Part II - Climate Change, Covid-19 & Oil Prices

Climate change and the relationship with oil finance

With reference to Amphora’s Agenda 2030 survey and eBook, this article explores a strong theme emerging from our international survey.

We asked our executives: ‘Do you believe that sources of finance for both trade and capital investment will become tighter in the next decade?’

What we heard surprised us and serves as an eye-opener for our western press to take into consideration.

Finance is an essential component to the industry. Finance here refers to both the capital investment necessary to continue exploration and production as well as trade finance to enable transactions. The figures for CapEx are mind-boggling – a modern refinery built from scratch would be in excess of $20 billion. A ‘low cost’ LNG gasification terminal with mobile capabilities is a ‘mere’ billion. Payback, therefore, is measured in decades and not years.

What happens if such investments are no longer viable or indeed become stranded?

Finance, together with demand are the two key drivers to the oil industry. Whether Covid 19 has a permanent impact on oil demand is almost impossible to call. There are some interesting schools of thought on the topic which focus on CapEx.

‘The virus will bring forward peak demand for fossil fuels’ said Kingsmill Bond at analysts It is beyond the scope of this article to bring to light the arguments for a peak demand as early 2022, but I would encourage the reader to download this comprehensive article for themselves.

Popular press tends to suggest that the West are not only pioneers in energy transition but that their sphere of influence is so strong that it will shape the course of developing countries.

We asked participants in our survey questions that would reveal whether this was the case and our takeaway is – don’t bet on it.

The availability of finance for example is quoted time and again - we know that listed energy companies particularly in Europe are at the vanguard of GHG reduction policies because of the influence of their investors.

Our expectations were that financing or rather the sources of financing for oil were beginning to become more scarce.

What was revealing was just how quickly a market will adapt. This is best summarised by Harry Tchillingurian’s quote captured in our survey:

Big banks may have grown more selective about which deals they do, and caution linked to investor relations, but other providers have rushed to fill the gap.

Harry Tchillingurian, Head of Commodity Research, BNP Paribas

So who or what are the alternative sources of finance?

The Rise of Commodity Houses Here are just some of the sources of funding our survey of executives shared with us. Commodity houses large and small are behaving more like finance houses. They are favoured in their relationship by regional banking partners, as they understand operational risk. Anecdotes were plentiful on the level of discounting being negotiated at the manifold – some examples cited as much as a $20* discount to keep the petro dollars inbound.

National Oil Companies Using Local Funding Circles An increasingly popular example cited for funding the supply of oil was the expanding influence of autonomous subsidiaries of NOCs. The example was most plentiful with our Nigerian respondents. Here we saw a mixture of local companies team up with a consortium of specialist finance houses, regional banks and large oil companies to bid for Niger Delta assets.

Subsidiaries and JVs Set Up with International Oil Companies (INOCs) We were cited so many examples of this close collaboration and how it influences the supply of products. One example is of a consortium of specialist trading subsidiaries who are working in conjunction with Arab banks to supply Somalia and Southern Sudan with petroleum products. Supply contracts were concluded Free at Terminal with a 90-day credit term. The combination of credit, political and price risk in such deals requires very careful coordination.

* The oil price at the time of the survey was a healthy 51 USD for Brent.

Given the proliferation of finance and the confidence shown by our survey, it is hard to believe that finance will be the driver it is led to be. Finance is important, but the market will find alternative sources. It will not play the part to bring along the significant demise of the hydrocarbon economy by the mid 2020s.

Oil prices lower

Transition period longer

Periods of high volatility

Risk monitoring will evolve

In summary, as far as transitioning to renewables is concerned, our survey revealed a trend towards a more much competitive landscape than we care to admit. In an environment where lower prices are the norm, production will be concentrated in a few players – who have the capacity and the risk appetite to move to new markets. All of these factors will require more robust risk management, better financial oversight and more closely integrated logistical control.

Security issues in the age of abundance have shifted from production to (disruption of) infrastructure

Massimo Nicolazzi, Prof. Economics, Energy Resources

Real time commodity trading and risk management software