Home' Trinidad and Tobago Guardian : October 3rd 2013 Contents OCTOBER 2013 • WEEK ONE www.guardian.co.tt BUSINESS GUARDIAN
ENERGY | BG9
High crude prices and low refinery margins have
placed a financial squeeze on State-owned Petrotrin
and the company has been scrambling to review its
budget and to contain costs, according to well-placed
Sources say the company has been particularly
hampered by the low levels of its own oil production
which has it importing more and more crude as it
tries to feed the refinery.
"You have to always remember that Petrotrin does
not sell crude. The company produces crude oil and
it then sells to its refinery on what is called a transfer
price. This price is slightly lower than the international
price. But it then has to buy some crude locally and
import most of the rest. It means that Petrotrin only
sells refined product, and if the difference between
the oil price and product price is low, then the com-
pany is in trouble. That is the present scenario," said
a source, speaking on condition of anonymity to the
Business Guardian on Tuesday.
Petrotrin s Poine-a-Pierre refinery has a capacity
of 165,000 barrels of oil per day (bo/d). However,
the company s crude production is just over 35,000
bo/d. It also buys an additional 10,000 bo/d from
lease out, farm out producers and another 5,000,bo/d
from other local producers. This means it imports
more than 110,000bo/d of high prices crude on the
For the past calendar year, crude prices have aver-
aged more than US$100 a barrel while the prices for
products like gasoline have remained fairly constant.
Sources say the margins were so low recently it was
less than US$1 a barrel.
Petrotrin s struggles come just as BP s lead econ-
omist and vice-president Christof Ruehl warned that
refining was not a good business to be in and he
expected plants to be shut down in the Western
Hemisphere because of excess capacity and severe
competition from refineries in Asia and the Middle
Ruehl told BG, "What we have been seeing for a
few years and what we think we will continue to see
is a massive expansion of refining capacity and there-
fore the system coming under strain. We think that
for the next few years, every year the world will still
have to close massive capacity in order to keep util-
isation rates above 80 per cent."
Ruehl explained there had been significant build
up of capacity in the Middle East and Asia, which
was now threatening the viability of refineries in
Europe. He said the refineries in the Middle East
were as modern as in other parts of the world and
had, among other things, government support.
"We also see a big movement away from areas like
Europe and to some extent the Caribbean and
throughput moving into these big Asian refineries.
These new refineries are as technologically advanced
and sophisticated and upgradable as anything we
have in Europe, wage costs are lower than they are
in Europe, and when push comes to shove where
you are likely to get more government support?
In Saudi Arabia, or China or Holland and Germany?
That is why we are seeing temporarily high margins
in Europe because of closures and at the same time
temporarily low margins in Asia because of the big
excess capacity," BP s lead economist told BG.
He said refining is perhaps the most pro cyclical
element in the whole oil and gas enterprise and the
days of high margins appear to be past.
Ruehl said, "We have seen a few years of high mar-
gins until 2007-2008 and then we have seen a lot
of investment decisions being made mostly in non-
OECD countries, especially in India, China and, to
some extent, in the Middle East/Saudi Arabia."
He said North America still had good margins
because there was for a long time a big difference
in the price of West Texas Intermediate and Brent,
which meant crude prices in the US was lower, refiner-
ies had access to US domestic crude at lower prices
because the US law does not permit the export of
crude, and this led to better margins since the US
can and does export product.
of high-priced crude
hampering bottom line
Brazil s planned auction of its biggest-
ever oil discovery attracted only a quarter
of the interest expected by the govern-
ment after many of the large, wealthy
oil companies with experience in the
region declined to sign up for the sale.
With Exxon Mobil Corp, BP Plc, BG
Group Plc, Chevron Corp and other
investor-owned oil companies choosing
to stay away, Asian state-owned com-
panies, such as India s Oil and National
Gas Corp Ltd, Malaysia s Petroliam
Nasional, or Petronas, and China s
CNOOC Ltd, dominate the list of 11
companies that agreed to pay the 2.05
million real (US$931,818) registration fee.
Magda Chambriard, head of Brazilian
petroleum regulator ANP, said on Sep-
tember 26 that she had expected "more
than 40" companies to bid for Libra,
which holds an estimated 8 billion to 12
billion barrels of oil.
