For the commodities market, the good times have come and gone, but the bad times are only just beginning.
Each commodities supercycle, defined as a decadelong bull market, has always been followed by a downturn that lasted just as long, or longer. With demand weak and oversupply rampant, it is unlikely that this time will be any different. For many countries and companies, this means the only options are adapt or die.
Conditions in the commodities market over the past two years have created a perfect storm for Mongolia, bringing to its knees what was once the poster child for emerging market success.
“It is no secret that the Mongolian economy is affected by decreasing foreign direct investments, coupled with China’s slowdown and impacted by [falling] global commodity prices,” Mongolian Prime Minister Saikhanbileg Chimed said in Hong Kong in April.
The Asian Development Bank forecast in March that the country’s gross domestic product will grow a meager 0.1% in 2016, a further slowdown from the 2.3% recorded in 2015. It is a painful comedown for a country that posted 17% growth as recently as 2011. The reversal of fortunes comes as Mongolia’s main exports — copper, coal and crude oil — have all become mired in the global commodities slump.
China is likely to get ahead of the United States and become the world leader in oil imports in 2016, the vice president of Unipec, a subsidiary of China’s oil giant Sinopec, said Thursday. According to China’s General Administration of Customs, the country imported a record volume of oil in 2015 amid low crude prices — 6.7 million barrels daily. The US imports of crude oil in 2015 stood at 7.4 million barrels per day.
“For the first two months of this year, imports of crude oil to China surpassed eight million barrels per day. According to our estimates, the average annual rate will stand at 7.5 million barrels per day. There is a possibility that China will overtake the United States in 2016 and become the world leader in the volume of imported crude oil,” Zhong Fu Liang said at the China — Russia Oil & Gas 2016 event in Beijing.
According to Unipec’s vice president, the volume of oil imports to China will continue to increase, but the growth may slightly slow down compared to previous years.
Unipec was founded in 1993 and is the largest Chinese international trade company. Unipec’s business covers trade in crude oil, oil products and liquefied natural gas, as well as warehousing and logistics.
Japan’s five leading trading houses are expected to book over 1 trillion yen ($8.87 billion) in impairment losses for the year ending March 31, with troubled resource markets wreaking havoc on earnings at top players.
Mitsubishi Corp. is expected to log a 150 billion yen net loss this fiscal year. Even when parent-only results fell into the red in fiscal 1999, the group as a whole saw a net profit. Mitsui & Co. announced Wednesday that it expects a 70 billion yen net loss for the year due to 280 billion yen in write-downs. This would be the first year that either company ends up with a group net loss.
“Our resource-related assets have grown, and an inflow of investment has made prices volatile,” said Mitsubishi President Ken Kobayashi.
Kobayashi, who will step down as president to become chairman on April 1, strove to balance Mitsubishi’s volatile resource businesses with stable nonresource ones. He has pushed for a number of acquisitions, for example, such as a roughly 150 billion yen purchase of a Norwegian salmon farming company in 2014. He said that nonresource businesses performed well this fiscal year. But plunging resource prices brought the whole trading house down.
A prime example is copper development in Chile in which both Mitsubishi and Mitsui took part. They jumped in in 2011 and 2012, right when copper prices were at their peak.
After the oil ministry’s tough talk, BP of the UK has signalled its desire to end arbitration seeking higher prices for natural gas from eastern offshore KG-D6 block that it co-owns with Reliance Industries.
The Cabinet on Thursday allowed market prices for undeveloped gas discoveries in difficult areas subject to a cap. But this higher rate will not apply to areas where their operators have either filed legal suits or arbitration over gas pricing.
Asked for comments, BP India spokesperson said, “The recent decision by the Government on marketing including pricing freedom for new production from deep, ultra-deep water and high-pressure, high-temperature areas provides clarity to end the pending gas pricing dispute.”
RIL, BP and their partner Canada’s Niko Resources had in May 2014 filed an arbitration seeking implementation of higher gas prices for the flagging KG-D6 block.
The Thursday’s Cabinet decision that allows operators to charge up to $7.08 per million British thermal unit (mmBtu) as against the current $3.82 per mmBtu will be applicable to new gas production and not existing output from fields like Dhirubhai-1 and 3 and MA in KG-D6 block.
The new rate will apply to four satellite gas discoveries of D—2, 6, 19 and 22 as well as R-Series gas find in the same block.
It will also be applicable for 1.4 trillion cubic feet MJ-1 discovery in KG-D6 block. But that can happen only when arbitration and litigation directly on gas price are concluded or withdrawn.
Around the year 2003 the only gas IPO that needed a bail-out was Petronet LNG. The issue would have devolved had it need not been saved by the then country head of Abn Amro, who provided the back stop to pick up 10 per cent of the issue-should it fail. And old timers would remember, Petronet LNG was the only IPO that listed below par. It was known even in mid 90s that RILs KG basin was neither large nor significant enough to meet the energy needs of India. MNC Shell which had been scouting for growth, came to India with a proposal to set up as many as 18 coastal terminals that could regasify liquified natural gas. A hype was created and Petronet LNG started moving.
