- Changing Landscape of Global E&P Industry
- China, the U.S. Dollar and Crude Oil Prices
- Steve Chazen Quips From Howard Weil Presentation
- Global Warming Debate Over? Don’t Count On It!
- Baltic Index Signaling Stalled Economic Recovery?
- Filling Out The Brackets – 2009 Worst Dictators List
Changing Landscape of Global E&P Industry (Top)
Last week marked a significant point in the current petroleum industry downturn. The more than $100 a barrel oil price decline, coupled with a 70%+ drop in U.S. natural gas prices during the second half of last year, signaled energy industry participants that their world would be significantly different in the future from the view they held as late as July 2008. There was little recognition of this change in the early stage of the price decline, but after the credit crisis exploded in mid September, about the same time that Hurricane Ike landed on the upper Gulf Coast of Texas, the realization about the future became real.
What made trying to figure out how the industry view would be changed was compounded both by economic and financial developments. A more important factor was the potential for a radical shift in the political landscape due to the presidential election. It was in the aftermath of the credit crisis that presidential candidate Barack Obama regained the public sentiment lead from his opponent, John McCain. While Mr. Obama was professing changing the culture of Washington and reversing the perceived anti-middle class policies of the Bush Administration, energy executives realized that the anti-oil company movement fostered by $4 a gallon gasoline prices earlier in 2008 would likely lead to changes in energy regulation.
The loss of access to capital markets for many smaller oil and gas companies and independent operators meant that companies were forced to radically re-plan their spending activities. This pressure came as commodity prices around the world collapsed – partly in response to pressure on financial funds to raise cash to meet client redemption requests and because prospects for global economic growth imploded.
Given a lack of clarity, or even a hint about the future petroleum industry environment, corporate, and even individual, financial survival became the immediate focus. The impulsive response for corporate executives was to stop current spending, slash future spending commitments and work to shrink the enterprise to a scale that can be supported by future cash flows, even though confidence in estimating what they would be was extremely low. The drilling rig count began to fall and with it the volume of oilfield activity and petroleum industry employment, also. The Bush Administration’s floundering response to the growing global credit crisis generated little confidence in how quickly this recession would be reversed. As Europe, and then Japan, and finally China and Southeast Asian countries experienced the impact that an absence of credit had on their commerce, fears about a repeat of the Great Depression dominated the popular press and media commentary. Fear became the watchword!
Now, six months after the credit crisis exploded, there are signs credit markets are starting to function again. Consumer spending, which had been in a freefall for most of this time, appears to be stabilizing. Housing prices are continuing to fall, but other housing industry indicators are signaling a possible stabilization. Prospects for global energy demand growth have evaporated, but while forecasters are still trying to assess the bottom in demand, energy executives realize that demand is not going to zero. Energy executives are now able to begin thinking about the future. While still not clear, there are trends emerging that will likely shape the energy market for the next few years.
These trends include: accelerating depletion in existing oil producing fields, many of which are extremely old, that will make growing supply more difficult and expensive; a growing world population that will need and demand more energy; political forces that will dictate where the western oil industry will be able to explore and develop new hydrocarbon resources; natural gas, once only a regional fuel, that will play a greater role in future world energy supplies; public (read government policy) pressure to control carbon emissions that will intensify and restrict, or at least boost, the cost of carbon-intensive fuels; energy demand growth in mature economies that will slow or possibly slip into a long-term decline trend; unconventional oil and gas resources that will account for a larger share of petroleum supplies; investors who will clamor for more stable investment returns; and a recognition that the next energy age is closer to dawning than at any other time in recent history.
