Home' Trinidad and Tobago Guardian : December 4th 2014 Contents DECEMBER 2014 • WEEK ONE www.guardian.co.tt BUSINESS GUARDIAN
ENERGY | BG9
There are predictions that
crude oil prices will continue
to fall and could go below
US$60 a barrel before it
rebounds in a year s time.
In a forecast on Tuesday, Bank of America
Merrill Lynch says it expects Brent crude
prices to drop below $US60 a barrel over
the next six months.
"This reinforces our bullish view on mar-
kets in the longer term and we reiterate our
view that the market will nearly double by
2018 and give a 15 per cent return over next
year," the company said.
Between September 14, and Tuesday
December 2, 2014, crude prices have fallen
from US$94 to US$68 a barrel.
Energy consultant Anthony Paul agrees.
"The reality is that crude prices have not
hit rock bottom. I agree it will go lower that
US$60 a barrel. I think what we in T&T
have to be concerned about is that the Gov-
ernment is not telling the country the entire
reality of the prices and the potential effect.
"For example, I hear the Minister of
Finance stating low oil prices will not have
a major effect because we are a gas-based
economy. The truth is: the value of a barrel
of oil equivalent of natural gas is significantly
lower than a barrel of crude and earns less
for the Government. Also, 42 per cent of
the LNG we sell is being impacted by lower
crude prices because they are indexed.
"It was an historical accident that natural
gas prices were linked to crude oil because
in Europe in the 1960s there wasn t a natural
gas market, so European importers decided
to link the price paid for gas to the value of
oil, which was seen as natural competition
since both were chiefly used for home heat-
ing, power generation, and industrial appli-
"So most of the natural gas contracts
used an oil price (or some basket of oil
prices) as the main index, and made the
gas price attractive relative to that. If oil
became more expensive, the gas price would
rise, but still be competitive with oil. If oil
became cheaper, the gas price would fall.
"This indexation also made sense to the
gas producing companies and countries.
For them, natural gas was---at least to some
extent---a by-product of their oil produc-
tion. They understood oil markets well,
and if they could sell gas at a price tied to
the oil market, that would suit them fine.
A similar historical situation led to the
adoption of oil indexation for liquefied nat-
ural gas (LNG) imports into Asian countries
like Japan and Korea, and for the exporters
supplying those markets."
Paul s argument is supported by the pres-
ident of Atlantic LNG and bpTT s regional
president s analysis.
Nigel Darlow, president of Atlantic LNG,
discussed with the Business Guardian the
fall in oil prices and its effects on LNG
"I think it is going to have a depressing
or dampening effect on gas or LNG prices
and I think we are already seeing that. The
LNG pricing has come off fairly significantly
and a large part of that is because there is
a lot of LNG contracts that are effectively
oil indexed. So, with the declining oil price,
you have seen a reduction in the LNG pric-
Norman Christie, regional president of
the country s largest natural gas producer
and Atlantic s largest shareholder, bpTT,
also confirmed the falling LNG prices.
"Of course some prices are tied to crude
and some are delinked from crude. In the
Far East, some of those prices are tied to
crude. So we have seen some fall off in
prices in those areas linked to crude. So
we have a mixed block."
Bank of America Merrill Lynch also
reports that the collapse in oil prices is
reverberating across the energy complex
and is now filtering through to LNG prices.
It said forecasts for mild weather in Asia
and Europe, following mild weather last
winter, mean stocks are at healthy levels.
"In Europe, gas demand dropped by an
astonishing 9.0 per cent this year to the
lowest level since 1998, mainly driven by
a mild winter but also depressed economic
activity," the bank said.
Chinese imports continued to disappoint
with demand growth slowing on mild
weather and a lower rate of GDP growth.
According to the bank, "LNG prices have
come down a bit quicker than we probably
anticipated and if anything, because there s
a bit more production coming on, going
back again to the fact that economic growth
has disappointed, it feels like we re going
to have a slightly softer year on LNG than
42% of LNG oil-indexed
...Gas prices to fall
Bond investors who helped finance
America s shale boom are facing
potential losses of US$11.6 billion as
oil prices plummet by the most since
the credit crisis.
The US$90 billion of debt issued by junk-rated
energy producers in the past three years has fallen
almost 13 per cent since crude oil peaked in June.
Halcon Resources Corp (HK), SandRidge Energy Inc
and Goodrich Petroleum Corp have been among the
hardest hit as OPEC s refusal to ease a supply glut
pushed prices to a five-year low of US$66.15 a barrel
The oil selloff is deepening concern among bond
investors that the least-creditworthy oil explorers will
struggle to pay their obligations and prompt bankers
to rein in credit lines as revenue slumps. Halcon, San-
dRidge and Goodrich are among about 21 borrowers
operating in the costliest US shale-producing regions
that will be unprofitable if crude oil falls below $60
a barrel, according to data compiled by Bloomberg.
"We are concerned that there will be defaults and
that was even before oil fell as much as it has," Ivan
Rudolph-Shabinsky, a New York-based money man-
ager at Alliance Bernstein Holding LP, said in a tele-
phone interview. "There was too much money going
into this space that would have resulted in problems
long term; now that timeline has been accelerated."
Advances in horizontal drilling and hydraulic frac-
turing, or fracking, have helped US drillers pump the
most in three decades. Companies have relied on debt
financing to make up for cash shortfalls as they
expanded, doubling energy bonds share of the high-
yield market to 17 per cent since 2008, according to
a October 14 report by Citigroup Inc.
High-yield, high-risk debt is rated less than Baa3
by Moody s Investors Service and under BBB- at Stan-
dard & Poor s.
West Texas Intermediate crude dropped from a
June high of US$107.26, falling 17.9 per cent in Novem-
ber after the Organisation of the Petroleum Exporting
Countries decided last week to keep its production
target of 30 million barrels a day.
Output in the US will climb to 9.5 million barrels
a day next year, the most since 1970, the Energy Infor-
mation Administration estimated Oct 7. Demand
nationwide will slip this year to the lowest since 2012,
the government predicted.
Lower oil prices will "affect cash flow but also
capital spending, which in turn, affect projected pro-
duction and cash flow in a downward spiral," Gary
Stromberg and Jan Trnka-Amrhein, analysts at Barclays
Plc, wrote in a note to clients dated yesterday.
Because the amount oil and gas companies are per-
mitted to borrow from bank lenders is directly tied
to the value of their reserves, falling commodity prices
increase the risk they will face a cash squeeze, according
to an October 9 report by Spencer Cutter, an analyst
at Bloomberg Intelligence in Skillman, New Jersey.
The extra yield investors demand to hold the bonds
of energy companies instead of comparable US Treas-
uries increased to 7.63 percentage points yesterday,
more than double the premium in June, Bloomberg
data show. The price of crude collapsed 35.7 per cent
during that period.
The issuance of debt has helped contribute to pro-
duction growth in the US and falling prices will make
it harder for companies to meet their obligations,
according to Virendra Chauhan, a London-based oil
analyst with Energy Aspects Ltd. Bloomberg
Junk bonds backing
shale boom facing
US$11.6 billion loss
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