The company roughly owned half by OMC like IOC, HPCL, BPCL and GAIL set up a unit at Dahej, and added another unit at Kochi. While gas for Dahej was to come from Qatar under a 25 plus 20 year contract, the gas for Kochi was to come from the Exxon Gorgon field in Australia. The pricing was complicated and no one believed that LNG would benefit India. But not only was Rs 5000 crore sunk into Dahej, an even larger sum was sunk in Kochi.
Imagine had Shell put in 18 LNG terminals, at current price atleast Rs 100,000 cr worth of LNG Terminals would have been insolvent, The reasons are two. One the capital cost of a LNG Terminal is extremely high-over USD 1 Bn for a one MTPA unit. Second is the landed price-which has no relation to the Oil price or to the price that consumers in India would pay and make fertiliser and power plants viable.
Royal Dutch Shell has taken a huge $8bn hit from the plunge in crude prices and its decisions to pull out of Alaska and axe a Canadian oil sands project.
Reporting a multibillion-dollar headline loss for the third quarter, the Anglo-Dutch energy group said on Thursday that it was cutting another 1,000 jobs and was determined to “become a more focused and competitive company”.
Ben van Beurden, Shell’s chief executive, described last month’s halt to a contentious exploration campaign in Alaska and the scrapping of its Carmon Creek oil sands project in western Canada as “difficult” decisions.
After writing down its shale gas assets in the Marcellus and Utica regions of the US, Shell recorded $8.2bn in one-off charges, sending it to a headline loss of $6.1bn in the three months to September 30, compared with a $5.3bn profit during the same period last year.
“These charges reflect both a lower oil and gas price outlook and the firm steps we are taking to review and reduce Shell’s longer-term option set,” Mr van Beurden said.
In early afternoon trading in London, Shell’s A class shares were down 2.4 per cent to £16.96.
State-owned Oil and Natural Gas Corp will cut gas production from its biggest fields in the Arabian sea by about 40 per cent as it carries out repair work on a pipeline that carries the gas to shore.
ONGC produces 33 million standard cubic meters per day of natural gas from the Bassein field in the western offshore. The gas is carried to shore by two under-sea pipelines, a 42-inch line and a 32-inch line.
The company plans to carry out repair work on the 42-inch pipeline that carries natural gas from the Bassein field to Hazira, from July 7 to 27.
“The repair work was to last 24 days but we have squeezed it in less than three week,” a top official said. “The repair work is to tentatively start from July 7 but could be pushed back to July 8 or 9.”
This would lead to stoppage of production at some wells. “The output will fall by 13-14 mmscmd during the shutdown period,” he said.
State gas utility GAIL India Ltd, which sells gas produced from the ONGC fields to the customers, has been intimated of the shutdown.
Qatar’s gas reserves are so vast it can maintain production at current rates for another 138 years, according to an official report published on Sunday.
An “Economic Commentary” from the Qatar National Bank (QNB) said the vast reserves of the tiny Gulf country will ensure it maintains its prominent position in the hydrocarbon sector “for years to come”.
It added that “Qatar has enough gas reserves to maintain production at current rates for 138 years”.
“Looking forward, Qatar is expected to maintain its dominant role in the global hydrocarbon sector,” read the QNB report.
“Global demand for clean energy is expected to continue rising, and Qatar is a leader in the Liquified Natural Gas (LNG) market.”
Royal Dutch Shell is in advanced talks to acquire BG Group for around £46bn ($68bn), in a deal that would expand the Anglo-Dutch group’s foothold in some of the world’s most exciting oil provinces and cement its dominance of the global trade in natural gas.
Since the price of crude began its rapid decline last June, expectations have been high that the oil sector could see a repetition of the mergers and acquisitions fever that reconfigured the industry in the late 1990s — another period of low oil prices.
That created the current crop of big oil companies such as BP, Chevron and ExxonMobil. Shell’s bid is worth about £46bn, according to people familiar with the matter, which represents a 50 per cent premium to BG’s market value. BG shares closed up 6.3 per cent at 910.4p on Tuesday, valuing the company at £30.7bn, before news of the talks broke.
Some significant deals have already materialised: Halliburton, the oil services group, recently bought rival Baker Hughes for $35bn and Repsol of Spain late last year acquired Talisman Energy of Canada for $8.3bn. Rex Tillerson, chief executive of ExxonMobil, said last month that the company could be open to a large deal.
To salvage 14,305 MW of stranded gas-based power capacity, the government has decided to put in place a transient mechanism where the plants can run at 30% plant load factor with assured supply of gas, but subject to a tariff cap of Rs 5.50 per unit. The operators of gas-based power units will get monetary support from thegovernment for a period of one year so as to be able toservice their debt while forgoing their return on equity.
In a reverse bidding method, the plant willing to take the lowest amount of support from the government’s power system development fund (PSDF) to maintain tariff at R5.50 will be given imported gas. The move would benefit Lanco Infratech, Essar Power, Reliance Power, GVK Group and GMR Energy, among others.
Announcing the Cabinet Committee on Economic Affairs decision on Wednesday, power and coal minister Piyush Goyal said with this new arrangement, electricity generation in the country would be enhanced by 79 billion units worth R42,000 crore.