"We'll take one prepackaged bankruptcy to go." That was the upshot of an announcement yesterday from oilfield services company Seventy Seven Energy (SSE)--the
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"We'll take one prepackaged bankruptcy to go." That was the upshot of an announcement yesterday from oilfield services company Seventy Seven Energy (SSE)--the
'In January SSE was threatened by the New York Stock Exchange with de-listing its stock (see Seventy Seven Energy’s Stock Threatened with Delisting from NYSE). One of SSE’s ongoing problems is that Chesapeake Energy, itself not in all-that-great-a-shape, provides nearly three-fourths (70%) of SSE’s revenue.'
Our live blog is tracking reaction to news that Russia and select OPEC members have agreed to an oil output freeze amid a global supply glut.
We'll also bring you the latest reaction to Anglo American's $5.6 billion net loss.''
After a devastating first trading week for oil in 2015, crude spirals lower again as traders become increasingly concerned about the Chinese markets and economy
The extreme pessimism in crude oil markets continues. WTI and Brent have set new lows almost every day of 2016, now trading in the low $30s per barrel. Crude is down 15 percent on the year.
The same gloominess surrounding oversupply has not changed. What is different this time are new worries over the Chinese economy. The Shanghai Composite has crashed by more than 5 percent in a single day multiple times in the past week and a half, and is off by 20 percent since late December. Fortunately, the index stabilized on January 12, closing out the trading day pretty much flat. But the turmoil in China’s stock market is far from over.
Investment bank Morgan Stanley jumped on the bandwagon of $20 Oil prophets, blaming the oil price slump on the strong dollar
That is the conclusion from investment bank Morgan Stanley, which published a research note on January 11 that attributes the sharp slump in crude prices to the strength of America’s currency. Morgan Stanley says that if the U.S. dollar appreciates a mere 5 percent, it could force crude oil prices down by another 10 to 25 percent.
Oil prices continue their progress lower, with the Brent benchmark falling as investors monitor developments in China and tensions in the Middle East.
Oil prices continued lower on Wednesday, with the Brent benchmark sliding to an 11-year low as investors monitored developments in China and tensions in the Middle East.
Brent for February delivery LCOG6, -3.54% dropped $1.57 , or 4.3%, to $34.85 barrel, setting it on track for its lowest settlement price since the summer of 2004, according to FactSet data.
Although some US oil companies are struggling with low oil prices, a new wave of innovation is hitting the oil patch, allowing for a significant reduction in drilling costs.
A variety of different improvements in production are starting to show up at all levels across the industry from small firms to oil majors. Statoil for example recently noted that it is experimenting with different types of sand and chemicals to improve production. And a number of companies have noted that they are moving from drilling wells one at a time, on an ad hoc basis, to drilling multiple wells at once. GE Oil & Gas has produced variable-use pumps that can be turned on and off in order to save energy versus the previous 24-hour a day operation cycle.
The end result of these actions is that per-barrel costs of oil have fallen to around $60 today versus $75 a year ago according to Citi analysts. And executives from oil companies are now forecasting that per barrel prices could fall to $50 or less before long. America has not yet lost the price war.
Now, one small Denver-based oil company has come up with a whole new model for producing in order to further drive down costs. Described as an "oil factory," Liberty Resources LLC and its CEO Chris Wright have developed a novel method for extracting oil. The firm is starting out by doing everything it can to eliminate the need for trucks traveling to and from its site. The company notes that trucks are often an irritant with local residents and more importantly, they add significantly to the cost of producing oil.
To do that Liberty will build a series of pipelines to its massive 10,000 acre Bakken site. The firm has pipelines that carry water and gas produced by wells, as well as other pipelines to carry oil. This technique is called ‘centralized resources’ and while other firms like Continental have explored it to some extent, Liberty is pioneering the process. In essence, the firm is trying to bring the efficiency focus of industrial engineering to the production focus of petroleum engineering.
In addition, like Statoil and a few other larger oil firms, Liberty is also focused on creating a production process than can be stopped and started based on optimal production times, costs, and oil prices. This could be an invaluable capability. Take Russia for example. Russian oil wells will freeze if they are shut down, and the country lacks significant storage capacity. As a result, Russian oil producers cannot respond to price downturns.
