Salman’s goal of a $2 trillion valuation within reach.Aramco raised $25.6 billion in the biggest-ever IPO, selling shares at 32 riyals each and overtaking Microsoft Corp. and Apple Inc. as the most valuable listed company.The start of trading in Riyadh marks the end of a saga that’s been intertwined with the crown prince’s rise to global prominence and his Vision 2030 plan to reform the Saudi economy. First announced in an interview with the Economist in January 2016, the IPO came after a tumultuous period that included the murder of government critic Jamal Khashoggi and the imprisonment of prominent Saudis in Riyadh’s Ritz Carlton. The sale ultimately fell short of the $100 billion international offering with a valuation of $2 trillion that the prince once proposed.Saudi officials pulled out all the stops to ensure that the stock traded higher after an offering that international investors largely rejected, citing the valuation and concerns including governance issues and possible security threats. The stock price also should be underpinned by demand from index-tracking funds, since Aramco will be added to emerging-market benchmarks.“Aramco should easily get to the $2 trillion valuation as soon as tomorrow; there is plenty of appetite for it,” said Marie Salem, the head of institutions at Daman Securities in Dubai. “And more money should flow soon with the international index inclusions. The start couldn’t be better.”Aramco, the world’s largest oil producer, is so big that it easily dwarfs the rest of the companies in the Saudi market, which have a combined value of about $500 billion. Adding in Aramco at its current market value, the kingdom’s bourse becomes the world’s seventh-biggest stock market, overtaking Canada, Germany and India. Saudi Arabia, though, only sold 1.5% of the company’s capital, meaning that barely any of its shares will trade.Final orders surpassed $119 billion, with authorities allowing lenders to boost loans beyond usual to support the sale.Not everyone is convinced the share price surge will last. Many international investors are avoiding the stock because of environmental, social and governance concerns, while others say the company is overvalued given its dividend yield versus peers.“Fundamentally, especially when taking ESG considerations into account, the valuation is stretched,” said Siddharth Sanghvi, head of emerging markets equity research at Amundi.Aramco has promised a bumper dividend payment of a minimum $75 billion a year until at least 2024. That implies a yield of about 3.9%, much less generous than peers BP Plc and Royal Dutch Shell Plc, yet also high enough to threaten to stretch the company’s finances if crude prices fall.Aramco’s IPO relied on some of the kingdom’s richest families, who had members detained in the Ritz hotel during a so-called crackdown on corruption in 2017, and also on cash from neighboring allies such as the sovereign wealth funds of Kuwait and Abu Dhabi. Gulf Cooperation Council investors are confident the stock price has plenty of room to increase, boosted by incentives that go from bonus shares to the fast inclusion in emerging-market benchmarks.Wealthy Saudis were pressed to buy shares after the start of trading to make the IPO a success, the Financial Times reported Tuesday.A surge in early trading validates “our thesis that Aramco’s pricing fell short of $2 trillion to leave upside on the table for Saudi and GCC investors, allowing them to benefit from the listing of Saudi’s crown jewel,” said Zachary Cefaratti, chief executive officer at Dalma Capital Management Ltd., which bought shares in the IPO through three funds.Goldman Sachs Group Inc., acting as share stabilizing manager, has the right to exercise an option to sell another 450 million shares. It could be executed in whole or in part up to 30 calendar days after trading begins. The previous largest IPO, Alibaba Group Holding Ltd., rose 38% in its trading debut in 2014.The Aramco IPO proceeds will be transferred to the Public Investment Fund, which has made a number of bold investments, including into SoftBank Group Corp.’s Vision Fund and a $3.5 billion stake in Uber Technologies Inc. Saudi authorities flagged this week that “a lot” of the money will be spent in the domestic economy.Read: Saudi Wealth Fund Leans Toward Spending Aramco Windfall LocallyThe proceeds of the Aramco deal alone are equal to more than a decade of IPOs on Tadawul, the Saudi stock exchange. The company will have a weight of 8% to 9% in the Tadawul All Share Index, said Khalid Al Hussan, chief executive officer of the bourse.Even though Aramco’s free float is among the lowest globally, the deal opens up one of the world’s most secretive companies, one that bankrolled Saudi Arabia and its rulers for decades, but until this year had never published financial statements or borrowed in international debt markets.(Updates with market closing in second paragraph.)\--With assistance from Alaa Shahine, Javier Blas, Ben Scent, Swetha Gopinath, Jacqueline Gu, Yasmina Daou, Srinivasan Sivabalan and Kat Van Hoof.To contact the reporters on this story: Filipe Pacheco in Dubai at firstname.lastname@example.org;Matthew Martin in Dubai at email@example.com;Will Kennedy in London at firstname.lastname@example.orgTo contact the editors responsible for this story: Celeste Perri at email@example.com, Phil Serafino, Blaise RobinsonFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
Investec Asset Management, which manages around 111 billion pounds ($142 billion), including over $1 billion in gold assets, wants companies to disclose emissions data across their supply chain, a letter to one of the companies seen by Reuters showed. Investec portfolio manager George Cheveley confirmed the request, saying Investec had asked for data on gold because it had a "significant interest" in the companies. With U.N. talks continuing in Madrid this week to bolster the 2015 Paris Agreement to curb global warming, Cheveley said he wanted a dialogue to increase gold companies' responsibility over their products beyond the mine gate.
