The latest commentary by me and Riaan Rossouw: Gas industry outlook for 2015
The WordPress.com stats helper monkeys prepared a 2014 annual report for this blog.
Here’s an excerpt:
A San Francisco cable car holds 60 people. This blog was viewed about 1,300 times in 2014. If it were a cable car, it would take about 22 trips to carry that many people.
Economists are one of the mainstream culprits blamed for the 2007/2008 financial crisis and the ensuing problems that followed. I find this tendency both frustrating and one sided.
Firstly, the Economics profession is by no means perfect and as in most fields has many areas that can be approved upon. However, discrediting Economics as a whole and equating “Economics” and “Economist” to solely consist of “Financial Economics” or “Macroeconomics” is not an accurate description. Whilst these sub-disciplines may be very prominent in the media, there are various other sub-disciplines that make-up Economics.
Secondly, distinction needs to be drawn between “predicting” and “causing” the crises.
Lionel Robbins defined economics as: “the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”. It follows that Economics is not solely concerned with “predictions” but also with “explanations”.
The main argument is that Economics “failed” to predict the financial crises. However, there were economists who raised concerns, for example the behavioural economist Robert Shiller gave early warnings of the overvalued US housing market and in the 1990s expressed concerns about the “bubbliness” of the stock market. When these examples are mentioned, it is argued that such economists did not do enough to outweigh those who were ignorant to it.
I find it hard to believe the field of Economics, in “failing” to predict the crises, was the root cause of the crises and can be blamed for it. Is it not more likely related to financial engineering, insufficient regulation and “aggressive” or “creative” accounting practices?
Conclusion: faulty financial engineering & creative accounting
In conclusion, there are a number of examples were financial engineering and “aggressive” accounting practices led to chaos, particularly with the securitisation of risky assets. I recommend reading the book Billion Dollar Lessons (Carroll & Mui 2008). The book provides a valuable discussion of [applicable] lessons that can be learned from business failures and how NOT to emulate them. For example, the case of Green Tree which provided long-term loans on short-term assets, increasing the mortgage period for mobile homes (with a lifespan of 10 to 15 years) to up to 30 years whilst using gain on sales accounting. A further example is Amerco who used SPEs (Special Purpose Entities) to keep debt off of their balance sheets. Amerco’s SPEs passed more than 60 audits over a number of years but with the collapse of Enron, such SPEs came under increasing scrutiny and auditors required Amerco to report the SPE debt on its balance sheet with dire consequences.
The 21st Africa Oil Week/Africa Upstream Conference took place in Cape Town earlier this month. I was fortunate to attend and present at this prestigious event. The conference addressed a number of inter-related issues pertinent to the future of the industry.
These inter-related issues include:
- resource nationalism & upstream investment;
- oil prices;
- shale gas and the impact on talent.
Firstly, host governments seek to maximise their share of revenues whilst investors want to maximise profits or returns in relation to the risks they take. Oil and gas projects have high costs and risks, with the opportunity for high rewards, i.e. economic rents. A major issue for host governments is to obtain a “fair share” of this economic rent.
Determining what constitutes a “fair share” is easier said than done. The government collects it’s share through bonus payments, various taxes, production sharing agreements, local content requirements as well as state participation through the National Oil Company. In the background, the stability and certainty provided by a country’s fiscal regime is a crucial concern for investors. Companies may tolerate a high level of government take, provided that they have certainty on what this take entails without the fear of retrospective changes or the burden of unexpected capital gains taxes.
In this context, there are a number of indices that measure investors’ perceptions of fiscal regimes and the impact it has on investment decisions. I find it striking that in many cases, survey respondents seem to have discounted the impact of fiscal uncertainty when reporting a minimal impact on investment decisions. For example, Nigeria’s PIB has been in process for many years and respondents seem to be relatively unaffected by this uncertainty. However, from what I have heard at the conference as well as from companies’ comments in the media, it certainly does have a profound impact on new investment. For example, Shell’s divestment from Nigeria’s onshore upstream. Although there are many factors that influence investment decisions, fiscal uncertainty will be a negative consideration. Uganda is a further example where pro-longed uncertainties have stalled the industry from developing. Significant oil finds in 2006 have yet to be brought to market, whilst domestic market obligations and refining has placed a further lag on the process.
Oil prices can only go up or down, but down is the current trajectory. Host governments will have to incorporate such developments into their policies, as opposed to only considering an upside scenario. Lower oil prices tied to rising costs place more pressure on oil firms to stay profitable and satisfy their shareholders. Accordingly, exploration dollars will flow to the most lucrative prospects in terms of both geology and fiscal stability.