Given this myriad of trends, each petroleum producer will need to develop his own strategy for growing his company. There will not be a one-size-fits-all corporate strategy for growth because so much about a company’s future will depend upon its current asset base, perceived corporate strengths and weaknesses and its risk tolerance. Industry moves during the past few months have covered a range of actions, but all designed to enhance individual company future opportunities. For example, the merger announced a week ago involving Suncor (SU-NYSE) and Petro-Canada (PCZ-NYSE) has created a junior IOC with a base built on its strong Canadian oil sands assets. In a world of low oil prices and faced with a high-cost asset base, a diversified combined company’s resource base enhances its cash flow generation capability and should enable it to lower its annual operating costs. From Suncor’s position, capturing the anti-takeover protection of the Canadian government’s golden share in Petro-Canada will ensure that the new company’s long-term strategy to exploit its oil sands asset base, even though it represents one of the more expensive unconventional petroleum resources available in the world, will not be short-circuited by a forced sale to a bigger company during a period of low investment returns.
Likewise, the recent purchase of Pure Energy (PES-ASX) of Australia by the UK’s BG Group (BG.L) demonstrates another case of a buyer seeking to back up its corporate strategy with assets. BG Group is involved in developing a liquefied natural gas (LNG) plant in Australia using coal bed methane gas, an as-yet-untested technology. Last year, BG Group purchased Queensland Gas Company for $2.9 billion, another company with coal bed methane reserves. With its 90% ownership (the balance will be acquired through forced sales under Australian securities law) of Pure, BG significantly expands its coal bed assets. To secure Pure, BG Group competed against much larger rival Royal Dutch Shell (RDS-A-NYSE) who has a joint venture with Arrow Energy (AOE-ASX) that in turn owned 20.3% of Pure and also competed for its ownership.
Another example of a company acting to strengthen its strategic position involves Libya National Oil Company (NOC). The government is striving to increase its oil production capacity to 3 million barrels a day by 2013. The country holds an estimated 42 billion barrels of reserves. In this case, Canadian oil explorer Verenex has a subsidiary that holds a 50% interest in a concession in the Ghadames Basin in western Libya on which it has made 10 discoveries to date. China National Petroleum Corp (CNPC) made a bid to buy Verenex for $400 million, subject to various conditions, one of which was a waiver of the right of first refusal claim held by NOC. In this case, NOC decided to exercise its first refusal right in order to further its long-term objective and prevent the oil falling into the hands of the Chinese, a nation that has aggressively moved to buy up natural resource assets around the globe during this period of commodity price weakness.
Other examples of companies exercising asset purchases to further corporate strategies include BP’s (BP-NYSE) and Statoil Hydro’s (STO-NYSE) purchases of gas shale leases from Chesapeake Energy (CHK-NYSE). The interesting question is whether this industry downturn will ignite a surge in industry consolidation such as happened in past downturns when Exxon and Mobil and Chevron and Texaco combined, along with a host of other oil and gas
Exhibit 1. Ghadames Basin Keys Libya’s Production Growth
Source: Rigzone
companies. Likewise, there has been speculation raised about consolidation within the oilfield service industry, especially following successful debt financings by companies such as Halliburton Companies (HAL-NYSE), Weatherford International (WFT-NYSE) and Nabors Industries (NBR-NYSE).
Both the oil and gas and oilfield service sectors will have a wide array of companies under varying degrees of financial stress in the coming months due to the speed of the recent industry downturn and, for producers, the shrinking of their borrowing bases. The ability of financially-stressed companies, particularly oilfield service companies, to weather this downturn will depend not only on their balance sheet strength, but also on their relative business exposure to those geographic regions suffering the most from weak commodity prices such as North America and Russia.
Another factor that could increase the pressure for deals is the outlook of the owners or managers of these stressed companies for how long before their markets improve. In the case of North America, the recent bleak assessment of the U.S. natural gas market issued by Aubrey McClendon of Chesapeake Energy saying he didn’t see an upturn in prices until 2010 or 2011 could force some companies to have to throw in the towel and combine sooner than they might otherwise consider. Absent these pressures, the urge to merge may remain merely an itch still waiting to be scratched.