Israel's Energy Ministry has advised three energy companies not to start work on the Aphrodite gas field off Cyprus until the two countries reach agreement over ownership of the reserves. Cyprus and Israel have been in dispute for several years over the gas reserves that straddle their maritime border, with no guarantee of any immediate resolution. Cyprus last month signed a 25-year concession with Noble Energy, Shell and Delek Drilling for exploitation of the Aphrodite field, which was first discovered in 2011.
Benchmark northwest European diesel refining margins eased on Monday but were supported by Royal Dutch Shell's shutdown of half of Europe's largest refinery. * Shell said it had shut a unit at its Pernis oil refinery in the Netherlands after a crude spill a day earlier.
Royal Dutch Shell said on Monday it had shut a unit at its Pernis oil refinery in the Netherlands after a crude spill a day earlier. Shell did not specify the unit concerned, but industry monitor Genscape said the 200,000 barrel per day (bpd) crude unit (CD6) was shut on Monday morning. Genscape said one of the furnace stacks of the cogeneration unit was also shut on Monday morning.
Big oil companies operating in Mexico have launched a drive to convince leftist President Andres Manuel Lopez Obrador to resume auctions of oil and gas contracts he has branded a failure in reviving the industry. Chevron Corp, Exxon Mobil Corp and Royal Dutch Shell Plc, among other firms in Mexico's Association of Hydrocarbon Companies (Amexhi), say they have met output targets and investment pledges worth hundreds of millions of dollars in the initial phases of their contracts. "We've been complying (with contractual obligations), and by any metric you look at, we've been successful," Amexhi President Alberto de la Fuente told reporters this week.
(Bloomberg) -- Connecticut agreed to buy power from a huge wind farm planned in the Atlantic Ocean by a joint venture of Avangrid Inc. and Copenhagen Infrastructure Partners.The venture, Vineyard Wind, will provide the state with 804 megawatts, or about 14% of its power needs. It’s part of Governor Ned Lamont’s push to get to 100% of the state’s electricity from carbon-free sources by 2040, Connecticut officials said in a statement Thursday. The project is forecast to come online in 2025.U.S. states from Massachusetts to Virginia see massive turbines in the ocean as a way to bring clean power to crowded coastal cities and fight global warming. New York has awarded contacts to build 1.7 gigawatts. New Jersey has a contract for 1.1 gigawatts. Analysts forecast it could grow into a $70 billion industry, revitalizing ports up and down the Atlantic.Avangrid rose on the news, curtailing earlier losses.Offshore wind farms will mark a huge shift in how the U.S. generates electricity. While they have boomed in Europe, offshore wind is almost nonexistent in the U.S., largely because it’s among the most expensive sources of electricity. Costs are falling, however, as the industry grows and developers install larger and larger turbines.Connecticut didn’t disclose Vineyard Wind’s price but said it was the lowest amount publicly announced to date in the U.S. for offshore wind.“It’s clear we bid in with an attractive price for ratepayers,” Vineyard Wind Chief Executive Officer Lars Pedersen said on a call with reporters.The previous low was $65 a megawatt-hour that Massachusetts agreed to pay to Vineyard Wind for another project it’s building in the Atlantic. That’s almost double the overall average wholesale power price in the region.New York agreed to pay $83.36 per megawatt hour to buy power from two projects off Long Island. New Jersey will pay $98.10 for electricity from a wind farm off Atlantic City.Vineyard Wind, which is building the project south of Martha’s Vineyard, will negotiate contracts with Connecticut’s two electric utilities: Eversource Energy and Avangrid’s subsidiary, United Illuminating Co.Vineyard Wind declined to say how much the wind farm would cost. As part of its bid, the developer agreed to spend $890 million on local economic development efforts, including upgrading Bridgeport Harbor. Vineyard Wind’s project that’s selling power to Massachusetts is about the same size as the Connecticut one and will cost an estimated $3 billion.Connecticut eventually plans to buy up to 2,000 megawatts of offshore wind. Developers that bid against Vineyard Wind include Orsted AS and a partnership of Royal Dutch Shell Plc and EDP Renewables.To contact the reporter on this story: Christopher Martin in New York at firstname.lastname@example.orgTo contact the editors responsible for this story: Lynn Doan at email@example.com, Joe Ryan, Pratish NarayananFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
Companies including Canada's Parex Resources and Ecopetrol SA won contracts to operate oil blocks in Colombia’s auction round on Thursday, as the Andean nation seeks to reinvigorate its petroleum sector. Ecopetrol and its subsidiary Hocol SA, Frontera Energy Corp and Amerisur Resources Plc were all awarded one contract each, the national hydrocarbons agency (ANH) said, after their initial bids did not receive counter-offers. Other successful bidders included Gran Tierra Energy , and Parex, who were awarded two contracts each, while CNE Oil and Gas SAS was awarded three contracts.