Moreover, Liberty is developing the entire 10,000-acre site to be fracked at once with nearly a 100 oil wells operating simultaneously. By drilling multiple wells at once and controlling inputs and output supply, the firm has significant cost advantages versus traditional ad hoc production methods. Even employee costs are lower, with Liberty citing the use of a third less workers than a conventional production process.
So what is the combined result of all these efficiency improvements? Liberty says it will still make money even with oil at $50 a barrel. And the firm expects costs to keep falling as oil service companies become more efficient and lower their own prices. At these prices and efficiency levels, US production becomes competitive with virtually any other oil source. And if efficiency gains continue at this pace, the US may weather the onslaught of Saudi oil much better than many expected.
By Michael McDonald of Oilprice.com
'The end result of these actions is that per-barrel costs of oil have fallen to around $60 today versus $75 a year ago according to Citi analysts. And executives from oil companies are now forecasting that per barrel prices could fall to $50 or less before long. America has not yet lost the price war...'
This time a year ago, the oil industry's biggest problem was finding a way to deal with the "retirement tsunami" about to crash down on it as older oilfield workers hung up their cork boots to enjoy freedom-55. Now, with oil prices still in the doldrums, many of those same workers are lucky to be hanging onto their jobs, while others have been booted from the payroll as an ugly wave of layoffs takes hold.
One of the worst-affected areas is the Canadian oil sands, where a higher per-barrel cost of production than conventional sources has oil companies scrambling to cut capital expenditures and in several cases, put long-term projects on ice.
On Thursday one of the region's big players, Husky Energy, announced that about 1,000 construction workers employed by a contractor at its Sunrise oilsands project, would be issued pink slips. The bad news for the workers came a day after Husky said that it had started to produce from the $3.2 billion, steam-assisted gravity drainage (SAGD) Sunrise operation, which it co-owns with BP.
The layoffs by Husky followed Suncor's decision in January to cut 1,000 employees and Royal Dutch's Shell's announcement that it will shed close to 10 percent of the workforce at its Albian sands project – around 300 workers.
The Canadian Association of Oilwell Drilling Contractors, which closely tracks drilling activity, said in February that up to 23,000 jobs could be lost as the number of rigs fall. Since the price started dropping last September, about 13,000 positions in the Alberta natural resources sector, mostly oil and gas, have been eliminated, according to Statistics Canada.
The bloodletting among the oil majors and their vast web of ancillary services has of course extended to the United States – which appears to be taking far more casualties than Saudi Arabia in the battle for marketshare. In January oilfield services giant Baker Hughes said it will lay off 7,000 employees, about 11 percent of its workforce; that number was rivalled only by its competitor, Schlumberger, which let go 9,000 workers. Shell, Apache, Pemex and Halliburton are among major oil companies to issue recent pink slips to the growing army of unemployed oil workers. In the U.S., the worst pain is, not shockingly, expected to be felt in Houston. Assuming a one-third reduction in oil company capital expenditures this year and 5 percent in 2016, the hydrocarbon capital of the world could lose 75,000 jobs, in a city that has added 100,000 new positions every year since 2011, said a professor at the University of Houston.
The oil jobs nightmare is in fact spreading like a cancer. According to Swift Worldwide Resources, "the number of energy jobs cut globally has climbed well above 100,000 as once-bustling oil hubs in Scotland, Australia and Brazil, among other countries, empty out," Bloomberg reported recently. Examples include foreign-trained engineers whose promise of employment at LNG plants in Australia have evaporated as projects get delayed; development projects halted in Brazil resulting in the closure of international schools and the relocation of workers; and 8,000 Mexican workers left without paycheques after Petroleos Mexicanos slashed contracts and purchases, Bloomberg said.
Of course, industry defenders say the oil and gas business is boom and bust by nature, and most veteran oilmen have gone through many a cyclical downturn and lived to fight another day. The question of whether or when the oil price will recover and all those laid-off workers are rehired is best left to the prognosticators. In the meantime, there is a danger in oil companies cutting too deep, according to oil and gas industry recruiters. They say firms that lay off too many workers will put pressure on older workers who may opt for early retirement. That could leave companies in the same situation as the 1980s, when an oil downturn meant few businesses hired and new graduates went into other more promising fields, leaving a serious talent gap.
"They will be very careful about reducing staff, because they’ve seen cycles like this before where commodity prices are weak for a certain period time, they lay off employees and they’re not well-positioned to get access to high-quality talent," said Mike Rowe, vice president of exploration and production research at Tudor Pickering Holt, an energy investment and merchant bank, in a story run by CNBC on how the layoffs could come back to haunt the industry.