China, the U.S. Dollar and Crude Oil Prices (Top)
Crude oil futures through last Friday had climbed 17% since the end of 2008. From the 2008 low on December 23 of $30.28 a barrel, crude oil futures are up an amazing 73%. In spite of that dramatic rise, it was less than 120 days ago that crude oil was trading in the mid $50 range. That speaks to the speed of the collapse of global oil prices and how explosive the recent recovery in prices has been. The improved oil price has come in the face of weak oil demand worldwide and growing oil and refined product inventories. If global economic activity has, to quote legendary investor Warren Buffett, “fallen off the cliff,” one has to wonder why oil prices have climbed from the basement.
A primary reason for the recovery in oil prices has been a general recovery in commodity prices. According to an article in The Wall Street Journal, investor sentiment has turned positive triggered by the Federal Reserve’s decision to ease credit with its massive $1.125 trillion liquidity infusion. That decision sparked a rally in almost all commodities – both hard and soft. The rally was further supported by several positive economic data points – U.S. gasoline consumption rising, electricity use in China increasing 6% in February, a surprising increase in housing sales and durable orders. Whether these data points will prove turning points in sustainable U.S. and/or global economic activity remains to be seen, but market optimists are viewing them as green shoots in late winter snows.
Another consideration is that the value of the U.S. dollar is falling after an extended period of strength driven by a flight to quality or security as investors have perceived that the United States was stronger and would solve its financial and economic challenges sooner than other countries. When we examine the trend in the value of the U.S. dollar compared to crude oil prices, it is clear that there largely has been an inverse relationship. As the value of the U.S. dollar was above 100, oil prices were weak (in the $20s) during most of 2000-2002. As the dollar started to fall in value, oil prices began to climb. The dollar eventually fell to about 80 at the end of 2004 and oil prices were stronger. During 2005-2006 the dollar rose in value while crude oil prices also climbed higher – a period that appears to defy the normal pattern between the two.
The dollar’s value began to decline in 2007, eventually falling to the 70 range as crude oil prices rose. The bottom in the value of the dollar coincided with the $147 peak in oil prices in July 2008. From that point forward, the dollar stabilized and began to rise in value as international investors along with U.S. ones recognized the security of the U.S. dollar in the face of the exploding global credit crisis. As the dollar’s value rose, crude oil prices, along with the prices of virtually all commodities fell. Now we are seeing the inverse of that pattern as the U.S. dollar has been weakening as global investors become concerned about the impact of the magnitude of money being injected into the U.S. banking system and the huge increase in federal government spending due to the economic stimulus bills.
Exhibit 2. Long-term Weak Dollar Creates Oil Price Strength
Source: EIA, MarketWatch, PPHB
In the past two weeks U.S. credit markets have witnessed the announcement by the Federal Reserve that it will be injecting $1.125 billion into the banking system through the purchase of mortgages, debt of Fannie Mae to help support their mortgage lending efforts and longer-dated Treasury bills in an effort to lower the yield on government bonds. That action was followed by the Treasury’s announcement of a plan to deal with toxic assets (loans and mortgage related instruments) on commercial bank balance sheets that are reportedly an inhibitor of bank lending.
We also had a phenomenon of officials from Russia, the European Union, EU member governments and the head of the European Central Bank criticizing the magnitude of the U.S. economic stimulus effort. The Bank of China’s Governor authored a paper on the bank’s web site suggesting the possible need for a new global reserve currency to replace the U.S. dollar. The U.S. Treasury Secretary Timothy Geithner initially suggested that the Chinese banker’s idea was something worth considering, but he then quickly retracted that view and reiterated the U.S. government’s official position that the dollar was, and would remain, a strong currency and the world’s reserve currency. Of course between his initial remarks and his correction, the U.S. dollar’s value fell dramatically, but did eventually recover. The impact of the weakening U.S. dollar and the corresponding rise in crude oil prices can be observed in the chart of the movement of these two indices over recent days.
The Chinese proposal was supported on Friday by a panel of economists who advise the United Nations. But what may be one of the most mind-altering proposals was a Congressional resolution introduced by Representative Michele Bachman (MN-R) that “would bar the dollar from being replaced by any foreign currency.” We shake our head at the lack of understanding that the Chinese are
Exhibit 3. Weak Dollar In Recent Days Drive Oil Price Higher
Source: EIA, MarketWatch, PPHB
proposing a new “reserve currency” and not the replacement of the U.S. dollar as our currency. I guess this is a case of legislate and then investigate, much as we have experienced with the economic stimulus bill.