(Bloomberg) -- Want the lowdown on European markets? In your inbox before the open, every day. Sign up here.Credit Suisse Group AG has acted to block Geneva prosecutors from using details of a critical report by the country’s financial regulator into the bank’s failure to prevent fraud at its wealth management unit.The bank asked Geneva prosecutor Yves Bertossa to seal the report, which he is legally required to do after a request, a spokesman for the prosecutor’s office said. Bertossa has now asked a court to lift the order in a bid to get access to the documents as part of an ongoing investigation into Patrice Lescaudron, the spokesman said.Credit Suisse, which is a party to the case, is relying on a clause in the Swiss legal system designed to prevent self-incrimination during a criminal investigation. Swiss law prevents evidence from being “examined or used” by prosecutors as long as it’s under seal. In making its case, the Zurich-based bank also invoked the right to keep confidential bank data secret.Lescaudron is a former Credit Suisse wealth manager who dipped into client accounts to cover up millions in trading losses. While he was convicted in early 2018 and released in November of that year, numerous victims have appealed parts of the verdict, meaning the criminal case remains open. Victims of the former wealth manager have long maintained that the bank should have more liability for his crimes.Bidzina Ivanishvili, his biggest former client, said in an interview last month that he still didn’t believe that Lescaudron acted alone. Geneva prosecutors have started a probe into allegations of forgery not covered in the original case and have been ordered by a court to re-examine claims from another client about Lescaudron’s past behavior.Officials at Credit Suisse and Finma declined to comment. A spokesman for Geneva prosecutors confirmed the order and the appeal, declining to give more details.While a decision on whether to lift a seal order is supposed to be made within 30 days, such cases can often linger for months, as happened with a long-running bribery case involving Royal Dutch Shell Plc and Eni SpA.Finma scolded Credit Suisse in a September 2018 report for numerous “deficiencies” in its money-laundering detection efforts in the case of Lescaudron, and how it managed assets tied to scandals at soccer’s global governing body FIFA, oil-producers Petrobras in Brazil and Venezuela’s PDVSA. The bank wasn’t fined, but was ordered to make a number of changes to bolster its compliance practices.That full report wasn’t publicly released, but the regulator issued a press release last year that summarized the findings.Instead of disciplining Lescaudron for repeatedly breaching the bank’s compliance rules, “the bank rewarded him with high payments and positive employee assessments,” Finma said in the press release. Credit Suisse has since adopted several measures to strengthen its compliance and combat money laundering, Finma said.Codename ‘Dino’Finma’s report, codenamed Dino, was considered sensitive enough by the bank that it wrote to the federal bank watchdog six weeks later, requesting that the financial regulator put it under seal, according to three people familiar with the correspondence.To share it with Swiss prosecutors, the bank argued, would be neither fair nor consistent with Article 248 of the Swiss Criminal Code, which dictates how and when documents can be sealed or should be returned to their original owners.Any disagreements about the possible release of the report seemed to have died down for at least a year. But on Sept. 11, Finma sent a copy of the report to the Geneva Prosecutor’s Office, two of the people said, who didn’t want to be named discussing an ongoing investigation.When the bank learned of this, a lawyer for Credit Suisse wrote to prosecutor Bertossa on Oct. 4 demanding, once again, that the report be put under seal, the people said.The report contains confidential information about bank management, the lawyers argued, which could do harm to the bank’s interests if revealed in a criminal investigation, according to the people.An earlier version of this story was updated to correct the process of sealing the documents.(Adds interview with former client in fifth paragraph)To contact the reporter on this story: Hugo Miller in Geneva at firstname.lastname@example.orgTo contact the editors responsible for this story: Anthony Aarons at email@example.com, Christopher ElserFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
Shares in M&C Saatchi Plc plunged around a half in value on Wednesday after the ad agency issued its second profit warning in less than three months due to an accounting scandal. The accounting review related to several units in the company's UK business overstating income and receivables, among others, and M&C said it would restructure its UK operations. "This restatement of our numbers and the reduction in forecasts make for very difficult reading," said Chief Executive David Kershaw.
Investors cheered Spanish group Repsol's pledge to slash net carbon emissions to zero by mid-century, saying they hope it will pile pressure on rival oil and gas companies to follow suit in the fight against climate change. The world's top oil and gas companies are under heavy pressure, not only from environmental groups but also from institutional investors, to fall in line with targets set in the 2015 Paris climate agreement to limit global warming. Repsol on Monday became the first leading energy firm to commit to a net-zero emission target, outdoing Royal Dutch Shell that had set out an ambition to halve emissions by 2050.
