Shell in Takeover Bid for BG Group , by Marex


Ben van Beurden

By Wendy Laursen

Royal Dutch Shell has agreed a deal with BG Group to buy the UK-based company for £47 billion ($69.6 billion) in cash and shares.

Since taking over Shell in 2014, chief executive Ben van Beurden had been trying to cut costs, and the deal is expected to enable the two oil and gas companies to reduce costs at a time when the industry is suffering from prolonged low oil prices.   “The result will be a more competitive, stronger company for both sets of shareholders in today’s volatile oil price world,” said Shell Chairman Jorma Ollila in a statement.

Shell is one of the world’s largest energy producers, with a market value of about $192 billion.

Buying BG will add to Shell’s proven oil and gas reserves by 25 percent and to production by 20 percent, including BG’s offshore oil fields in Brazil’s Santos Basin, natural gas reserves in East Africa and the Queensland Curtis LNG project in Australia.

Shell and BG said the offer is about 50 per cent above the closing price of April 7. BG Group shareholders will end up with close to 20 percent ownership in the newly formed group.   By applying its capabilities to BG’s assets, Shell believes that, by around 2020, the combined group will have two strategic growth businesses – deep water and integrated gas – that could potentially each generate $15-$20 billion in cash flow per annum. It will also have upstream and downstream capacity to generate a further combined $15-$20 billion in cash flow per annum.

BG had a market capitalization of $46 billion at Tuesday’s close, Shell was worth $202 billion and Exxon, the world’s largest energy company by market value, was worth $360 billion.

With BG, Shell would be the leading foreign oil company in Brazil. Analysts at investment bank Jefferies said they now expected Shell to surpass Exxon as the world’s largest publicly traded oil and gas producer by 2018, with output of 4.2 million barrels of oil equivalent per day.

Global LNG production was 246 million tonnes last year. The new Shell-BG group would have 18 percent of world output.

There are still a number of regulatory hurdles to be overcome before the deal is finalized with authorities in Europe, China, Brazil, the United States and Australia.

Shell acquired Spanish oil company Repsol’s LNG business in January 2014.

Great Minds Think Alike, That’s the Problem, by Marex

Think alike 1

By Haifeng Wang

The spectacular collapse of oil prices in the past nine months has generated much buzz and fanfare (see chart below). Investors have piled on billions of dollars, betting a rebound of oil prices, which had been hovering around $100 per barrel for years. The action is emblematic of the famous mantra of “be greedy when others are scared, be scared when others are greedy,” and served many people well in seizing opportunities created by market chaos. However, people may have to bite the bullet if too many subscribe to this theory at the same time.

Think alike 2

They only need to look to the shipping industry for an example of a bet that fails to materialize. When the great recession hit the shipping market, the shipping industry slid into a crisis due to a glut of supply and a sudden deceleration of the world economy, much like what caused the plunge of the oil market today. This change of fortune was anything but unusual for an industry to which regular peaks and bottoms are a hallmark.

In the wake of weak demand, shipping companies usually cut spending; weaker companies are forced out of the market or consolidated into stronger ones; new orders are slashed and more ships are retired. The market force eventually finds an equilibrium and breeds the boom as demand picks up. Yet this time was different. Viewing new ships as depressed assets, fresh capital waded in and buoyed shipping companies that were facing dreadful financial situations. More ships were brought into the fleet, widening the gap between demand and supply. Six years after the recession, the shipping industry is still wandering in a dire straight. Except for the first group of investors who cashed out, the remaining either exited with losses or stayed with a glim hope that a recovery will finally destine.   

History may repeat itself yet again in the oil industry as many are trying to snap up “cheap” assets in the industry, aggravating the problem of oversupply. Many people argue that the oil prices will begin to climb in a year or two as higher cost producers feel the pinch, so too did those who reckoned the shipping market would bounce back as “others” were driven out. However, if too many people count on others to bear the brunt, they are bound to be disappointed.

