Effect of Iraq Crises on Global Benchmark

By Grant Smith

Brent crude, a global benchmark, is trading above $100 a barrel for a 23rd consecutive month, the longest stretch in data starting in 1988. Prices will average more than $100 this year and in each of the next three years, according to analyst estimates compiled by Bloomberg. It traded at $110.27 a barrel at 11:10 a.m. in London.

Iraq’s production contracted 7 percent since reaching a 35-year peak of 3.6 million barrels a day in February, according to the International Energy Agency. The Basrah Oil Terminal in southern Iraq is scheduled to load 2.5 million barrels a day of crude for export this month and 2.7 million in June, according to loading programs obtained by Bloomberg News.

Shipments from the south, the only region exporting regularly, will probably stall at about 2.5 million barrels a day, unless work on storage tanks, pumping stations and other infrastructure is completed, the Paris-based IEA said in a report May 15.

“There are still lots of uncertainties regarding deliveries,” B.K. Namdeo, refineries director at Hindustan Petroleum Corp., said in Mumbai on May 13. “If the situation continues or worsens, we may have to cut Iraqi oil imports next year and switch to countries like Iran.”

Credit: Bloomberg.net

Iraq Oil Revival Stalls Again as Violence Pinches Growth

By Grant Smith and Nayla Razzouk  

The revival in Iraqi oil output has stalled again.

Production forecasts for 2014 are getting less optimistic. The Oil Ministry’s official target is 4 million barrels a day by the end of the year. More likely it will be 3.75 million, Thamir Ghadhban, an adviser to the prime minister, said in an interview May 14. Or perhaps 3.4 million, about the same as last month, according to the average of six analyst estimates compiled by Bloomberg News.

Violence and conflict are pinching growth for OPEC’s second-biggest member. While Iraq added about 2 million barrels to daily production since 2003, the year of Saddam Hussein’s ouster, attacks on pipelines and an oil-revenue dispute with the semi-autonomous Kurdish region are diminishing the country’s dependability as a supplier. They’re also contributing to making oil more expensive, VTB Capital said.

“Iraq always seems to be the producer of the future,” Mike Wittner, head of oil market research at Societe Generale SA in New York, said by phone May 13. “The entire world has been upbeat on Iraq’s prospects for the last couple of years. But it’s not steady growth. They have to get the security situation sorted out, or that’s going to continue to hamper them.”

Iraq’s exports to Europe have been curbed since early March because of sabotage on its northern pipeline to Turkey. New supplies from the Kurdish region are mostly halted because of the dispute with the central government. Prime Minister Nouri al-Maliki may need to form a broad coalition to remain in power after last month’s parliamentary elections, potentially slowing oil-policy decisions.

Effect of Current Crude Oil Prices on Fuel Supplies

By Ben Sharples

Crude inventories in the U.S., the world’s largest oil consumer, probably rose to 391.5 million in the week ended May 23, according to the median estimate of eight analysts in the Bloomberg survey. Stockpiles expanded to 399.4 million through April 25, the highest level since the EIA began publishing weekly data in 1982.

Gasoline supplies probably climbed by 250,000 barrels last week, the survey shows. Distillates, including heating oil and diesel, are projected to have dropped by 200,000 barrels.

The EIA, the Energy Department’s statistical arm, will release its weekly stockpile data at 11 a.m. tomorrow in Washington, a day later than usual because of the Memorial Day holiday. The industry-funded American Petroleum Institute is scheduled to publish a separate report today.

“Investors have one eye on what’s happening in Ukraine,” said Jonathan Barratt, the chief investment officer at Ayers Alliance Securities in Sydney. “If inventories decline again, the market will focus on it, regardless of ample supply.”

WTI has technical resistance along its 30-day upper Bollinger Band, data compiled by Bloomberg show. Futures halted advances in early March and mid-April near this indicator, at about $105.25 a barrel today. Sell orders tend to be clustered around chart-resistance levels.

Credit: Bloomberg.com

546m Gallons of Crude Oil Spilled in Nigerian N'Delta in 50 Years, Say NGOs

Oil tanks

By Ejiofor Alike

About  546 million gallons of crude oil have been spilled into the Niger Delta over the last 50 years. The quantity amounts to 11 million gallons a year, representing about 50 times the estimated volume spilled in the historic Exxon Valdez Oil Spill in Alaska, United States, in 1989.

These revelations are contained in a letter written by 13 Nigerian and five international Non-Governmental Organisations (NGOs) on the National Oil Spill Detection and Response Agency (NOSDRA) Bill, before the Senate.

The letter, a copy of which was given to THISDAY Wednesday, stressed   the need for the passage of the NOSRDA Amendment Bill 2012 into law, as well as the need to ensure remediation and protection of the environment in the Niger Delta.

“The bill is due to be discussed in a Senate hearing on 12 February. The reform of the NOSDRA Act 2006 will provide clearer regulations and a strong response mechanism to deal with oil spills which will save millions of lives and improve the livelihoods of all the communities living in the Niger Delta,” it said.