Royal Dutch Shell, Mitsubishi Corp and Trafigura presented bids for a contract to lift some 20.2 million barrels of Ecuadorean crude between 2020 and 2023, the Andean country's energy minister told reporters on Tuesday. The country expects to pick a winner for the contract, which is expected to generate $950 million in export income for Ecuador, in the coming days, said the minister, Jose Agusto. Ecuador invited some 51 companies to participate in the auction, the first of its kind in more than a decade.
(Bloomberg) -- The European Union is gearing up for the world’s most ambitious push against climate change with a radical overhaul of its economy.At a summit in Brussels next week, EU leaders will commit to cutting net greenhouse-gas emissions to zero by 2050, according to a draft of their joint statement for the Dec. 12-13 meeting. To meet this target, the EU will promise more green investment and adjust all of its policy making accordingly.“If our common goal is to be a climate-neutral continent in 2050, we have to act now,” Ursula von der Leyen, president of the European Commission, told a United Nations climate conference on Monday. “It’s a generational transition we have to go through.”The commission, the EU’s regulatory arm, will have the job of drafting the rules that would transform the European economy once national leaders have signed off on the climate goals for 2050. The wording of the first draft summit communique, which may still change, reflects an initial set of ideas to be floated by the commission on the eve of the leaders’ gathering.The EU plan, set to be approved as the high-profile United Nations summit in Madrid winds up, would put the bloc ahead of other major emitters. Countries including China, India and Japan have yet to translate voluntary pledges under the 2015 Paris climate accord into binding national measures. U.S. President Donald Trump has said he’ll pull the U.S. out of the Paris agreement.In a pitch of her Green Deal to member states and the European Parliament on Dec. 11, von der Leyen is set to promise a set of measures to reach the net-zero emissions target, affecting sectors from agriculture to energy production. It will include a thorough analysis on how to toughen the current 40% goal to reduce emissions by 2030 to 50% or even 55%, according to an EU document obtained by Bloomberg News.Make It IrreversibleIn the next step, the commission will propose an EU law in March that would “make the transition to climate neutrality irreversible,” von der Leyen told the UN meeting. She said the measure will include “a farm-to-fork strategy and a biodiversity strategy” and will extend the scope of emissions trading.The EU Emissions Trading System is the world’s largest cap-and-trade market for greenhouse gases. It imposes pollution caps on around 12,000 facilities in sectors from refining to cement production, including Royal Dutch Shell Plc and BASF SE. Von der Leyen eyes the inclusion of road transport into the market and cutting the number of free emission permits for airlines.Some of the transportation industry’s biggest polluters have already stepped up efforts to reduce their environmental impact. In June, France’s Airbus SE, its U.S. rival Boeing Co. and other aviation companies pledged to reduce net CO2 emissions by half in 2050 compared with 2005 levels. EasyJet Plc, the U.K.-based discount airline, has promised to offset all of its carbon emissions by planting trees and supporting solar-energy projects, while Air France will take similar steps on its domestic routes.Germany’s Volkswagen AG, the world’s largest automaker, aims to become CO2 neutral by 2050, while Daimler AG plans to reach that target for its Mercedes-Benz luxury car lineup by 2039.To ensure that coal-reliant Poland doesn’t veto the climate goals next week, EU leaders will pledge an “enabling framework” that will include financial support, according to the document, dated Dec. 2. The commission has estimated that additional investment on energy and infrastructure of as much as 290 billion euros a year may be required after 2030 to meet the targets.The EU leaders will also debate the bloc’s next long-term budget next week. The current proposal would commit at least $300 billion in public funds for climate initiatives, or at least a quarter of the bloc’s entire budget for the period between 2021 and 2027.(Updates with details on draft sumit communique from fourth paragraph.)\--With assistance from Ania Nussbaum, Siddharth Philip and Christoph Rauwald.To contact the reporters on this story: Ewa Krukowska in Brussels at firstname.lastname@example.org;Nikos Chrysoloras in Brussels at email@example.comTo contact the editors responsible for this story: Chad Thomas at firstname.lastname@example.org, Chris ReiterFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- For years, OPEC ignored the rise of the U.S. shale industry and came to regret its mistake. Now, the group is making another bold gamble on America’s oil revolution: that its golden age is over.When the Organization of Petroleum Exporting Countries meets this week, ministers will discuss whether to extend their current output target, rather than reduce it, according to people familiar with the internal debate. The reason? They believe relentless U.S. oil production growth will slow rapidly next year.OPEC isn’t alone. Across the industry, oil traders and executives believe U.S. production will grow less in 2020 than this year, and at a significantly slower rate than in 2018. On paper, the cartel has the oil market under control.Brent crude has been trading around $60 a barrel for most of 2019, about 14% higher than at the start of the year but well below the peak of $75.60 a barrel set in late April.