#Venezuela Siphoning U.S. #Oil Exports to China Sinks Bonds #MasterEnergy @Bloomberg

At less than 800,000 bopd, Exports to the USA were the lowest since 1985!!

Venezuela Siphoning U.S. Oil Exports to China Sinks Bonds

Venezuela’s plummeting oil sales to the U.S., its biggest export market, are exacerbating a collapse in the nation’s debt securities.

Bonds issued by Venezuela sank 3 percent on Jan. 31, a day after data released by the U.S. Energy Information Administration showed that 2013 energy sales to the country are headed for a 28-year low. The selloff pushed losses this year to 12.4 percent, more than three times the average 3.93 percent drop among notes from the least-creditworthy developing nations, according to data by Bloomberg.

The tumble in oil exports, Venezuela’s biggest source of dollars, comes as President Nicolas Maduro faces a shortage of U.S. currency that’s caused consumer prices to soar 56 percent and foreign reserves to plunge to a decade-low of $21 billion. Petroleos de Venezuela SA, the state-run oil producer known as PDVSA, is sending hundreds of thousands of barrels a day to China to repay loans totaling more than $40 billion since 2008, at a time when its production is shrinking.

“It’s an indictment of the mishandling of PDVSA,” Edwin Gutierrez, who manages $10 billion of emerging-market debt at Aberdeen Asset Management Plc, said in a telephone interview from London. “The country’s capacity to pay continues to deteriorate.”

Photographer: Meridith Kohut/Bloomberg

Oil Minister and President of PDVSA Rafael Ramirez said, “There are no reasons to think... Read More

Gutierrez said he is underweight Venezuelan bonds.

‘Under Control’

Dollar shortages helped fuel a record 73 percent decline of the bolivar on the black market last year as the country, which imports about 70 percent of the goods it consumes, struggles to pay billions of dollars in debt to food importers and airlines. U.S. currency obligations to private companies have surged to more than $56 billion, according to Barclays Plc. The government failed to pay $8.7 billion to companies in 2013 that provide goods from grains to toilet paper, Caracas-based researcher Ecoanalitica estimated last month.

“There are no reasons to think that we have an unsustainable economy,” Oil Minister and President of PDVSA Rafael Ramirez said in an interview on the Televen television network on Feb. 2. “Oil revenues are under control. Venezuela has never not met its commitments. We’ve never stopped paying.”

Venezuelan exports of crude and petroleum products to the U.S. averaged 792,000 barrels a day in the first 11 months of last year, according to data published on the U.S. Energy Information Administration’s website. That daily average over all of 2013 would result in the lowest rate since 1985.

Output Drops

Rising domestic demand, declining production at PDVSA and a boom in North America shale oil output are also deepening the drop in exports to the U.S. that began during the government of former President Hugo Chavez.

Production declined to 2.45 million barrels a day in December from a daily average of 2.9 million barrels reported in 2012, a Bloomberg survey showed. Crude rose 0.7 percent today to $97.09 a barrel as of 2:24 p.m. in New York.

Venezuela is exporting 640,000 barrels a day to China, Ramirez told reporters in Caracas on Nov. 27. About 310,000 barrels a day are used to pay back loans, he said at the time.

“From a financial point of view, for Venezuela, it’s not very smart,” Russell Dallen, the Miami-based head trader at Caracas Capital Markets, said in a telephone interview. “They obviously have to sell the oil at much cheaper rates because of the freight costs. But it was a political decision.”

Credit-default swaps, used to protect against bond losses stemming from non-payment, indicate a 65 percent chance that Venezuela will halt payments over the next five years, second only to Argentina, data compiled by Bloomberg show.

‘Strong Argument’

Francisco Rodriguez, senior Andean economist at Bank of America Corp., said investors should hold on to their Venezuelan bonds.

“Our bottom line on Venezuela long-term continues to be positive,” Rodriguez said in a Jan. 28 report. “The country has strong capacity to pay, is not depleting its assets, and will sooner or later get out of its fiscal mess by devaluing. Given that its yields are similar to those of countries with much more serious near-term capacity problems, there is a strong argument to hold its bonds.”

The extra yield investors demand to own Venezuelan dollar-denominated bonds instead of Treasuries has surged 2.85 percentage points this year to 12.87 percentage points, data compiled by Bloomberg show. That’s the highest among 56 developing nations included in the Bloomberg USD Emerging-Market Sovereign Bond Index (BEMS), apart from Argentina.