If the Chinese proposal for a new global reserve currency has any merit (and we doubt it does in any concrete terms), what would be the impact on crude oil prices? We doubt there would be any since oil is denominated in U.S. dollars and traded globally with no problems. As a business economist pointed out Friday morning on one of the morning financial television shows, anybody with a supply of gold could establish a bank in London and declare their currency (gold backed) to be the new reserve currency for the world. Whether any government would shift its financial system to that new, self-declared reserve currency and require all financial transactions and trade be settled in the new currency is questionable. Maybe, if the institution sponsoring the new currency were solid enough, after 40-50 years, it might create a new reserve currency. Possibly political, economic and financial events could shorten the time frame, but near-term there shouldn’t be any impact on oil prices.
Given the economic and financial stimulus actions underway, and the political battle over the proposed Obama Administration’s government budget that has just started, we believe the backdrop for oil prices will be a weakening U.S. dollar value, albeit with brief periods of surging strength. That overall trend should help support crude oil prices in the low $50s range for the foreseeable future, baring a significant economic demand collapse or another financial crisis. Should more positive U.S. economic news emerge over the next few weeks, we would look for crude oil to solidify its base in that low $50s range. That would likely encourage producers to start shifting from their bunker mentality, driven by the damage done to their balance sheets and cash flows from 2008’s oil price collapse, to a slightly more optimistic outlook. Unfortunately, an improved oil price outlook won’t help them particularly in dealing with the growing challenges posed by trends in the North America natural gas market that are wrecking havoc on the domestic oilfield service industry.
Another consideration regarding any shift in producers’ market outlooks is that they cannot overtly reflect this optimism since it would encourage oilfield service companies to stand firm against the pressure to reduce prices. With crude oil in the low $50s range, a number of marginal exploration and development projects become profitable. But successfully forcing drilling rig and oilfield service costs down across the board might actually have a greater impact on producer company profitability than the additional marginal projects that suddenly become profitable. Of course what we are describing is the natural struggle between producers and service companies over what are fair levels of industry profitability. Until oil and gas prices go meaningfully higher from current levels, this struggle will be intense and neither side can react to the oil price recovery with glee.
Steve Chazen Quips From Howard Weil Presentation (Top)
We owe the following to our friend Art Smith, formerly with John S. Herold, but now head of Triple Double Advisors, LLC. He attended the 37th annual Howard Weil energy conference last week and sent along a number of quips from Steve Chazen, president of Occidental Petroleum (OXY-NYSE). We saw Mr. Chazen interviewed on CNBC that same day. We found several of his quips interesting and confirming of certain of our views.
“We’re not just beating up on our suppliers; we’re making life miserable for our own employees.” (This was in reference to the company’s initiative to cut $1.00 per BOE from operating expenses.)
“We (management) own a lot of OXY stock that isn’t on margin so they can’t take it away from us.”
“I guess I slept through the business school class when they told us ‘debt is good.’”
“We think our A credit rating is good advertising.”
“My wife doesn’t pay much attention to the OXY stock price, but she sure counts those dividends. We love dividends at OXY.”
“We send this chart to suppliers – as a negotiating tactic.”
Exhibit 4. OXY Uses Oil Price To Pressure Service Costs
Source: Occidental Petroleum, Art Smith
You will notice that the chart shows the total cost of rigs over time compared to the trend of crude oil prices. Rig rates rose in tandem with oil prices from 2000 through 2005, and then began to rise faster. While rig rates have declined some since last summer, they haven’t fallen nearly as much as oil prices. But as history has shown, it takes only a short time for rates to collapse. The worst for oilfield service companies fundamentally is not yet upon us, but the worst for the stocks may have passed.