“Saudi Arabia is doing a reasonable job to balance the market,” said Marco Dunand, head of commodity trading house Mercuria Energy Group Ltd. He has some words of warning too: “OPEC will need to watch U.S. production very closely.”But Saudi Arabia and its allies should be wary of discounting competition from U.S. shale and other non-OPEC suppliers.Total U.S. oil production reached an all-time high of almost 17.5 million barrels a day in September, up 1.3 million barrels a day from a year earlier. That expansion is likely to continue at least into the beginning of 2020 before slowing down.Slower growth doesn’t mean no growth, however. While the independent companies which drove America’s shale expansion are struggling, and have announced big spending cuts, Big Oil is now playing a much bigger role in key basins such as the Permian. Companies with deeper pockets, such as Exxon Mobil Corp. and Royal Dutch Shell Plc are likely to continue spending, increasing production in Texas, New Mexico and elsewhere.Vitol Group, the world’s largest independent oil trader, expects U.S. production to increase by 700,000 barrels a day from December 2019 to December 2020, compared to growth of 1.1 million barrels a day from the end of 2018 to the end of 2019.Brazil, Guyana, NorwayPerhaps the biggest problem for OPEC isn’t American shale but rising output elsewhere. Brazilian and Norwegian production is increasing, and will advance further in 2020. After several years of low prices, engineers have made many projects cheaper, and the results are clear.Norway’s Johan Sverdrup oil field, the biggest development in decades in the North Sea, started up earlier this year, months ahead of schedule and several billions dollars under its original budget. And Guyana, a tiny country bordering Venezuela in Latin America, is about to pump oil for the first time.Join Bloomberg News Oil Strategist Julian Lee for a Q&A on OPEC+ at 2pm London time on Monday.“For OPEC, it remains a difficult first half of 2020,” Russell Hardy, Vitol’s chief executive officer, said in an interview. “U.S. production is growing strongly this quarter and in the first half of next year we’ll add non-OPEC production from Norway, Brazil and Guyana.”The cartel knows well that it’s taking a gamble. The group’s own estimates show that if it continues pumping as much as it has done over the last couple of months -- roughly 29.9 million barrels a day -- it would supply about 200,000 barrels more crude daily than the market needs on average next year. The oversupply would be concentrated in the first half, when OPEC estimates it needs to pump just 29 million barrels a day to prevent oil stocks building up.Iraq said on Sunday that OPEC and its allies will consider deeper production cuts, though the comments come after the coalition has widely signaled reluctance to take such action. Prices rallied in response, adding 2.2% to $61.79 as of 12:40 p.m. in London.Other OPEC officials, speaking privately, believe the world’s supply and demand balance could be tighter than many expect -- a big change from the past three years. They see non-OPEC output growth falling short of forecasts while global demand increases could be higher than expected.“The market’s fear of a global recession has receded,” said Vitol’s Hardy. “There are problems here and there, but in general the music hasn’t stopped and demand didn’t follow the 2008 model” when it slumped amid the financial crisis.And the crude market is, right now, relatively tight, giving OPEC some solace that it would be able to weather the first few months of 2020 when it will loosen up a bit. The tightness is particularly acute for the kind of oil that most Middle East nations pump: lower quality so-called heavy-sour oil. Riyadh, for example, is selling its flagship Arab Light crude at a premium of 40 cents to the benchmark into Asia, one of the strongest ever levels.The problem is that the oil market isn’t just crude: other petroleum liquids, such as so-called condensate and natural gas liquids -- which are by-products of oil and gas drilling -- are abundant. Condensate and NGLs are processed into refineries, and often blended with fuels such as gasoline and also used to produce petrochemical industry feedstock naphtha.“The crude oil balance for next year shows a tight market,” said Amrita Sen, chief oil analyst at London-based consultant Energy Aspects Ltd. “But when you add other liquids, like condensates, then the balance is looser.”(Updates oil price.)\--With assistance from Grant Smith.To contact the reporter on this story: Javier Blas in London at email@example.comTo contact the editors responsible for this story: Will Kennedy at firstname.lastname@example.org, James Herron, Christopher SellFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg Markets) -- In a small office at the run-down hotel his family owns in Poza Rica, Mexico, Guillermo Salinas recalls how his country’s oil dreams imploded, along with many of his own hopes for a brighter future. A light flickers overhead. The air smells of chlorine, though hardly anyone uses the hotel’s blue-tiled pool anymore.On this muggy day in September, some of the few guests at the once-thriving Hotel Salinas are a dozen or so federal police sent to the area to protect pipelines from thieves who siphon off gasoline to sell on the black market. Having federales as paying customers is a mixed blessing: The sight of a bunch of guys in the lobby with rifles slung over their shoulders doesn’t exactly help lure tourists.Nowadays any paying customer is welcome here. Poza Rica, a city in the Gulf Coast state of Veracruz, lies on the edge of the vast onshore Chicontepec oil basin. About a decade ago, Petróleos Mexicanos, the state-owned oil giant that has iconic status in Mexico, was investing billions of dollars in Chicontepec. Salinas and other entrepreneurs rushed here to open