By Andrew Topf of Oilprice.com
'It may be difficult to look beyond the current pricing environment for oil, but the depletion of low-cost reserves and the increasing inability to find major new discoveries ensures a future of expensive oil.
While analyzing the short-term trajectory of oil prices is certainly important, it obscures the fact that over the long-term, oil exploration companies may struggle to bring new sources of supply online. Ed Crooks over at the FT persuasively summarizes the predicament. Crooks says that 2014 is shaping up to be the worst year in the last six decades in terms of new oil discoveries (based on preliminary data).
Worse still, last year marked the fourth year in a row in which new oil discoveries declined, the longest streak of decline since 1950. The industry did not log a single "giant" oil field. In other words, oil companies are finding it more and more difficult to make new oil discoveries as the easy stuff runs out and the harder-to-reach oil becomes tougher to develop.
The inability to make new discoveries is not due to a lack of effort. Total global investment in oil and gas exploration grew rapidly over the last 15 years. Capital expendituresincreased by almost threefold to $700 billion between 2000 and 2013, while output only increased 17 percent (see IEA chart).
Despite record levels of spending, the largest oil companies are struggling to replace their depleted reserves. BP reported a reserve replacement ratio – the volume of new reserves added to a company’s portfolio relative to the amount extracted that year – of 62 percent. Chevron reported 89 percent and Shell posted just a 26 percent reserve replacement figure. ExxonMobil and ConocoPhillips fared better, each posting more than 100 percent. Still, unless the oil majors significantly step up spending they will not only be unable to make new discoveries, but their production levels will start to fall (some of them area already seeing this begin to happen). The IEA predicts that the oil industry will need to spend $850 billion annually by the 2030s to increase production. An estimated $680 billion each year – or 80 percent of the total spending – will be necessary just to keep today’s production levels flat.
However, now that oil prices are so low, oil companies have no room to boost spending. All have plans to reduce expenditures in order to stem financial losses. But that only increases the chances of a supply crunch at some point in the future. Put another way, if the oil majors have been unable to make new oil discoveries in years when spending was on the rise, they almost certainly won’t be able to find new oil with exploration budgets slashed.
Long lead times on new oil projects mean that the dearth of discoveries in 2014 don’t have much of an effect on current oil prices, but could lead to a price spike in the 2020’s.
All of this comes despite the onslaught of shale production that U.S. companies have brought online in recent years. U.S. oil production may have increased by 60 to 70 percent since 2009, but the new shale output still only amounts to around 5 percent of global production.
Not only that, but shale production is much more expensive than conventional drilling. As conventional wells decline and are replaced by shale, the average cost per barrel of oil produced will continue to rise, pushing up prices.
Moreover, with rapid decline rates, the shale revolution is expected to fade away in the 2020’s, leaving the world ever more dependent on the Middle East for oil supplies. The problem with that scenario is that the Middle East will not be able to keep up. Middle Eastern countries "need to invest today, if not yesterday" in order to meet global demand a decade from now, the International Energy Agency’s Chief Economist Fatih Birol said on the release of a report in June 2014.
In fact, half of the additional supply needed from the Middle East will have to come from a single country: Iraq. Birol reiterated those comments on February 17 at a conference in Japan, only his warnings have grown more ominous as the security situation in Iraq has deteriorated markedly since last June. "The security problems caused by Daesh (IS) and others are creating a major challenge for the new investments in the Middle East and if those investments are not made today we will not see that badly needed production growth around the 2020s," Birol said, according to Reuters.
If Iraq fails to deliver, the world could see oil prices surge at some point in the coming decade. Despite the urgency, "the appetite for investments in the Middle East is close to zero, mainly as a result of the unpredictability of the region," he added. '
By Nick Cunningham for Oilprice.com
The U.S. is in a relatively strong position to take advantage of Asian demand for natural gas. There are now a total of three proposed export terminals for liquefied natural gas (LNG) in the U.S. that have achieved all the necessary permits.
With full federal approval, political risk for LNG exports can be laid to rest. Now, the bigger challenge for LNG exporters is finding and securing a captive market for their product. In this regard, there is a lot to be excited about as well.