“Every day that goes by without a change in the policy mix gets us that much closer to that so-called day of reckoning,” Peter Lannigan, a managing director at broker-dealer CRT Capital Group LLC in Stamford, Connecticut, said in a telephone interview. “In Venezuela, the theme in the market for a while now has been, ‘I don’t like the fundamentals, but they’ve got oil. I don’t like the economic policy mix, but they’ve got oil.’ It’s eventually going to catch up with them.”

To contact the reporters on this story: Boris Korby in New York at bkorby1@bloomberg.net; Corina Pons in Caracas at crpons@bloomberg.net

To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net; Michael Tsang at mtsang1@bloomberg.net

Read the article online here: Venezuela Siphoning U.S. Oil Exports to China Sinks Bonds - Bloomberg

Excellent study on energy investments in Africa.

http://www.oilcouncil.com/expert_insight_articles/mobilizing-finance-energy-development-africa

Mobilizing Finance for Energy Development in Africa | Oil Council

Terry Newendorp, Chairman & CEO, and Shannon Thomas, Analyst, Taylor-DeJongh

Many economies on the African continent are undergoing a transformative expansion. Recent oil and gas discoveries, along with improvements in transparency and governance, have prompted the opening of new markets to foreign investment in all segments of the oil and gas value chain. International investors are also proving increasingly willing to take on emerging market risks as they seek to employ capital in a depressed global market. These trends have resulted in the highest levels of African investment since the 2008 global financial crisis. Though infrastructure requirements remain high, existing gaps in financing are increasingly being filled through a balanced approach that combines support from development agencies and export credit agencies, private equity investment, intracontinental investment, and the use of asset-backed debt facilities such as Sukuk and reserve-based loans.

Africa is already a proven oil and gas giant, accounting for 16% of total global production in 2012. The top four African producers—Nigeria, Algeria, Angola, and Libya—are all OPEC members with established oil industries. Yet most of the continent remains unexplored. A recent flood of notable discoveries in non-OPEC Africa indicates great potential for the approximately 45% of identified exploration blocks that remain open, and for the future of the African continent as a global oil and gas heavyweight for decades to come.  

Figure 1: Recent oil & gas discoveries (Q1 2012 - Q3 2013) Source: Company press releases and reports

Historically, it was easy-to-export oil that motivated the bulk of foreign investment in Africa’s hydrocarbons sector. But with rapidly increasing domestic demand for energy, many African countries can also support the monetization of natural gas developments. Evidence for this is clear: the past five years have seen an increase in midstream and downstream oil and gas infrastructure projects that is expected to continue in the years to come.  This is creating pronounced change in opportunities for the production of infrastructure-intensive natural gas. Previously unvalued and newly discovered gas deposits on both the eastern and western African coasts are gearing up for production, positioning Africa to greatly expand its already significant role in the globalizing gas trade. Over 15 years ago, South African industrial conglomerate Sasol invested in the Mozambican Pande and Temane gas fields with the intention of supplying Sasol’s local fuel retailers in Maputo. Now, the offshore gas discoveries in Mozambique exceed 65 Tcf, in a massive resource that will support not only domestic economic development, but also large LNG projects to supply global demand. Natural gas reserves and downstream infrastructure are also developing apace in other countries, including East African hot spots Tanzania and Kenya.  And in Mauritania, the Banda offshore gas field is being developed as part of an integrated plan that will provide the first electricity to residents in over 60 towns in the Senegal River Basin.

Still, there is much progress to be made. Based on moderate projected growth in domestic and global demand, the African continent will require USD 1.6 trillion in cumulative investment in oil infrastructure and USD 721 billion in gas infrastructure over the next 22 years,with an average required total upstream spend estimated at USD 92 billion per year. This amount could be even higher due to the complex technical requirements of many planned offshore and LNG developments.  Fortunately, maturing economies and novel risk mitigation strategies are creating new avenues for meeting the financing gap.