The dash into shipping and oil partly reflects the fact that assets elsewhere have been greatly inflated, as a result of loose monetary policy globally. As the search for discounted asset intensifies, industry fundamentals are either ignored or masked by a false sense of margin of error. If capital remains artificially cheap – and it will be as countries compete to depreciate the value of their currencies – money managers will continue to power money into industries that look relatively inexpensive and be locked into it when too many of them think the same way. 

This entry has been created for information and planning purposes. It is not intended to be, nor should it be substituted for, legal advice, which turns on specific facts.

18 Ships Stuck in Lake Superior Ice, by Marex


Stuck 1

By MarEx

Crews are working to clear a path through what has been called one of the biggest ice covers on the Great Lakes in decades that left 18 vessels stuck since Monday, including one freighter with a damaged hull.

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The Canadian Coast Guard is working in concert with the United States Coast Guard to ensure a long line up of ships will be able to travel safely through heavy ice conditions in Whitefish Bay on eastern Lake Superior.

As of Wednesday afternoon, there were 18 vessels waiting to move. Two of those vessels have now cleared the ice field with the assistance of the Canadian Coast Guard Ship Samuel Risley.

CCGS Samuel Risley, and the United States Coast Guard cutters Mackinaw, Alder, and Hollyhock have spent several days creating tracks through the ice. Once those tracks are established then direct escorts through the ice will be made, and the ships can get underway to various locations throughout Lake Superior and towards the St Marys River. 

The Canadian Coast Guard icebreaker, CCGS Pierre Radisson, has been deployed to assist in this icebreaking mission. CCGS Pierre Radisson, home-ported in Quebec City, has just arrived on lower Lake Superior and will join this effort to get all of the ships safely underway to their destinations.

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Officials say that warmer air and a sudden change of wind loosened the ice and moved it around in Whitefish Bay, trapping the vessels just northwest of the Soo Locks. The ice packed into the eastern side of Lake Superior has halted movement to the east and west, making it difficult to free the ships. The ice has backed up the shipping of Canadian grain, U.S. iron and steel and other products to one of the most important economic regions in North America.

Two U.S. cutters and the Canadian Coast Guard ship Samuel Risley have already been working to free the ships from the 35-mile ice field and will soon be joined by another powerful ice cutter.

The damaged freighter Kaye E. Barker is expected to transfer its load of iron ore before being relocated for repairs. Officials stated that they expect to have all vessels free by Thursday. 

China, Vietnam Consider Joint Offshore Development, by marex


China & Vietnam

By Wendy Laursen

China and Vietnam agreed to friendly negotiations, and the possibility of joint development projects, to settle their differences over the resource rich South China Sea.

A joint communique carried by Xinhua said that both countries had a candid exchange of views on their maritime differences when China’s president and the head of Vietnam’s Communist Party met this week. 

The leaders stated that they would “proactively look for transitional resolution methods which do not affect either side’s position, including looking at and discussing joint development”.

Communist parties rule both countries, and trade has swelled to $50 billion annually, but Vietnam has long been suspicious of its giant neighbor, especially over Beijing’s increasingly assertive claims to almost the entire South China Sea.

Anti-Chinese violence flared in Vietnam last year after a $1-billion deepwater rig owned by CNOOC was parked 240 km (150 miles) off the coast of Vietnam in the South China Sea.

Since then, however, China has sought to make amends with Vietnam, including sending senior officials to Hanoi.

Chinese President Xi Jinping told Nguyen Phu Trong, general secretary of Vietnam’s Communist Party, on Tuesday that the two countries must manage their dispute over the South China Sea well to maintain peace and stability.

Joint Development Successes

Joint developments have been achieved successfully elsewhere including the 1979 Memorandum of Understanding and the 1990 agreement between Malaysia and Thailand which led to joint developments in disputed waters in the Gulf of Thailand. 

The Timor Gap Treaty, signed by Australia and Indonesia in 1989, and the Treaty on Certain Maritime Arrangements in the Timor Sea, signed by Australia and East Timor in 2006, also facilitated joint development in disputed waters.