But investing in U.S. LNG exporters is not without risks. For one, a rapid rise in demand for LNG in Asia is suddenly looking a bit less of a sure thing. That is largely due to China’s flagging growth rate.
More importantly, American producers will face stiff competition from their Australian counterparts. A massive volume of liquefaction capacity is set to come online over the next several years. Australia is bringing online 62 million tonnes per year (mtpa) of LNG export capacity by 2018, which is a staggering figure considering the country only has 22.2 mtpa today. And they are much closer to the markets of China, Japan, and South Korea.
That proximity lowers shipping costs, which may seem nominal considering the cost of production, liquefaction and regasification. But lower shipping costs could be just enough to make the difference in winning long-term contracts. Australia, therefore, is sitting in the best possible spot to serve the hungry consumers in East Asia.
The equation could be upended, however, due to one massive infrastructure project: the expansion of the Panama Canal.
The Panama Canal just passed its centennial, having been inaugurated in August 1914. For 100 years the canal has allowed shorter shipping times between Atlantic and Pacific nations. But the canal is vastly outdated as it cannot handle modern super tankers. Its system of locks and passages are too small and too narrow for the ships that carry enormous loads of crude oil or LNG. For that reason, the Panama Canal is currently not a major thoroughfare for energy.
That is set to change with the historic expansion of the canal. Through an international consortium, Panama is building an additional set of locks that can handle much larger vessels.
As it stands, only ships with the capacity to carry 400,000 to 550,000 barrels of oil can pass through the canal. Known as “Panamax,” these ships of 80,000 deadweight tons (dwt) tend to be on the smaller end of oil tankers used in global trade. The expansion will lift the upper limit of ship sizes to 120,000 dwt, with the ability to carry 680,000 barrels of crude (see chart).
When completed, an estimated 80 percent of the global LNG shipping fleet will be able to pass through those narrow waters. Currently, the canal cannot handle any LNG ships.
The big question is when it will be finished. Having initially been approved over seven years ago, the project is now wildly over budget and behind schedule. The original price tag was just $5.2 billion, but that may balloon to $7 billion when all is said and done. The project suffered from a halt in construction in early 2014 over whether or not the consortium building the expansion would be reimbursed for the higher costs. The canal was expected to open in October 2014, but the start date has slipped to the end of next year or the beginning of 2016.
Despite the setbacks the canal expansion could alter patterns of trade for LNG. Only Trinidad and Peru have liquefaction facilities in the Americas, the latter of which would not need the Panama Canal to reach Asia. The completion of the canal will coincide with the commencement of operations for some of the first major LNG export terminals on the U.S. Gulf Coast. When U.S. liquefaction facilities come online, they will discover that there will be a shorter route to Asia.
This could provide larger opportunities for American LNG suppliers as they compete in the global marketplace. Cheniere Energy (NYSE: LNG) hopes to be the first supplier in the U.S. to begin operation. At its Sabine Pass facility in Louisiana, already equipped to handle incoming LNG, Cheniere plans on adding two liquefaction trains by the end of 2015, with two more to be built in the 2016-2017 timeframe. Each train will be able to export 4.5 mtpa. Cheniere already has a contract in hand with Korea Gas, which plans on purchasing 3.5 mtpa for 20 years beginning in 2017. A similar contract was agreed to with Gail India, with deliveries set to begin in 2016.
The Panama Canal expansion will allow Cheniere to cut costs for its deliveries. According to the Panama Canal Authority, travel times for Cheniere from the Gulf Coast to East Asia could be cut from 63.6 days down to 43.4 days, reducing costs by 24%.
Another big winner is the Cameron LNG facility. It received final approval from the U.S. Department of Energy in early September 2014, greenlighting construction. The $10 billion facility is owned by Sempra Energy (NYSE: SRE), which has a 50.2% stake. Three other companies each own a 16.6% stake in the LNG export project: GDF Suez (EPA: GSZ);Mitsubishi Corporation (TYO: 8058); and Mitsui and Co. Ltd. (TYO: 8031).
Mitsui’s role is an interesting one. It holds upstream assets in the U.S., with shale gas holdings in the Marcellus and Eagle Ford Shales. It will pay the Cameron LNG facility a “tolling” agreement – essentially a fee to liquefy its gas and transport it. Mitsui contracted out tolling capacity for 4 mtpa for 20 years. Mitsui also has its 16.6% stake in Cameron LNG. All of this provides a level of stability for the project – it has a certain amount of upstream supply guaranteed, as well as steady toll fees that aren’t subject to price volatility.