Global Warming Debate Over? Don’t Count On It! (Top)
Last Saturday evening, an estimated 4,000 cities, towns and villages in 88 countries worldwide are estimated to have participated in Earth Hour 2009. Sponsored by the non-profit conservation organization World Wildlife Fund (WWF) and designed to be a symbolic gesture in support of action against global warming, Earth Hour is in its third year. At 8:30 p.m. local time, potentially one billion people began to voluntarily turn off their lights for 60 minutes. The visual impact will be a rolling wave of blackouts traveling across the globe. It does remind one of the early days of U.S. manned space flight when Australian towns often turned their lights off and on as a space craft was passing overhead to signal their best wishes to the crew.
As dramatic as this event is, even it creates friction among supposed conservation partners. WWF does not attempt to estimate the energy savings from this lightless-hour, but the associate director of the Columbia Climate Center in New York City, Mary-Elena Carr was quoted as saying, “The issue is whether it goes beyond a ‘really cool’ event and leads to anything tangible. If there was an idea of how much energy was being saved, people could take measures to lower their energy use in a systematic and practical way.” But WWF spokeswoman Leslie Aun’s view is, “We think the value of Earth Hour is the lights going off, not the energy savings.”
Exhibit 5. Toronto’s Lights Going Off During 2008 Earth Hour
Source: National Geographic, J.P. Moczulski/The Canadian Press/AP
United Nations Secretary-General Ban Ki-moon has urged people to participate in Earth Hour to demonstrate their support as a way of letting politicians know that they expect action when world leaders gather later this year to draft a replacement for the Kyoto Protocol. The U.N. building will participate in Earth Hour, saving an estimated $102 in electricity cost.
Dealing with the issue of global warming has become a centerpiece of the Obama administration’s energy and environmental strategies. During last year’s political campaign, then presidential-candidate Barack Obama vowed he would work to make the United States a “green economy” and that his administration’s policies would significantly restrict greenhouse gas emissions consistent with the Kyoto Protocol mandates, even though the United States Congress rejected the document. He also said his government would become a leader in helping to secure a global agreement to the follow-on environmental agreement to Kyoto to be negotiated at a meeting in Copenhagen, Demark at the end of the year.
While this is an admirable goal, increasingly new scientific evidence is signaling that the global warming hysteria of recent years possibly was overdone. At the same time, other studies have been produced showing that the pace of global warming is accelerating and the earth’s environment faces more severe climate-change related impacts sooner than previously thought and that these impacts may be more severe than earlier believed. While the struggle between the two sides continues, media reports have begun to highlight what may have been the motivator behind the GHG hysteria – money.
For academicians struggling with university spending cuts, seeking federal research money becomes a quest that sometimes drives the production of studies with dramatic potential outcomes, yet leaves unanswered what the certainty of those events might be. To answer the question, more research is needed, i.e., give me more money. Sometimes it seems that the more dramatic the outcome’s impact, the easier it is to secure more research funding.
In light of the battling studies phenomenon, we were struck by the contrast between two articles published barely a week apart on the National Geographic Society web site. The two studies deal with the impact global warming may be having on the planet’s oceans. In one study, sea levels around Boston, New York and Washington and much of the U.S. Northeast coast are projected to rise as much as twice as fast as global sea levels during this century putting the region at increased risk during hurricanes or winter storm surges. Sea levels will rise due to thermal expansion and the slowing of the North Atlantic Ocean circulation because of warmer ocean surface temperatures. Melting glacier ice would further add to the sea level rise. The northeast U.S. region could see sea levels increase by 14 to 20 inches by 2100. The study was published by the online journal Nature Geoscience.
The other study, published by the journal Science, shows that the long-term trend in sea levels since the Cretaceous period has been downward. When this trend is extended out for the next 80 million years, it suggests that even if all of today’s ice caps were to melt, sea levels would be 230 feet lower than they are today. The study showed that 80 million years ago, when dinosaurs ruled the Earth, global sea levels were roughly 560 feet higher than they are now. The reason for the historical decline, and if continued the future sea level decline, is the creation and spreading of new ocean crust along underwater mountain chains called mid-ocean ridges. This has the impact of causing sections of the ocean crust (floor) to cool and sink taking sea levels down.