In recent years, debt financing in Africa has largely been government sponsored. The World Bank estimates that 70% of current external lending to Africa originates from foreign governments, and of the remaining 30%, around half the loans were based on sovereign guarantees. A significant source of debt has been development finance institutions (DFIs )such as the World Bank, and export credit agencies (ECAs), which have seen in today’s illiquid markets an opportunity to advance their own organizational goals (economic development and export promotion, respectively) by offering debt facilities and credit enhancements. Poor or no sovereign credit ratings limit many African governments’ access to international debt markets, on top of which many countries face restrictions on non-concessional debt and sovereign guarantees imposed by the IMF and World Bank.As both a direct and indirect result of these restrictions, in the past three years oil and gas firms used their own cash flows as the largest funding source for new business in Africa. Nevertheless, the availability of both debt and equity financing has steadily increased.

 Figure 2: Sources of African Debt in 2011. Source: World Bank International Debt Statistics

Growing investor confidence is driving growth in equity investment with the help of alternative financing sources and risk mitigation measures, with benefits for Africans and international investors alike. A survey conducted by PwC showed that in the past three years, private and public equity were the fastest growing funding sources for oil and gas companies’ African operations, but still account for only 28% of total oil and gas financing. Also notable is the emergence of private equity funds as investors in energy and infrastructure developments. As of early 2013, Taylor-DeJongh identified 57 private equity funds that operate exclusively in Africa, and majors such as Carlyle, Och-Ziff, and Blackstone have started funds that specialize exclusively in African infrastructure. Growth in first-time funds and private investment companies specializing in specific regions within Africa is especially pronounced. Upstream oil and gas projects offer private investors value growth in the form of reserve increases, making them an attractive alternative to the more competitive buyout market. Energy demand from expanding local markets also helps to balance risk.African banks are an additional emerging resource.  South African banks such as Standard Bank and Nedbank have established themselves as lenders for energy infrastructure throughout the continent. The Nigerian banking sector is also especially active in home-country oil and gas sector lending. This trend is extending to other countries, often with the support of credit enhancements from DFIs and other external agencies. Across all sectors, the largest markets for local currency loan syndications are in Kenya, Zambia, Nigeria, Ghana, Angola, and South Africa. Loan tenors in Sub-Saharan Africa have extended to as long as 8 years, with hope that continued macroeconomic stability and regulation might support longer terms in the future. In the meantime, engaging local investors puts available capital to work, hedges currency risk, and has the potential to reinforce regulatory advances, helping to ensure long term reliable and stable returns.

The availability of resources as collateral is particularly advantageous because it allows companies to raise debt secured by claims on future production. Since 2007, banks have issued nearly USD 17.7 billion in reserve-based loans (RBLs) in Africa. RBLs base credit on the net present value of projected cash flows from resource sales.Banks have varying approaches to reserve-based lending, but the existence of fields in production or under development is necessary. The credit facility is reevaluated regularly, allowing credit growth if production or reserves increase. In the past two years, over USD 5 billion in RBLs have been issued based on assets in Ghana, Nigeria, Equatorial Guinea, and Egypt.

Growing competition for RBLs has also helped to hasten the expansion of Sukuk, an Islamic asset-backed debt instrument. Like conventional bonds, Sukuk provide a fixed amount of income to the borrower for a predetermined tenor.  Like RBLs, they are backed by physical collateral and associated cash flows. In lieu of interest, the lender is entitled to an agreed-upon portion of the income or dividends generated by the backing asset in exchange for taking partial ownership responsibility (similar to a moderated equity risk).  The global market for Sukuk has grown over 28% annually for the past five years, for a total market exceeding USD 130 billion in 2012 and expected to surpass USD 600 billion by 2015. While Egypt has been the target of most African Sukuk to date, issuances have also taken place in The Gambia, Senegal, and Sudan; plans for sovereign Sukuk are also being developed in Nigeria, Mauritania, Morocco, and South Africa.  

With each major project that successfully uses tailored financing solutions to accommodate a unique risk profile and expand local economic activity, more opportunities are likely to emerge for international and African investors. The risks of doing business in frontier markets are real, but institutional and infrastructure growth promise to reward those sponsors and investors who are willing to find constructive mitigation and risk-sharing structures. The mutual benefits to private and public stakeholders, both local and international, should encourage even more investment and help bring Africa into a new era of economic development, as global investors follow the lead of the capital providers to Africa’s oil and gas sector. 

---

Mobilizing Finance for Energy Development in Africa | Oil Council