The Panama Canal will reduce costs for this project as well.
Another set of winners will be the shipping owners. With shipments from the U.S. to Asia set to increase, there are a few companies that stand to gain. Teekay LNG (NYSE: TGP), which is the third largest owner of LNG ships, is banking on increased marine traffic to boost its bottom line. It has booked five-year contracts for two of its ships to carry U.S. LNG.
Golar LNG (NASDAQ: GLNG), another LNG shipper that is eyeing rapid growth over the next few years. It has 13 ships under its management right now, but it is building more as quickly as it can in order to take advantage of rising demand for marine vessels. Golar is also building floating LNG liquefaction vessels. The ships will be able to liquefy natural gas at offshore fields, and ship directly from there. Golar is building 10 units over the next five years. In a vote of confidence, Bank of America upgraded Golar LNG’s stock to a “buy” rating because of strong demand for its services.
The LNG trade is in a holding pattern of sorts as a flurry of construction is still underway. But beginning in 2015, and definitely by early 2016, LNG trade will take off. The Panama Canal expansion will be completed just in time, and will play a key role in facilitating trade flows between the U.S. and Asia.
Source : oilprice.com
(Picture Courtesy of Julian Boulle World Wing-suit Champion.)
The L.A. Times spilled the beans last week that the Energy Information Administration is set to severely downgrade the Monterey Shale in California in an upcoming report. Once thought to hold 13.7 billion barrels of technically recoverable oil, the EIA now believes only about 600 million barrels are accessible. Slashing technically recoverable estimates by 96 percent could be enough to kill off the shale revolution in California before it really got started.
But why is the difference between the two estimates so staggering? Much of the hype surrounding the Monterey was based off a rudimentary 2011 assessment by Intek Inc., an engineering firm based in Virginia. The firm was so off on its projection of recoverable oil reserves because it used some shaky assumptions – and essentially concluded that the shale revolution going on elsewhere in the United States could easily be replicated in California despite there being key differences.
However, there have been warning signs before this report. According to an impressive report put together by geoscientist J. David Hughes late last year, the Monterey has very little in common with the Bakken or Eagle Ford, and he concluded that the Monterey formation would never live up to its billing.
For example, with less than a few hundred feet of thickness, the much older Bakken and the Eagle Ford formations are predictable and straightforward. The Monterey, on the other hand, is often over 2,000 feet thick. Also, it’s unlike the flat layered formations in the Bakken, which makes drilling relatively easy, the Monterey has a series of layers that are folded on top of each other. And the Monterey was established in a tectonically active area, making it highly unpredictable and geologically complex. This presents enormous engineering difficulties, and essentially seals off much of the oil located in the Monterey given today’s technology and prices.
But without its own survey, the EIA relied upon Intek’s inaccurate estimates back in 2011 and it has been the baseline from which everyone has been working.
Moreover the error-filled 2011 estimate of the Monterey was used in a 2013 economic analysis by the University of Southern California, which found that the state of California could reap as much as $24.6 billion per year in tax revenue, and create as much as 2.8 million jobs by the end of the decade by allowing shale development. Such heady estimates are too big to ignore for state policymakers, and Governor Jerry Brown has publicly supported hydraulic fracturing in a standoff with environmentalists.
That means that with the massive economic projections now deflated, the political tide could also turn against oil and gas companies in the state, further adding to their woes. The legislature is considering a statewide ban on fracking, a move that will no doubt pick up some momentum on the news that the Monterey actually will not deliver huge benefits to California. And with 100 percent of the state suffering from drought, using millions of gallons to frack a single well is drawing the ire of such disparate factions as farmers, ranchers, environmentalists, and average residents. A recent poll indicates that a majority of Californians now support a statewide moratorium on fracking.
“The cost-benefit analysis of fracking in California has just changed drastically,” State Senator Holly Mitchell, sponsor of anti-fracking legislation, recently told ABC News. “Why put so many at risk for so little? We now know that the projected economic benefits are only a small fraction of what the oil industry has been touting. There is no ocean of black gold that fracking is going to release tomorrow, leaving California awash in profits and jobs.”
