Archive for ‘oil & gas’

05/07/2017

What Rosneft’s purchase of Essar’s oil refinery means

CONGLOMERATES sometimes sell their least promising units, thereby ginning up returns for the remaining empire. But groups saddled with huge debts do not have that luxury; only by disposing of the most profitable parts can they raise enough funds to satisfy creditors. Such is the story of the Essar Group, which is in the final stages of selling its crown jewel, India’s second-biggest private oil refinery, to a consortium led by Rosneft, a Russian oil titan. The slimming of what was once the country’s third-largest diversified corporate group is a welcome signal that an era of powerful industrialists running rings round their creditors is ending.

The purchase by Rosneft (along with a Russian investment fund and Trafigura, a trading firm) of the giant Vadinar refinery in the state of Gujarat for $12.9bn will be the largest-ever foreign investment in India. It has been a long time coming. It was first mooted over two years ago and jointly announced with fanfare in October by India’s Narendra Modi and Russia’s Vladimir Putin. The deal includes an Indian port and a network of coveted petrol stations.

Most analysts approve of Rosneft’s intiative as a way of diversifying away from upstream activities in Russia. But what is most telling is why the assets came up for sale in the first place. Essar, whose interests span power plants, steel, infrastructure and shipping, says that it saw a good opportunity to monetise an asset it has nurtured for years. It may have had little choice. An investment splurge starting in 2011 has left various Essar operating entities, along with a holding company based in the Cayman Islands, with a combined debt of around $20bn. Although the company does not disclose updated financials (it is privately held by the Mumbai-based Ruia family) few firms in its various industries make the sort of money it would need to pay down such a debt.

In the past, bosses at Indian state-run banks (which conduct over two-thirds of all lending) could easily be convinced to overlook trifles such as a debtor’s inability to repay loans. It takes over four years for an insolvency process to return a meagre 26 cents on the dollar to creditors, so bankers often preferred to behave as if even the most distressed company might somehow find a way of repaying a loan.

A bad-loan crisis followed. Around one in five loans made by state-owned banks are either set to default or have already done so. The central bank is pushing bankers to get tough on errant borrowers. In recent weeks it has threatened to push a dozen firms with huge debts into insolvency unless deals to refinance their debts could be reached quickly. One was Essar Steel.

Banks are still allowed to forgive a part of a company’s debt. But there is now pressure to show that shareholders pay a price, by having to forfeit large chunks of their equity to the banks. Advisers involved in the talks over Essar Steel say the group will have to give up over half its equity in the steel business to convince lenders to refinance loans. That is new: in past cases, parts of Essar have moved in and out of debt restructurings without the central group having to give up any stakes.

Part of the reason the Rosneft deal was held up for so long, insiders say, is that state-owned banks insisted that the Ruia family clear debts from other bits of the Essar empire first, including from the central holding company. They refused to agree to a sale until that was done (Essar repaid in part by taking out a bridge loan from Vneshtorgbank, a big Russian lender). That shows a savvy few thought state-owned bank executives possessed.

The cash from the sale to Rosneft will take away about half of Essar’s $20bn of debt but will also deprive it of its main source of profits. Essar’s pain in having to sell the oil refinery is the corporate system’s gain. Resolving festering bad loans, either by forcing asset sales or seizing ownership, is an essential part of restoring the health of Indian banking. Credit to Indian industry is currently shrinking for the first time in two decades. Resolving this mess can only help companies—including what will remain of Essar.

Source: What Rosneft’s purchase of Essar’s oil refinery means

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26/08/2016

China’s Oil Industry Destined for Big Changes – China Real Time Report – WSJ

China’s largest oil fields are the stuff of Communist Party folklore, but today they’re potent symbols of the challenges facing China’s energy industry.

Significant falls in the first half of this year at China’s biggest-producing oil fields — Daqing, Shengli, and Changqing — have solidified a moment anticipated by the global energy industry: Oil production in China is in long-term decline.

The turnabout is jarring for an industry that has long held huge political sway in China. The “Daqing Spirit”– meaning hard work in the face of challenges — has long been celebrated by top leaders. The companies have been held up as critical to fueling China’s economic rise.