China’s Need

China’s remarkable economic growth over the past three decades is matched by an insatiable thirst for oil, states analyst John R. Weinberger in China Seeks to Dominate Off-Shore Energy Resources in the South and East China Seas.

China’s average annual growth in crude oil consumption has been 7.4 percent over the past ten years. By 2020, the CNPC Economic and Technology Research Institute projects that 65 percent of Chinese crude oil supplies will be imported.

Natural gas is quickly emerging as a primary alternative fuel in China for electric power generation and transportation, says Weinberger. The Institute of Energy Economics of Japan’s projection, through the year 2040, forecasts a steep 42 percent rise in China’s natural gas consumption from 2011.

Offshore developments

Most development of offshore resources to date has occurred close to shore within each country’s exclusive economic zone. CNOOC is the most active of China’s national oil companies in the South China Sea and is working with Husky on the Liwan gas field that has an estimated 4-6 trillion cubic feet in proved and probable reserves.

China more than tripled natural gas production since 2003, producing 3.8 trillion cubic feet (Tcf) in 2012, and the government is targeting production to reach about 5.5 Tcf of natural gas per year by the end of 2015. Most of the anticipated production growth is from large onshore fields in the western and north central regions of China as well as from the offshore deepwater regions in the South China Sea.

PetroVietnam has partnered with a number of foreign companies to develop offshore fields. Because of the government’s push to award foreign contracts, major foreign oil companies have a strong presence in Vietnam’s offshore production in production-sharing contracts (PSCs) with PetroVietnam. 

Chevron has operated offshore Vietnam since 1996 and expanded its operations after acquiring Unocal in 2005. The company currently operates three PSCs in the Cuu Long and Phu Khanh Basins and estimates around 5 Tcf in proved and probable reserves offshore Vietnam. French independent Perenco surpassed ConocoPhillips as the largest energy investor in Vietnam in 2012 after buying out the U.S. company’s Vietnam assets, including six offshore blocks in the South China Sea.

Future Potential

The U.S. Energy Information Administration (EIA) estimates for the area stretching from Singapore and the Strait of Malacca to the Strait of Taiwan is approximately 11 billion barrels of oil and 190 trillion cubic feet of gas in proved and probable reserves. Most conventional hydrocarbons reside in undisputed territory.

However, EIA admits that it is difficult to make an accurate estimate because of under-exploration and territorial disputes. The contested Spratley Islands have virtually no proved or probable oil reserves and industry sources suggest less than 100 billion cubic feet of gas. However, a US Geological Survey 2010 analysis resulted in an estimate of 0.8 and 5.4 billion barrels of oil and between 7.6 and 55.1 trillion cubic feet of gas in undiscovered resources. 

The contested Paracel Islands do not have significant discovered conventional oil and gas fields, and geological evidence suggests the area does not have significant potential. However, the area may contain significant natural gas hydrate resources.

Territorial claims

China claims about 90 percent of the South China Sea, displaying its reach on official maps with a so-called nine-dash line that stretches deep into the maritime heart of Southeast Asia. 

China refers to the Spratly Islands, Paracel Islands, Pratas Island, and Scarborough Reef as Nansha Qundao, Xisha Qundao, Dongsha Qundao, and Huangyan Dao, respectively, claiming these as well as all surfacing and undersea features within the nine-dashed line.

Vietnam claims all of the Spratly and Paracel Islands. Vietnam considers the Spratly Islands an offshore district of Khanh Hoa Province and occupies several of them. 

China seized all of the Paracels in 1974. Like the Chinese, Vietnamese archeologists provide their own evidence to support a long historic presence. Hanoi claims that since France controlled both island groups beginning in the 1930s, Vietnam succeeded to those rights after independence. 

The Philippines, Malaysia, Brunei and Taiwan also have claims to parts of the potentially energy-rich waters that are crossed by key global shipping lanes.

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