Although it was merely one estimate, the erroneous 2011 projection fueled a land rush that may now come undone. It was published in an era when shale oil and gas was positively booming in other parts of the United States. If the industry had figured out how to get oil and gas out of shale in the Marcellus, the Bakken, and the Eagle Ford, then surely the same was in store for the Monterey. The industry jumped in.
But now with much of the Monterey’s oil out of reach for now, the bubble that inflated the value of many companies holding acreage in California could be set to burst.
The biggest loser from EIA’s downgrade is going to be Occidental Petroleum (NYSE: OXY), the largest acreage holder in the Monterey. The 1.2 million acres under Occidental’s control is spread up and down the Central Valley and also outside Los Angeles. The prospective revenues expected to flow from those holdings was thought to be huge.
Currently trading at around $96 per share, the company hit an all-time high in 2011 when it announced a big California discovery. Occidental was thought to be sitting on 10 billion barrels of oil, and some analysts speculated that the stock price could jump to nearly $200 per share. But drilling results and production have been disappointing since then.
Occidental has been trying to spin off its California operations into a standalone business, and the value of such a company was estimated to top $16 billion, according to a Deutsche Bank estimate last year. But if Occidental is only able to recover a very small fraction of what the market previously thought it could, its value could take a huge hit. And with a market cap of $76 billion, its theoretical $16 billion worth of California assets going up in smoke could do real damage.
Venoco Inc., a company that used to trade publicly under the ticker symbol VQ but was taken private in 2012, is an independent driller that has focused on the Monterey – with little to show for it. It owns 46,000 acres in the Monterey and drilled 29 wells between 2010 and 2012, but was not able to produce anything. It has since paired back capital expenditure due to the poor results. The latest EIA revision merely confirms the terrible experience Venoco has had in the Monterey.
Other companies are not as exposed to the Monterey as Occidental. Freeport McMoRan (NYSE: FCX) holds about 70,000 acres in the Monterey, but much of it is legacy oil and gas acreage for conventional production. The prospect of Freeport seeing much production from its shale acreage just took a bit of a hit, but the company hasn’t done much drilling and wasn’t putting much in the way of new capital expenditures into shale exploration anyway.
Bigger oil and gas companies have thus far been eyeing the Monterey without dropping huge outlays to get in. That leaves Occidental as the odd one out. The company thought it was getting in on the ground floor, but will have to face up to the fact that the Monterey formation – which was billed as holding two-thirds of the entire shale oil resources in the United States – will turn out to be a massive disappointment.
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Due to the tense standoff between Russia and Ukraine in the Crimea, and the increased pressure this has put not only on far-reaching international relations, but on Ukraine’s energy security and its critical energy independence ambitions, this week we take you straight to Kiev for on-the-ground insight.
First, to recap the events of the past several weeks:
Ukrainian President Viktor Yanukovych was ousted in February after months of street protests in Kiev, sending the country into a chaotic struggle for a new administration—with the energy portfolio one of the prime pieces of political real estate. But the ensuing chaos was sidelined by another crisis of an international nature when Russia moved to seize Ukraine’s Crimea region, where it harbors its Black Sea Fleet. The standoff here continues between Ukrainian troops and pro-Russian troops holding the Belbek airbase. The US has threatened a variety of sanctions on Russia, and US Secretary of State John Kerry hit the ground in Kiev in a show of support for the new administration and promises of an economic assistance package. On Monday, we saw panic in the markets, but that panic subsided when Russian President Vladimir Putin made a live TV appearance saying that military action would be a last resort to protect its “compatriots” from the “terror” in the aftermath of what Russia perceives as a coup. After a day of panic on Monday, Putin’s comments on Tuesday gave the Russian bond markets a bit of a reprieve. But for now, all attention has shifted from Kiev to Crimea, and with Gazprom threatening to reverse a discount on gas prices in April over the ouster of Yanukovych, energy is again the axis around which everything is spinning.
Energy expert Robert Bensh offered us some exclusive insight into the extremely dynamic events on the ground in Ukraine. Mr. Bensh is the majority shareholder in Cub Energy—a key oil and gas operator in Ukraine—and has been intricately involved in Ukraine’s national energy policy. Speaking from Kiev on Tuesday, Mr. Bensh shared his thoughts on where this might go and what it means for energy:
First, Putin seems to have blinked after his controversial intervention in Ukraine, pulling troops back from exercises close to the Ukrainian border.