The London-based consultancy Energy Aspects compiled data from China’s oil fields. It shows just how great a toll the plunge in crude prices has taken on overall domestic production.

China’s three biggest oil fields experienced production declines of between 7-9% in the first half, according to Energy Aspects. That far outpaced China’s production decline as a whole. Small gains from output in the Xinjiang region and elsewhere haven’t been enough to compensate.

The declines are important, Energy Aspects said in a recent report, “because it symbolizes a significant shift in thinking” by Chinese officials. While the government has a long-held goal of limiting imports — and protecting jobs in places like Daqing — by keeping production high, leaders seem to have realized that track was both unsustainable and expensive.

With global crude prices under $50 per barrel, many aging wells at big oil fields in China lose money with each barrel they pump. Shutting off the taps at home helps to stem losses when cheaper oil can be purchased from overseas.

So what does it mean?In short, the assets that long served as the cornerstone for revenue for companies such as PetroChina are drying up. If China’s energy giants want to be more profitable–as outside investors and China’s government are pressuring them to do–they’re going to need to look to diversify revenue.

That’s likely to include a mix of initiatives, say Chinese executives and analysts. One part of the drive might be trying to secure new oil production overseas. That would mean a renewed push for outbound deals. Big discoveries in Brazil and elsewhere appear particularly attractive to China.

The other path to future growth is more complicated. For example, China’s oil companies are keen to learn how to boost sales and profits at the thousands of retail gas stations across China. Earning more money from sales of Snickers bars or cigarettes would make them somewhat less vulnerable to the vicissitudes of global oil prices.

The bottom line: China’s oil industry, like the economy as a whole, is destined for big changes. Many of those in the coming years will involve a greater global role for the oil giants — PetroChina, Sinopec, and Cnooc — than they currently have today.

The bigger global footprint is inevitable, says one person with ties to China’s top oil executives, as production at home begins to dwindle. The international revenues are needed to stave off a domestic slowdown.

“We are coming. We are coming,” he said.

Source: China’s Oil Industry Destined for Big Changes – China Real Time Report – WSJ

31/05/2016

ONGC Videsh, Azerbaijan’s SOCAR look to jointly sell oil | Reuters

ONGC Videsh has signed a preliminary agreement with the trading arm of Azerbaijan’s state energy company SOCAR to look at jointly marketing crude oil, the company said in a statement on Tuesday.

OVL, the overseas assets acquisition arm of the country’s biggest explorer, Oil and Natural Gas Corp (ONGC), wants to leverage the experience of SOCAR Trading SA in oil marketing, it said.

Reuters had reported about the deal on Monday.

Source: ONGC Videsh, Azerbaijan’s SOCAR look to jointly sell oil | Reuters

08/04/2015

Learning Mandarin in the tundra – Russia invites China into oil business | Reuters

Russia‘s freezing north has never been the most welcoming place for foreign travelers, and its onshore oil riches have always been state secrets. But when the order comes from the Kremlin to open up, people obey.

Pipelines to be laid to transport oil to Vankor are seen at the Rosneft company owned Suzunskoye oil field, north from the Russian Siberian city of Krasnoyarsk, March 26, 2015.  REUTERS/Sergei Karpukhin

Last September, President Vladimir Putin, who has been seeking new markets in Asia for Russian energy exports to replace traditional customers in Europe, announced that he would welcome Chinese investment in Vankor, a vast new oil field in remote eastern Siberia owned by state firm Rosneft.

Since then, delegations from both China and India have been flown out to visit the field in the remote tundra.

Some of the workers, who spend four weeks at a time at the isolated station – where temperatures can fall as low as minus 60 Celcius (minus 76 Fahrenheit) – have duly taken up Mandarin.

“No problem. We will work with the Chinese workers if need be,” said Alexei Zyryanov, deputy head of an oil and gas production unit.

All of Vankor’s output of 440,000 barrels per day of crude is already shipped east, via the East Siberia-Pacific Ocean pipeline, which includes a spur feeding China’s northeast.