restaurants, hotels, and oil service businesses.It looked like Poza Rica was going to be a boomtown. But the boom has become a bust. Joblessness is rampant—even some drug cartels that once terrorized the town have gone elsewhere because there’s not enough money to be made.So, like a lot of Mexicans, Salinas, who manages the hotel day to day, feels let down. “The government told businesses to prepare ourselves by creating new infrastructure and services for Pemex,” he says. “That didn’t last, and now a lot of investment has stopped. Many of us in the hotel business are fighting to survive.”The same could be said of Pemex. Ratings companies are sounding the alarm over the world’s most indebted oil company, with one already cutting its bonds to high-yield, high-risk junk. The biggest risk of all is that the state company’s distress will drag down the Mexican economy.Any hope of preventing that and of revitalizing such places as Poza Rica now rests with President Andrés Manuel López Obrador. When he took office in December 2018, one of his signature promises was to return Pemex to its glory days. AMLO, as the president is known, has placed Pemex at the heart of his ambitions to upend three decades of neoliberal policies. So while he’s pledged much-needed investment to revive the company, he’s dialing back moves that had ended Pemex’s monopoly on crude production and provided a whiff of modern management practices where do-little jobs-for-life weren’t uncommon.Pemex is now saddled with a mandate that looks a lot like a job creation program, including the construction of a refinery in AMLO’s home state that most industry analysts say isn’t needed. This populist prescription for saving Pemex, whose debt load is more than $100 billion, is exactly what disturbs ratings companies. The press offices for Pemex and López Obrador didn’t respond to requests for comment.In retrospect it seems clear the president was always headed in this direction. Early in the López Obrador administration, Pemex added the motto “For the Recovery of Sovereignty” to its logo—lest anyone mistake it for a more typical energy producer focused simply on drilling for oil and gas.And that’s where AMLO’s troubles began.QuickTake: How AMLO’s Plans to Transform Mexico Ran Into Reality When he became president, López Obrador had at least appeared to have the bona fides for revitalizing Pemex. As mayor of Mexico City from December 2000 to July 2005, he successfully juggled wildly divergent constituencies. What’s more, he was a child of the oilpatch: He spent his early years in Tepetitán, an off-the-beaten-path village with a couple of wells sunk into the ground.But the Pemex of AMLO’s childhood was vastly more successful than it is today. In 1953, the year he was born, the oil industry was booming in his home state of Tabasco. Nationwide, production had almost doubled over the previous 15 years. By 1968 it had doubled again.There were always concerns that Mexicans at the bottom of society weren’t getting a fair share of oil wealth, however. López Obrador, who’d worked as a bureaucrat and a college professor, latched on to that anger as he began his political career. After losing a controversial 1994 election for the state governorship—his opponent’s campaign spending came under scrutiny—he joined activists who blockaded Pemex wells and rose to prominence when he appeared on television covered in blood following a clash with police.In 2000, when he won Mexico City’s mayoral election, López Obrador positioned himself as a pragmatic leftist. While he expanded social programs for senior citizens, single mothers, and the disabled, he was also willing to work with billionaire Carlos Slim on development projects and former New York Mayor Rudy Giuliani on crime-fighting initiatives.AMLO used the job as a launchpad, running for president in 2006 on a left-wing agenda that included protecting Pemex from what he saw as efforts to privatize the company. He lost to center-right candidate Felipe Calderón by less than 1 percentage point, according to the official count, but claimed fraud and didn’t accept the results. He and his supporters formed a symbolic shadow government and shut down the heart of the capital city with weeks of protests.In the following years, as Calderón took steps toward modernizing Pemex, López Obrador led the resistance, packing arenas with angry citizens for hourslong rallies. He told his followers to close down airports, oil facilities, and highways to publicize their objections to Calderón’s plans. “The country’s oil belongs to the people, even the most humble,” López Obrador told protesters outside Pemex’s Mexico City headquarters in 2008. “We must defend this historic conquest.”As Calderón’s single six-year term was ending in 2012, López Obrador ran again for president. This time he lost by a much wider margin to another center-right politician, Enrique Peña Nieto.Peña Nieto’s administration finally achieved the cherished goal of the Mexican right: opening Mexico’s energy industry to foreign investment. Although the timing wasn’t ideal—the ink on the reforms was barely dry before the 2014-15 oil price crash—Mexican fields were attractive to international players such as BP, Chevron, Exxon Mobil, and Royal Dutch Shell.In the end, Peña Nieto’s government got bogged down in corruption allegations and the public’s perception that the president and his wife, a former telenovela star, were disconnected from the realities of everyday life. That opened up space for López Obrador to run once again as a reformer in the July 2018 presidential election.AMLO’s National Regeneration Movement (Morena) promised something new: a government that would focus on fighting poverty and putting ordinary workers over the entrenched business interests that many believed were coddled