The boom in unconventional resources, particularly US shale gas, places a further dynamic on the global oil patch. Particularly in terms of the next generation of talent and upstream skills. Unconventional resources are attracting a large proportion of new graduates. The exploration and production skills they develop are valuable but not perfectly transferable to the conventional exploration game. What will happen once the oil price and the search for conventional oil picks up? Will there be a talent gap? The industry already faces a talent challenge, a large proportion of knowledge is pooled with the older generation preparing for retirement. It will be crucial for companies to embrace these skills for longer by supporting the transfer of critical skills to the next generation. Referring to critical skills, I mean those more intricate skills you normally do not get from a textbook, but from an expert who can say: “been there, done that, got the upstream T-shirt”
The Fraser Institute runs an annual Global Petroleum Survey which surveys executives and managers on jurisdiction specific barriers to investment in oil and gas exploration and production. The latest results are for 2013 and are briefly discussed here for Africa’s largest oil and gas producers. The survey develops a Policy Perception Index, which incorporates scores for a number of factors that impact on investment. It can be worthwhile to consider the index scores for Africa’s established oil/gas producers in the context of their respective reserve and production values.
In terms of oil reserves, the top ranked countries (2013) are Libya, Nigeria, Angola & Algeria:
In terms of production this ranking is somewhat different with Nigeria in 1st place, followed by Angola, Algeria and lastly Libya:
Although Libya is placed 1st in terms of reserves, the country’s political turmoil and instability has had a significant impact on production.
The same group of countries dominate reserve and production values for natural gas. The top countries for gas reserves are Nigeria, Algeria, Egypt & Libya:
For gas production the top countries are Algeria, Egypt, Nigeria & Libya:
In terms of the “Policy Perception Index”, the higher the score the less attractive the jurisdiction, the scores are arranged into 5 quintiles
- Score <20 (being most attractive)
- 20 to 39.99
- 40 to 59.99
- 60 to 79.99
- 80 to 100 (being least attractive)
The 2013 Policy Perception Index scores for the above mentioned producers are illustrated below:
The jurisdiction rankings (out of 157 countries) are as follows:
Angola 108.00 (Score: 60.14)
Egypt 117.00 (Score: 62.62)
Algeria 126.00 (Score: 71.04)
Nigeria 135.00 (Score: 75.75)
Libya 145.00 (Score: 79.98)
Although investment barriers play a major role, the basin maturity and existing reserves also have a significant impact, as is shown by Libya.
Note: All the graphs are based on data obtained from
- The 2014 BP Statistical Review of World Energy.
- The Fraser Institute’s 2013 Global Petroleum Survey.
A large body of research is focused on the impact of natural resources on economic growth. A big portion of this is focused on the so called “resource curse” in resource dependent economies. However, an important question is often omitted: How would resource rich countries have developed in the absence of having these natural resources?
In a recent paper, Torben Mideksa attempts to answer this specific and important question. The paper develops a case study for Norway’s economy – In short, the analysis constructs a synthetic but robust model of the Norwegian economy that is without hydrocarbon resources. The model compares the evolution of per capita income of the actual and synthetic economy from 1951 to 2007. The main result: “The results indicate that, on average, about 20% of the increase in GDP per capita since 1974 is due to the petroleum endowment”. The author notes that this is an interesting result but that Norway could be an exceptional case. However, in this context, the author further highlights that natural resource endowments hold great potential for improving economic welfare.
Water, particularly water quality, is one of the main issues surrounding the Fracking/Environment debate. I recently attended a lecture by Prof Avner Vengosh (Duke University) who works on this specific issue in the USA. (Have a look at his publication).There are many facets to the water issue. Prof Vengosh’s presentation highlighted three areas of concern:
1) The acquisition of water (Where will the water for Fracking be acquired?, will it influence the availability of water for the domestic population?, will operations take place in water stressed areas?)
2) Which chemicals will be used in the fracking process?
3) What will happen to the waste water? (to what extent can it be recycled?).
Furthermore, the publication highlights a number of risks, particularly:
1) Possible contamination of shallow aquifers through stray gas leaking – well integrity/poorly constructed wells.
2) Possible water contamination in areas of shale development and or waste management – spills, leaks or disposal of fracking fluid & untreated waste water.
3) The accumulation of metals & radioactive elements in water sources.
4) Impact on fresh water in water stressed areas.
The presentation once again highlights the importance of effective regulation and monitoring of Fracking activities to ensure that the risks to water resources are minimised.
The eia’s updated World Energy Investment Outlook considers the issue of energy investment and its influence on the affordability, sustainability and reliability of the global energy system. According to the report, energy investment for 2013 totalled more than $1 600 billion and an additional $ 130 billion was invested in improving energy efficiency. It is projected that running up to 2035, energy supply will need an annual investment of around $2 000 billion. In addition, efficiency improvements will require spending of up to $550 Billion.
In terms of hydrocarbons, the real annual capex on oil, gas and coal has more than doubled since 2000, surpassing $950 billion in 2013. North America has mean the focal point for increased oil and gas investment (think shale gas and tight oil), whilst other regions also experienced an upward trend.
Global investment in Hydrocarbon fuel supply
Upstream cost will experience upward pressure as declining fields necessitate the exploration of more challenging/marginal fields. However, technological improvements tied to learning will help to offset some of these pressures, leading to oil prices that may rise to (in real terms) $128/barrel by 2035. The full report can be accessed here