In response to the overthrow of his ally Yanukovych, and victory by the Maidan (protest movement), Putin has thrown everything at Ukraine over the past few days, intervening directly in Crimea, threatening to intervene more generally in other regions of the country, pulling aid, threatening to raise gas prices, and threatening trade restrictions. And yet despite all of this, his strategy has been far from successful.
Efforts to destabilize oblasts in Eastern Ukraine seem to have largely failed, with demonstrations of several thousand in support of Russia, but nothing really to rival the Maidan protests and threaten regime change.
The results of the above have been pretty minimal; in fact, if anything the above seems to have served to rally the Ukrainian population (perhaps with the exception of ethnic Russians in Crimea) behind the government in Kiev and against foreign (Russian) intervention. Even prominent oligarchs, who stood on the fence throughout the Maidan protests, have now come out against foreign intervention, and two were even appointed regional governors in oblasts in eastern Ukraine. Hence, alleged threats to encourage further splits in Ukraine appear to have largely failed.
In explaining this about-turn by Putin, it would appear that he has been taken aback by the lack of real traction in support of Russia on the ground (beyond Crimea), the unwillingness of the government in Kyiv to respond with force (which would surely have been an excuse for further Russian intervention), and Western threats (and real potential) of sanctions. The latter I think are particularly worrying to the Putin regime, as they suggest a very significant threat to the stability of the Russian economy when it is already looking decidedly anemic.
Second, and noted above, the response of the authorities in Kyiv to a hugely challenging threat from Moscow has been balanced, measured and moderate. They have avoided rash action, and instead appealed to the international community, winning much support for their moderation, and appearing as the underdogs.
Third, the international community has rallied behind Ukraine against what is widely perceived in the West at least as Russian aggression. Russia struggled to defend itself at Monday’s UN Security Council hearing. There is also now a real chance that Russian aggression will finally unlock major financial assistance for Ukraine-- with talk of IMF financing arriving even before presidential elections in May.
Fourth, I am a great believer in "what does not kill you makes you stronger." Herein there is little doubt that Ukraine still faces huge challenges on the economic front. However, I am encouraged that the Yatseniuk government realizes that time is not on its side, and seems prepared to accept the IMF prescription of reforms, "off the shelf" with no attempt to negotiate. This will be difficult and brutally painful--lower budget spending, higher taxes, privatization, increased energy prices. However, at least this government can explain this as required because of: a) the well-documented excesses of the previous regime (see photos of Yanukovych's residence); b) foreign aggression, and the need to ensure and defend Ukraine's sovereignty; c) the need to cement Ukraine's European orientation, and the drive to speedily sign the AA/DCFTA. On this latter note I am still encouraged that both the new government in Kyiv, and also the EU are signaling their intention to sign this agreement at the earliest opportunity, and likely soon after the presidential elections.
The AA/DCFTA could be transformational for Ukraine. It might now be argued that the best strategy for Putin would be simply to step back and leave the reformers to their own devices, assuming they would inevitably squabble and split--maybe, but perhaps this time around will be different.
The Ukrainian economy was/is in a dire situation. The challenges are enormous still--both domestic and external. However, Ukraine is in need of radical reform, and often countries need crisis situations to respond with meaningful reforms. The current crisis and reforms, if implemented, could still be transformational for the country. This is a huge, perhaps a generational opportunity to reform, supported by the West, and with little alternative now to pursue anything less. The agenda is reform or fail, from an economic perspective and perhaps also in terms of sovereignty.
Despite this upbeat scenario, though, what is clear is that Ukraine still faces hugely difficult macro challenges, domestic political tensions (track record of unity within the reform parties is less than inspiring) but also the likelihood of strong headwind from a less-than constructive approach from Russia. However, we finally see a faint glimmer of light at the end of the tunnel --let's hope this is the exit and not a Russian truck coming the other way.
As something of a footnote to the above a key question for investors is whether any Western bailout will be with or without PSI, and what form this could take, including a haircut, an extension of maturity for short duration debts falling due or some other more innovative solution. Or, perhaps even no PSI.
Opinion in official circles remains somewhat mixed with moral -hazard issues at play, but also the need for a timely assistance program, and mindful of debt sustainability considerations. Key in determining the way forward will be the on-going IMF mission which will shape the current state of play, macro framework and the financing needs. We should have a better picture herein over the next couple of weeks.
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