by previous administrations. He pledged to revive Pemex, shield it from foreign interference, and make it a company of the people again.At home and abroad, business executives and investors blanched at what they heard; the peso, bonds, and stocks all suffered heavy losses in the lead-up to the vote. But much of the citizenry embraced it, sending AMLO to a resounding victory. In his ascent, pundits inevitably heard echoes of Donald Trump, Brazil’s Jair Bolsonaro, and other unconventional politicians gaining ground around the world.Now, more than a year after the election, the problems plaguing Pemex are coming to a head, and its investors are increasingly restless.Production plummeted to 1.68 million barrels a day on average in the first nine months of 2019, half what it was in 2004, and Mexico’s most lucrative fields are drying up quickly. Investment is desperately needed, but the cash-strapped company dedicated about $2.5 billion to capital expenditures in the first nine months of the year, just 28% of its $9 billion target for the full year. That target was already not even half of Pemex’s capital expenditures during some of Calderón’s years in power.While Pemex is profitable—earnings before interest, tax, depreciation, and amortization in the first nine months of the year reached $17 billion—most of that was wiped out by taxes and duties that totaled $13.9 billion in that span. “The issue is that the government takes all of that away,” says Lucas Aristizabal, Latin America senior director at Fitch Ratings Inc. in Chicago.AMLO’s critics say his government has no realistic strategy to fix what’s wrong. They dismiss the centerpiece of López Obrador’s investment plan for Pemex—an $8 billion refinery in his home state—as a boondoggle, or worse. They say Pemex has no need for it, the business of turning crude into fuels is best left to someone else, and the project will divert attention away from its core business of drilling.Construction hasn’t yet started on the 340,000-barrel-a-day plant, though bulldozers are preparing the land for what’s to come. It will siphon off more than 4 of every 5 pesos in additional funds the government allocated to Pemex from 2020 to 2022 as part of its five-year business plan.Never mind that existing refineries were operating at only 40% of their potential in September because of underinvestment and a lack of light crude for processing, or that the plants lose more money as they produce more, according to analysts. “It’s cheaper for Pemex to buy gasoline [from abroad] rather than refine it in the country,” says Ixchel Castro, an oil and refining markets manager for Latin America at Wood Mackenzie Ltd.Even so, López Obrador’s notion that another refinery will help curtail foreign involvement and influence in Mexico’s oil business resonates with large swaths of the population that have long equated Pemex with national sovereignty. PEMEX grew out of Mexico’s expropriation of foreign companies’ oil interests in 1938, a time when units of Royal Dutch Shell and Standard Oil Co. were dominant players. Mexican schoolchildren learn from their history books that citizens lined up outside the Palacio de Bellas Artes in Mexico City to donate silver, gold, and even chickens to pay for the takeovers. More than 80 years later, the Día de la Expropiación Petrolera is celebrated across the country on March 18, especially in oil regions.López Obrador’s detractors argue that his policies, rather than rescuing Pemex, could push it into insolvency. That would be devastating for the economy and for government revenue. Oil revenue accounted for about 18% of federal government income in the second quarter of 2019, whereas oil and gas contributed just 3.4% of Mexico’s gross domestic product last year, less than half the level of 25 years ago. López Obrador’s budget for next year depends in part on Pemex boosting production by about 16%, a rate of growth unseen in almost four decades.Mexico needs to ditch the “pipe dream” of building refineries and integrate its energy industry with its northern neighbor’s, says James Barrineau, a money manager at Schroders Plc, the third-largest holder of Pemex’s peso-denominated debt. The failure to do so, he says, “is really the core reason why people have been cautious about AMLO.”In June, Fitch Ratings downgraded Pemex’s bonds to junk, citing the company’s falling oil production and ballooning debt, and cut Mexico’s sovereign debt rating, because of the government’s close ties to the company. Moody’s Investors Service Inc. and S&P Global Ratings have raised similar concerns.Swaps traders are paying more to buy insurance against a default, with the cost of five-year contracts up more than 40% since the end of 2017. Bond buyers are demanding more than 4 percentage points of extra yield to hold Pemex’s 10-year notes instead of similar-maturity U.S. Treasuries, almost three times the premium investors get on Mexico sovereigns.López Obrador, meanwhile, has belittled the credit rating companies and ignored their recommendations to plow more funds into Pemex’s oil production and exploration business, sell off non-core assets, and welcome private investment. “As soon as we arrived they started talking about how they were going to lower the rating,” he said at a press conference in August. “I hope they are more careful in their analysis, more professional, more objective.”Recent government measures to shore up Pemex have helped keep the ratings companies at bay. In September the government pumped $5 billion into Pemex to help ease its debt burden, and the company sold $7.5 billion in bonds to refinance short-term debt. Pemex had already received $1.3 billion as part of the budget approved in December 2018. It’s also gotten $1.5 billion in tax breaks and $1.8 billion in assistance with its pension