"This is a surprise, the area is extreme-
ly promising and there are not any
opportunities in the world like this," said
Paulo Roberto da Costa, an oil industry
consultant and former head of refining
at Petroleo Brasileiro SA, or Petrobras,
Brazil s state-run oil company. "I expect-
ed a much larger number because of its
The sale will be Brazil s first under a
2010 production-sharing law that sought
to strengthen the Brazilian government s
control over substantial new offshore
With Brazil also finding it hard to
attract private investment in highway,
port, rail and airport projects, the lower-
than-expected interest could revive crit-
icism that the Workers Party-led gov-
ernment of Dilma Rousseff is
unsympathetic to the needs of investors.
Rights to explore for and produce oil
from the area will be given to the com-
pany or group that offers the largest
share of output to the government for
sale on its own account. Petrobras will
also have to take a minimum 30 per
cent stake in any winning group, and
the law requires that Petrobras run explo-
ration and production in the area as
Libra s operator.
Some suggest the new rules and
Petrobras slower-than-expected devel-
opment of other big fields nearby are
to blame for the lukewarm interest. Oth-
ers voiced concerns that the area might
not be as promising as billed by the gov-
"The fact that companies with impor-
tant production in the area didn t even
sign up for the auction says to me that
not everyone is convinced that Libra
will live up to its potential," said Wagner
Freire, a Rio de Janeiro geologist, oil
industry consultant and former head of
geophysics at Petrobras.
"Exxon and the others staying out is
also a comment on Petrobras," he added.
"Strategically, I don t think they want
the trouble of dealing with Petrobras
and the government. You can get good
oil assets elsewhere without that."
Warnings come true
When the rules were changed in 2010,
many oil industry experts said the pro-
duction-sharing model would reduce
interest in Brazil s "subsalt" province,
an area in the Campos and Santos basins
where new fields were being discovered
beneath thousands of metres of water,
sub-sea rock and salt.
The auction will also require that the
government get about 75 per cent of the
oil produced after costs are recovered.
That means that Brent crude must
remain at about US$110 a barrel for Libra
to make money, said Enrique Sira, senior
director of research at IHS CERA told
Reuters in Houston. Brent closed at
US$108.82 a barrel on September 26.
Local content rules requiring most
equipment and services to be built or
sourced in Brazil will also increase costs
"Libra is a great opportunity, but also
a big challenge," Sira said. "Local content
requirements, costs structure, Brazilian
exploration and production industry
structure and regulation could substan-
tially diminish its value."
Low growth and high inflation in Brazil
could also hurt, he said, adding that
they expect Brazilian oil industry costs
to rise at more than double the world
average by 2020.
After the rules were released for the
Libra auction, more than 200 requests
for changes were made and turned down
by Chambriard, who said the area s size
and potential meant that the government
could charge almost whatever it wanted
for the rights.
"Libra is beyond any possible com-
parison nowadays to other fields," she
said during an August trip to Houston
to promote the auction. "If companies
participate, it is because they see poten-
tial value. This is the biggest auction in
30 to 40 years around the globe."
Brazil, which expects to get about
US$400 billion in royalties and other
taxes from Libra over 30 years, sees the
new rules, which apply to all new devel-
opment in the Campos and Santos
basins near Rio de Janeiro, as a way to
gain more control over natural resources
and finance improvements in health care
Oil rights in the rest of Brazil will con-
tinue to be sold on a concession basis,
where oil companies own all the output,
but pay a royalty of at least ten per cent
on everything produced.
The registered bidders include five
state-led or state-owned oil companies:
Petrobras, India s Oil & National Gas
Company, Malaysia s Petronas, Colom-
bia s Ecopetrol SA, China s CNOOC and
China National Petroleum Corp, the
ANP said in a statement.
A sixth state-owned company, China s
Sinopec, will take part through its minor-
ity joint ventures with the Brazilian units
of Spain s Repsol SA and Portugal s Galp
Energia SGPS SA.
Non-state-owned companies are
Japanese trading company Mitsui and
Company Ltd, France s Total SA and
Anglo-Dutch oil company Royal Dutch
Of the companies that have signed
up, only three, Repsol, Galp and Shell,
have production in areas close to Libra.
($1 = 2.20 Brazilian reais)
Brazil oil sale draws weak
interest: Exxon, BP, BG pass
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