The letter noted that in 2011, the United Nations Environment Programme reported that the Ogoniland region in the Niger Delta alone could take 30 years to recover from oil spills.
The NGOs called for an end to the spilling and destruction of the environment and the unacceptable devastation on the lives of local communities in the areas of oil exploration.

“This can be achieved by strengthening the institutional and regulatory power of NOSDRA, and enshrining the ‘polluter pays’ principle in law, which the NOSDRA Amendment Bill 2012 will do,” it added.
The groups urged   the lawmakers to forge ahead with the NOSDRA Amendment Bill 2012 for the betterment of the environment and Nigerians.

Among those who endorsed the letter were Thelma Diwari, representing CBNHRSD; Head of Centre for Environment Human Rights and Development (CEHRD), Zabbey Nenibarini;  Nick Hildyard of Cornerhouse; and the Executive Director of Foundation For Environmental Rights, Advocacy & Development (FENRAD), Nelson Nnanna Nwafor.

Nigeria FG Seeks Supports of EITI to End Crude Oil Theft

Crude Oil Theft

President Goodluck Jonathan on Monday urged the Extractive Industries Transparency Initiative (EITI) to do more to support efforts by the Federal Government to stop the exportation of stolen crude oil from Nigeria.

The president made the request when the Chairperson of EITI, Ms. Claire Short, paid him a visit at the Presidential Villa, Abuja.

He called on EITI to join the Federal Government in working to ensure that refineries that received stolen crude oil from Nigeria were identified and punished.

``The efforts of EITI in criminalising `blood diamonds’ from African mines have helped in curtailing that illegal business.

``I urge you to also support Nigeria as we confront the forces stealing Nigerian crude oil.

``The theft of crude oil from Nigeria involves the collusion of foreigners and the stolen crude is refined abroad.

``EITI can use its mechanisms to help us track down the thieves and those who receive the stolen crude oil,” he said.

News Agency of Nigeria (NAN) reports the president observed that Africa was losing a lot through leakages in the mining and extractive industry.

He urged Short and her colleagues at EITI to help to end the exploitation of Africans and African nations by multinational companies engaged in the extraction of the continent’s immense natural resources.

The president said that an expanded inter-ministerial committee would be inaugurated next week to ensure greater synergy in NEITI’s investigations.

He said that the committee would also facilitate the implementation of NEITI's recommendations for greater probity in Nigeria’s oil industry.

Jonathan said that the inauguration of the committee was in line with the Federal Government’s commitment to giving the NEITI all necessary support and freedom to discharge its duties,

The president commended EITI’s efforts at discouraging exploitation and corruption in extractive industries across the world.

He assured Short and her team that Nigeria would continue to strive for even greater openness and transparency in its oil and mining sectors.

RPT-Canada crude-by-rail exports reach record high of 160,000 bpd

Canadian exports of crude oil by rail hit a record high of 160,000 barrels per day in the first quarter of 2014, Canada's National Energy Board says, a more than 50 percent rise from the same period a year earlier.

Canada shipped 160,164 bpd out of the country by rail between January and March, a sharp rise from the first quarter of 2013, when it exported 105,632 bpd, the NEB said on Friday. The first-quarter figure was a 7 percent increase from the final quarter of 2013, when 149,479 bpd were exported by rail.

The crude-by-rail boom in Canada has been gathering pace over the past two years as producers seek alternatives to congested export pipelines that can leave crude bottlenecked in the oil-rich province of Alberta and weigh on prices.

Midstream companies such as Gibson Energy Inc and some major Alberta oil sands producers such as Imperial Oil are rushing to build new unit train terminals that can load more than 100 cars or up to 70,000 barrels of crude in one go.

Canada, which has the world's third-largest crude reserves after Saudi Arabia andVenezuela, exports around 2.6 million bpd in total. (Reporting by Nia Williams; Editing by Peter Galloway)

Credit: Reuters

Protecting Nigeria’s Revenue Through Crude Oil Hedging

Tanker vessel

By Wale Adebayo

Crude oil accounts for about 80 percent of Nigeria’s export earnings. It may therefore be surmised that any drop in the international price would have a significantly negative impact on the Nigerian economy and create a massive budget deficit. A budget deficit would lead to drawdown in our foreign reserves.  Nigeria’s foreign reserves currently stand at about $36.5billion as at April 2012. The foreign reserves figure is anticipated to continue to grow under the current democratically elected government of President Goodluck Ebele Jonathan together with proper management by the trio, the Central Bank of Nigeria Governor Mallam Lamido Sanusi Lamido, Honourable Minister of Petroleum Dieizani Alison-Madueke and Honourable Minister of Finance Dr. Ngozi  Okonjo Iweala.

2011 Production, Revenue and Excess crude oil revenue

In the 2011 budget, $62per barrel (pb) was provided for in the 2011 Appropriation Bill. In simple terms, this means our crude oil budget benchmark is put at $62 pb and if the international crude oil price falls below $62pb our budget will go into deficit. At $62 benchmark and a production output of 2.3m barrel per day in 2011 that gave an annual production of over 839million barrel and revenue of $52 billion per year. At $100pb Nigeria earned $83.9billion in 2011 (NGN 12.6 trillion naira).The excess crude oil earned for 2011 should be approximately $31.9 billion (approximately NGN4.8 trillion excess crude oil revenue in 2011).