obligations. In the first nine months of 2019, Pemex says, it saved $1.22 billion by reducing fuel theft and an additional $375 million or so by trimming its payroll of 124,000 and interest payments on its debt.All that money isn’t nearly enough to fund Pemex’s needs, according to Andrés Moreno, chief investment officer of Afore Sura, Mexico’s third-largest pension fund, which holds Pemex bonds. He says the company needs $10 billion to $15 billion a year in cash flow to reverse oil production declines, so the government support is just “a plug-in.” “They are removing the emergency for the next two years, but it doesn’t solve anything,” Moreno says. “What is missing in Pemex’s case is awareness of the emergency and willingness to put ideology in a drawer.”As an example of how things could work better, analysts and money managers point to Brazil’s state-controlled oil company, Petróleo Brasileiro SA. To be sure, it’s had plenty of problems of its own, including corruption and an enormous debt load of about $83 billion. But it does some things right: For two decades it’s worked with foreign oil majors to develop vast reserves in deep-water fields off its coasts, allowing it to tap outside expertise as it gained experience in the highly technical drilling required there.López Obrador’s strategy to increase oil production by focusing on onshore and shallow-water fields is shortsighted, according to these analysts and money managers; it also fails to acknowledge the huge promise of Mexico’s deep-water and unconventional acreage, which have much higher production potential but require foreign expertise and private investment.“The current administration has made revamping Pemex—as we call it, ‘making Pemex great again’—a priority,” says Pablo Goldberg, a portfolio manager at BlackRock Inc., which owns Pemex debt. “Eventually, what we need to be seeing is the production capacity of Pemex going up. Some of this financial assistance [from the government] should give Pemex capital to invest. Now we have to see whether it’s well done.”On the outskirts of Poza Rica, dried-up wells stretch into the distance, pockmarking surrounding citrus plantations. Chicontepec is estimated to hold about one-fifth of Mexico’s oil and gas reserves. In the early 2000s—after the gigantic shallow-water field Cantarell, discovered in the 1970s, started to decline at an accelerated pace—government officials promised Chicontepec would be a boon to Mexico’s production.Pemex drilled thousands of wells over the following decade. In 2010 it contracted global firms, including Baker Hughes Co. and Halliburton Co., to develop top-of-the-line production-enhancing techniques at five new field laboratories. That attracted transport and logistics companies, equipment and service providers—all to meet the needs of Pemex and its contractors.The black-gold rush didn’t last long. The drilling proved far more complicated and expensive than Pemex anticipated. At its peak in 2012, Chicontepec contributed fewer than 70,000 of the nation’s 2.5 million barrels in average daily output. The failure cemented Pemex’s reputation for incompetence after executives squandered billions of dollars on it, financed mostly with debt.During Peña Nieto’s administration, Pemex officials acknowledged that Chicontepec was a failure, and the company drastically reduced its investment in the field. Poza Ricans, believing new oil investment was coming their way, supported López Obrador at the ballot box. Pemex’s 2020 budget does call for doubling annual investment in Chicontepec to $319 million. But for the time being, Pemex’s operations in the region have continued their steady decline.Building a refinery in his home state hasn’t helped AMLO’s cause in Poza Rica (population: about 200,000). “It’s disappointing that we voted for him and all the support in the energy sector has gone elsewhere,” says Paola Ostos, operations manager of Poza Rica-based Transervices Energy, which shuttles workers and equipment to oil installations. “As a businesswoman, I feel that we’ve been forgotten. We were the principal oil zone of Mexico for many years, and now all the activity is being concentrated in the south.”Every March 18, Poza Rica still celebrates the Día de la Expropiación Petrolera. But life in the oilpatch isn’t what it used to be. Residents say the festivities—which used to span several days and include a carnival—have lost much of their luster.On the outskirts of Poza Rica at 9:30 a.m. on a late summer’s day, the sun is already turning the sheet-metal homes in squatter communities into ovens. Overhead, plumes from a Pemex processing plant streak the sky. Day after day, the installation burns natural gas that seeps from Pemex’s oil wells.Salvador Reséndiz, president of the Business Coordinating Council for the northern region of Veracruz, says López Obrador promised Poza Rica a new plant during his presidential campaign. Although Pemex’s 2020 business plan includes rehabbing the facility, Reséndiz worries that Poza Rica will be forgotten—and that the refinery in the president’s home state will take precedence.“It’s very clear that in these first three years of the new government, all of the investment in Pemex is going south, south, south,” he says. “When will it come north? When are they going to put money in Poza Rica?” —With Sydney Maki, Eric Martin, and Nacha CattanStillman covers energy. Villamil covers emerging markets. They are based in Mexico City. To contact the authors of this story: Amy Stillman in Mexico City at email@example.comJustin Villamil in Mexico City at firstname.lastname@example.orgTo contact the editor responsible for this story: Stryker McGuire at email@example.com, Brendan WalshFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
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