But a proposed Chinese investment in a stake in the project would go far further than Moscow has ever gone before to luring Beijing into its hydrocarbon industry.

Rarely has Moscow considered offering an ownership stake in such a big strategic onshore deposit to outsiders, despite decades of interest from Western majors. The offer is the more remarkable for being made to China, a rival for decades with which Russia nearly went to war in the 1960s over a border dispute.

Rosneft confirmed that it has reached a draft agreement to sell a 10 percent stake in Vankor to China.

via Learning Mandarin in the tundra – Russia invites China into oil business | Reuters.

05/02/2015

Why Oil-Hungry China Isn’t Reaping Benefits From Low Prices – China Real Time Report – WSJ

China – which gets 60% of its oil from abroad — is on its way to becoming the world’s largest petroleum importer, and is already there by some measures. So in theory it stands to be a huge beneficiary of plummeting oil prices.

However, as The Wall Street Journal reports, the benefits of cheap oil for several major economies are far less clear, as governments from Europe to Japan battle fears that falling prices—in part a result of cheap energy—will deter spending by consumers and new investment by companies.

In China, cheap oil hasn’t been nearly the boon many may have thought. That is the result of several factors.

The government controls prices, meaning the drops for Chinese businesses and consumers lag those of international oil markets. China’s central government has raised fuel taxes, offsetting prices declines. Both factors add up: The government-maximum price in Beijing for basic-quality gas comes out to roughly $3.50 a gallon, once currency conversions and other factors are weighed. Compare that to the U.S., where that same gallon costs about $2.07.

Then there are the structural issues in China’s economy like overcapacity that low prices can’t fix.

“If you look at the lower oil price, it’s true China is a net importer of oil so in theory it should be beneficial,” said Vincent Chan, a research analyst at Credit Suisse CSGN.VX +0.05%. “But at the same time you have other issues like some of the structural issues that are more important in China.”

The bottom line for China: While consumers and some industries have gotten a boost from lower oil prices, the benefits have been pared by the central government’s preference for price stability. Similarly across Asia, governments have used low oil prices to unwind complicated and costly subsidies, which in recent years have kept prices at the pump artificially low for many Asian consumers.

via Why Oil-Hungry China Isn’t Reaping Benefits From Low Prices – China Real Time Report – WSJ.

05/02/2015

Falling oil prices pull India’s budget out of the fire | Reuters

Falling oil prices have been a major windfall for India: Just weeks ago it faced failing to meet fiscal deficit targets, but can now expect a budget that not only hits its targets, but also provides extra cash to support reform.

India's Finance Minister Arun Jaitley gestures during the session 'India's Next Decade' in the Swiss mountain resort of Davos January 23, 2015. REUTERS/Ruben Sprich

The coming budget for fiscal 2015/16 (April-March), which will be unveiled on Feb. 28, is widely seen as a test of Prime Minister Narendra Modi‘s ability to lead economic reform.

Fortunately for Modi, the economic climate has handed him a chance to pass that test with flying colours: Budget planners are optimistic that he will set Asia’s third-largest economy on a path for growth of 7 percent to 8 percent over the next two years.

“The situation is far better now than in December,” said one finance ministry official, who spoke to Reuters despite a ban on contact with the media in the secrecy-shrouded run-up to the presentation of the annual budget. “The budget will deliver on Modi’s promise of better days for the economy.”

The halving of global oil prices since mid-2014 has allowed the Modi government to raise diesel and petrol fuel taxes and cut diesel prices by 25-30 percent – a windfall gain for households as well as businesses, and dampening inflationary pressures in the economy.

via Falling oil prices pull India’s budget out of the fire | Reuters.

14/12/2014

With Oil Prices Falling Venezuela Needs China More Than Ever – Businessweek

Venezuelan President Nicolás Maduro had a Plan B in the event the Organization of Petroleum Exporting Countries declined to back his country’s proposal to cut output to boost prices.