However, we should not forget that Nigeria operate joint venture (JV) agreement with the major international oil company at 55% to 45% JV agreement. This means Nigeria earned 55% of $31.9billion excess crude oil which came to about $17.5 billion (NGN2.6 trillion naira) in 2011.

2012 Production, Revenue and Excess crude oil revenue

The Federal Government has set an oil production target of 2.48 million barrel per day and oil price of $72 per barrel benchmark for the purposes of revenue projections in the 2012 budget
Crude oil revenue at current international crude oil prices of over $100 (which is above the benchmark of $72 for 2012) is about $248million per day (assuming $100 average daily price). This would come to about $90.5billion at the end of 2012. Excess Crude Oil revenue in 2012 assuming oil continues to trade at over $100, will be over $25bn (NGN3.8 trillion naira)

Also we should always remember the 55%-45% joint venture agreement. This means Nigeria is projected to earn $13.9 billion (NGN2 trillion) in excess crude oil revenue in 2012. ( This is more than enough to take care of Nigeria infrastructure problem and still have enough saving for the Nigeria Sovereign Wealth Fund account).

Oil Price Shock in 2008

It is highly optimistic to assume that the government will continue to earn this excess crude oil revenue though. However, the oil market is very volatile and dangerously unpredictable, as was witnessed in 2008 when crude oil peaked at about $140 and yet fell to $30 in the same year. This sudden price drop saw a number of oil-producing nations suffer substantial losses and massive budget deficit, which is why hedging against such occurrences, has become extremely important.

The best way to guarantee Nigeria’s oil revenue, based on our budget benchmark of $75pb for 2012, is for the government to hedge our crude oil production at the budget benchmark as strike price using the money we derive from the excess to buy a put option at 75 strike- protection on our production against a fall in the international crude oil price below $75. This has to be done urgently given the current downward trend in the global commodity price .

Benefits of Hedging

Below are the benefits of Hedging to Nigeria government:
• increasing accuracy of budgeting
•  guaranteeing a minimum price the Government will receive for its crude oil sales.
• reassuring the Federal Ministry of Finance and Central Bank that it will be able to meet its budget obligations to ensure satisfactory funds are available for National development.
• promoting transparency, accountability and consistency of foreign exchange earnings as hedges can be benchmarked against international Oil prices in US dollars $
• reducing uncertainty of the future international market events
•  supporting long-term financial planning and cost control
• creating greater certainty of cash flows;
•  It will also guard against any production shortfall and
• resulting in a favourable Credit Rating for the Nation by international rating agencies

Hedging Instruments

Hedging is done using financial contracts (put options or call options), which gives the right but not the obligation to buy or sell an asset against another at a pre-determined rate (“strike”), and at a pre-determined time. Buying an option gives full hedge and unlimited participation if the price move is favourable and should guide against budget deficit/shock due to any fall in the international crude oil prices below our budget benchmark price. It will also guard against any production shortfall.

The Cost of Hedging

This is dependent on the trading price of crude oil at the time of hedging. If it is trading close to our strike (budget benchmark) it will be costlier than if it is further away from the benchmark. For example if Nigeria decided to hedge now using the Nigerian budget benchmark at strike price $72 and with oil trading at over $100, it would be cheaper than if oil were below $100 and close to the benchmark

Mexico as a Case Study

(Lesson from Mexico)

Mexico is one of the major crude oil producing countries and has over the years been involved in hedging of their crude oil productions using options. Mexico’s oil hedging program is one of the biggest from a single entity in the derivatives market.
In 2009, Mexico spent a total $1.5bn to hedge a total of 330m barrels at a budget benchmark of $75 strike. When oil dropped to as low as $28pb in 2008, Mexico made more than $5bn on those hedges. As they were fully hedge and was able to sell at the strike price of $75 even though oil was trading at $28
In 2010, seeing the advantages, Mexico spent a total $1.17billion to hedge a total of 230million barrels at a budget benchmark of $57 strike in 2010, and $812m to hedge a total of 222million barrels at a budget benchmark of $63 strike in 2011. Mexico has already taking care of her 2012 crude oil through hedging.

The Way Forward for Nigeria Government

Given the current market price of over $100, there is need for the Nigerian government to act swiftly and consider starting a hedging program for our crude oil production. At the current price, we can get the hedging done much cheaper than we would if the price were to fall. The Nigeria government can also consider hedging in parts - for example 40% to 50% of daily productions like some other oil producing countries.

Advisor Role to the Federal Government on Crude Oil Hedging

Nissi-Lloyds Capital & Investments LLC is available to provide advisory services to the Federal Government of Nigeria on Crude oil hedging. Currently an industry leader in deal origination, execution and distribution, Nissi-Lloyds Capital has advised on many transactions across several sectors and assets as well as demonstrated market leadership capabilities in derivatives structuring and advisory.

Adebayo is  MD/CEO of Nissi-Lloyds Capital & Investment LLC, Lagos.