We haven’t read the actual studies, but have relied on the various global warming, climate change and weather blogs and numerous media reports about each study. What struck us about the studies was two points: 1) the fear expressed by one study’s conclusion in contrast to the acknowledgement that other factors could alter its conclusion; and 2) what the conclusions of these studies might mean for the energy business.
The observations of the lead author of the rising sea level study reinforced our view about the hysteria behind the global warming movement. He said, “The northeast coast of the United States is among the most vulnerable regions to future changes in sea level and ocean circulation, especially when considering its population density and the potential socioeconomic consequences of such changes. The most populous states and cities of the United States and centers of economy, politics, culture and education are located along that coast.” At least in his mind, the northeast region of the country is more important and valuable than the rest of the country. We wonder what California, Florida and other coastal states not part of the northeast feel about that statement?
In contrast, the long-term study on falling sea levels pointed out that there are questions about exactly what the Earth’s landmasses might look like in 80 million years because in addition to sea level changes, plate tectonics should significantly shift the continents. As the study pointed out, some of the plates will bump and grind, others will drift apart, and still others will dive under landmasses and melt within the Earth’s hot interior.
So if you are in the offshore drilling business, rising sea levels are good for your long-term future – there will be more sea and less land to explore. On the other hand, if sea levels drop, we will need more land rigs to drill many of our Gulf of Mexico wells rather than jackup and floating drilling rigs. While this issue might seem like a laughing matter, the two views of the world – one with us returning to sea levels 170 meters higher as they were 80 million years ago and the
Exhibit 6. World Different With Higher Or Lower Sea Levels
Source: National Geographic Society
other with sea levels down by 120 meter – offer intriguing views of a significantly changed world. In the lower sea level scenario note the impact on the Arctic region, especially off Russia. Given the estimated volume of Arctic oil and gas resources lying off Russia’s coast, think about how much easier it will be to access those resources without having to deal with waterborne drilling rigs and production facilities.
Regardless of what one thinks about the global warming (or climate change as others like to call it) issue, it has been embraced by the current administration and Congress. They will drive legislation that will attempt to address the perceived root causes of it – carbon emissions. The debate has begun, and actions such as the Environmental Protection Agency’s move to regulate carbon dioxide in the atmosphere will change how the domestic economy functions. We may not fully understand or appreciate the changes in energy consumption and production that regulation may bring, so monitor the debates in Washington and the actions of Congress.
Baltic Index Signaling Stalled Economic Recovery? (Top)
In recent months we have pointed to the recovery in the Baltic Dry Index, a measure of transportation charges for ships carrying dry bulk materials such as iron ore and other raw materials, as an indicator of the emerging global economic recovery. From its low on December 5th, the index has jumped 247% as of last Friday. This is truly an impressive rise, but when we consider that the index was almost five times Friday’s value merely one year ago, the recovery doesn’t appear quite as impressive.
Exhibit 7. Baltic Dry Index Recovery In Pause Mode
Source: CapitalLink.com
From the peak for the index on June 5th of 11,689, the index fell by almost 94% to its December low. This collapse was largely due to the global trade slowdown, some of which was associated with China’s economic hiatus at the time of the Olympics Games. The Chinese government shut down many manufacturing plants immediately prior to the start of the games and during them to help clear the air in Beijing. In anticipation of the shutdowns, these plants stepped up their output to have supplies to sell during their business hiatus. When global financial problems began to surface in the summer, global trade slowed. China was a contributor because it was importing less due to its actions associated with the Olympics. When the international credit crisis exploded in September, global trade came to a screeching halt and the bulk shipping business was severely impacted.