Downtown Caracas, Venezuela

The day after OPEC’s Nov. 27 decision to maintain production at current levels, a move that drove oil prices to new lows, a somber-looking Maduro went on national television to tell the Venezuelan people he was dispatching Finance Minister Rodolfo Marco Torres to Beijing. Torres spent the first week of December in China, during which he tweeted photos of his meetings with Chinese officials and bankers.

via With Oil Prices Falling Venezuela Needs China More Than Ever – Businessweek.

21/11/2014

China Stocks Up on Oil While It’s Cheap; Tanker Companies Profit – Businessweek

With oil prices off about 30 percent since June, China is importing record amounts of crude to build up a strategic reserve. Cheap fuel is giving tanker companies their best profits in years.

via China Stocks Up on Oil While It’s Cheap; Tanker Companies Profit – Businessweek.

28/10/2014

Putin Turns to China as Russia’s Economy Is Weakened by Sanctions – Businessweek

Defying the U.S. and Europe is forcing Russian President Vladimir Putin to aid his biggest rival to the east. To avert a recession, Russia is turning to China for investment, granting it once restricted access to raw materials and advanced weapons, say two people involved in planning Kremlin policy who asked not to be identified discussing internal matters. Russia’s growing dependence on China, with which it spent decades battling for control over global communism, may end up strengthening its neighbor’s position in the Pacific. With the ruble near a record low and foreign investment disappearing, luring Chinese cash also may deepen Russia’s reliance on natural resources and derail efforts to diversify the economy.

“Now that Putin has turned away from the West and toward the East, China is drawing maximum profit from Russian necessity,” says Masha Lipman, an independent political analyst in Moscow who co-authored a study on Putin with former U.S. Ambassador Michael McFaul. China is wasting no time filling the void created by the closing of U.S. and European debt markets to Russia’s largest borrowers. A delegation led by Premier Li Keqiang signed a package of deals on Oct. 13 in Moscow. Among them were an agreement to swap $25 billion in Chinese yuan for Russian rubles over three years, a treaty to protect companies operating in Russia and China from having their profits taxed twice, and cooperation on satellite-navigation systems and high-speed rail. To promote trade, Export-Import Bank of China agreed to provide credit lines to state-owned VTB Group and Vnesheconombank, Russia’s development bank, as well as a trade finance deal with Russian Agricultural Bank.

Russia’s economy is more vulnerable than it’s been since the collapse of the Soviet Union in 1991. Unlike then, Russians are united in support of their leader, and with $455 billion in foreign currency and gold reserves, the country isn’t broke, according to Lipman. “The economy was much worse then, but Russia was in a much better position geopolitically because it had the support of the U.S. and Europe,” she says. Putin spokesman Dmitry Peskov didn’t respond to requests for comment.

via Putin Turns to China as Russia’s Economy Is Weakened by Sanctions – Businessweek.

22/10/2014

India’s Modi Ends Fuel Subsidies, Showing He Is a Reformer – Businessweek

Narendra Modi has proven once again how important it is to be lucky in politics. In the spring, he was India’s opposition leader, running for prime minister by focusing on the government’s mismanagement of the economy. He had plenty of ammunition: The coalition led by the Congress Party had presided over years of corruption scandals and stalled reforms—and also had to contend with a growing budget deficit fueled by soaring prices for oil and other imported commodities.

In India, Falling Oil Prices Make Modi's Job Much Easier

During the campaign, Modi said he wanted to cut back on the costly subsidies the government offered millions of Indians to cushion the blow of those soaring prices. Petroleum subsidies account for one-quarter of India’s 2.6 trillion rupee ($42.4 billion) subsidies bill. But after he won in a landslide, Modi’s first budget (which his finance minister announced in July), was a modest plan that left the subsidies untouched.

That left observers unsure as to whether Modi was backing away from the politically difficult task of making the cuts. “We can either trust that the government will deliver price hikes as the year progresses,” Mirza Baig, head of foreign exchange and interest rate strategy at BNP Paribas in Singapore, wrote in a report after the budget announcement in July. “Or we can be more cynical and suggest that the Modi administration intends to continue the practice of rolling forward subsidy expenditure to next year.”

via India’s Modi Ends Fuel Subsidies, Showing He Is a Reformer – Businessweek.

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