The recent recovery in the Baltic Dry Index has pointed to increased trade, and especially an improvement in demand for raw materials in China. The Chinese government’s economic stimulus efforts have contributed to the economic activity recovery, but it has also been helped by the previous depletion of raw material inventories that needed to be replenished. The disquieting trend is that for the past 13 days, the Baltic Dry Index has been declining. In fact, from the recent peak to last Friday, the index has fallen by 27%. While the rise in the index was portrayed as a green shoot in the winter snow, does its fall signal merely a pause in the global economic recovery or that the economy is actually worsening? Many recent economic statistics around the world are reflecting signs of increased stabilization in economic activity and, in certain cases, even some growth. Credit markets, while demonstrating improved liquidity, remain largely constrained hurting the pace of the recovery in global trade. After the magnitude and speed of the recent economic contraction, it is not surprising that any recovery comes in fits and starts. We will continue to monitor the index for signs of the health of the global economy.
Filling Out The Brackets – 2009 Worst Dictators List (Top)
Parade magazine published its annual article listing the world’s worst dictators for 2009. Having followed the list for the past few years, one has the feeling he is watching the annual NCAA basketball selection shows – it seems largely to have the same cast of characters each year only in different rankings. Just as elite college athletic programs seem to dominate the top rankings of their sport every year, dictators have the same record. I guess when you have all the power in a country, until you either die or are overthrown; you’re always at the top of the list.
The list of dictators was arrived at by examining the policies of these leaders, the amount of repression, the level of corruption and the level of restrictions on individual freedoms in the countries. The information used to rank the dictators comes from various sources including Human Rights Watch, Amnesty International, Reporters Without Borders and the U.S. State Department.
Economists and political scientists have always talked about the politically corruptive power of natural resources in a country. It is often called “the natural resource curse.” In a paper published in Foreign Service Journal, Thomas I. Palley, director of the Globalization Reform Project at the Open Society institute, highlighted the problem for countries rich in natural resources. “…numerous academic studies show that, controlling for income level, countries that are highly dependent on revenues from oil and other minerals score lower on the U.N. Human Development Index, exhibit greater corruption, have a greater probability of conflict in any five-year period, have larger shares of their population in poverty, devote a greater share of government spending to military spending, and are more authoritarian than those with more diverse sources of wealth.” He goes on in the article to discuss the issues and possible solutions, citing as examples many of the countries listed on the worst dictators list.
What we find when examining the 2009 list of worst dictators is that there has been a little movement within the rankings, but two new dictators made the list of the top 20 – Cameroon and Turkmenistan. Generally new dictators appearing on the list debut near the bottom of the list. That was the case this year with Cameroon whose leader, Paul Biya, was ranked 19th. However, Turkmenistan’s dictator, Gurbanguly Berdymukhammedov, finished in 9th place in his first appearance on the list.
Despite the changes in the dictator rankings, the overall impact on the world’s crude oil market was not altered appreciably. This group of the 20 worst dictators still controls a meaningful amount of the world’s crude oil reserves. These countries hold 38.5% of the global oil reserves as estimated by BP, down one percentage point from the prior year. The crude oil reserve holdings are dominated by three countries – Saudi Arabia, Iran and Libya. In terms of global oil production, the 20 countries produced about 22.8 million barrels per day, or about 28% of the total world production in 2007, which is flat with the group’s production for 2006.
Exhibit 8. 2009 Worst Dictators Impact Global Oil Market
Source: Parade Magazine, Mar. 22, 2009; BP; CIA; PPHB
It will be interesting to see whether the economic turmoil from the global credit crisis of last year causes political upheavals in any of these countries. However, unless the changes occur in a select few countries, there likely will be little impact on the global oil market. Of course, many of us would like to see political changes in all these countries for the benefit of their citizens, regardless of the potential positive impact on the world’s oil market.
Note: Musings from the Oil Patch reflects an eclectic collection of stories and analyses dealing with issues and developments within the energy industry that I feel have potentially significant implications for executives operating oilfield service companies. The newsletter currently anticipates a semi-monthly publishing schedule, but periodically the event and news flow may dictate a more frequent schedule. As always, I welcome your comments and observations. Allen Brooks
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Parks Paton Hoepfl & Brown is an independent investment banking firm providing financial advisory services, including merger and acquisition and capital raising assistance, exclusively to clients in the energy service industry.
