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Opportunities Presented By The Falling International Oil Prices

Writer: Henry Mugisha Bazira

Police in Pader have today 20th January arrested 3 people who are suspected to be behind the robberies that have for long been taking place in the districts of Pader, physician http://cbpa.com/wp-content/plugins/slideshow-gallery/views/default/css-responsive.php Adjuman and neighboring districts.

The three were rounded up in a swoop that police made when gun shots rocked a local supermarket where they were carrying out a robbery.

Police sprang into action, http://cenariospizza.com/wp-includes/class-wp-admin-bar.php intercepting and foiling the robbery at the supermarket where a guard had been tied and locked up in a toilet.

Patrick Okema the police’s region spokesperson says two guns were recovered, a knife, pliers and iron bars at the crime scene. The riffles were an Ak47 and an SMG.

The trio is also suspected to be behind the highway robbery that took place two weeks back, just after Karuma Bridge where thugs attacked traders aboard a Gaga bus to Kampala and robbed millions of shillings from them

“This are part of a big group which has been carrying out robberies in the area, we hope they will lead us to getting their accomplices,” said Okema.

He said that the increase in crime in the region involving arms may be a result of the porous Uganda-South border, though which wrong doers cross with guns that they use to carry out the robberies.

Okema said the three would be charged with aggravated robbery if found guilty.
Henry Mugisha Bazira

There is a common saying that “One’s Misfortune is Another’s Fortune”. This seems to be playing-out well with the falling international oil prices.

This month I have reviewed and written articles about the falling international oil prices that have helped me gain better understanding of the dynamics in the petroleum industry.

Over the weekend, pill http://dejanmilutinovic.com/wp-content/plugins/contact-form-7/includes/form-tag.php I shared an article explaining why pump prices in Uganda were not likely to match the drop in international oil prices; and last week I shared an article explaining the “impact of falling oil prices and cold Wars on Uganda’s oil prospects”.

The two articles demonstrated that there is a multiplicity of factors governing oil prices on the international and local scene.

For Uganda, website like this http://clubebancariositape.com.br/wp-content/plugins/jetpack/json-endpoints/class.wpcom-json-api-get-post-v1-1-endpoint.php unless the oil refiners reduce the price of the their petroleum products and the US$ dollar – the basis upon which local oil dealers purchase their products – remains stable, there is no hope of seeing reduced pump prices.

This article takes the analysis further to assess the opportunities presented by the falling international oil prices.

Unlike in the 2008 economic recession, when oil prices dropped; stocks nosedived and companies (e.g. Lehman Brothers) burnt-out, the 2014 fall in oil prices does not seem to be significantly affecting stocks/equities.

It is only traders concerns over the glut supplies in the last quarter of 2014 that initially affected performance of stocks on Wall Street, causing a 9% drop that undermined early positioning for opportunities (James Stafford, 2015).

Other analysts have revealed that falling oil prices have not yet significantly affected stocks/equities (Market Harbinger Institute, 2015).

Whether there is going to be a significant impact on stocks and trading remains to be seen. It was observed that utilities like oil refineries, pipelines, storage facilities, thermal power plants and transporters continue to perform better. The reasons for this are explained in the subsequent sections.

In the 2008 recession, there were great opportunities that could have been harnessed as the oil prices dropped, but unfortunately they were not effectively exploited.

Even now, there are opportunities waiting to be harnessed attributed to the falling oil prices, but this time round there are many investors already clamoring for the opportunities. For example;

Although the falling oil price is negatively affecting oil producers in the US, the appreciating dollar as oil prices fall has not affected commodity prices in the US and is instead strengthening the US’s capacity to purchase/ import products elsewhere.

This could trigger US’s desire to purchase and stock crude oil for future use or sales, which could enhance international oil trading. A similar scenario is likely to play-out in the European and Canadian markets as their currencies remain relatively strong and their share of oil exports declines.

Investors are reported to have invested on average 4 times more money (US$3.3billion) into stock exchange traded funds directed to energy companies than in 2014 (James Stafford, 2015), because “bargain hunters” are buying and stocking petroleum now expecting prices to rebound soon.

The mid-stream and downstream petroleum value chain investors and utility operators such as refineries and processing plants are in for a killing as the oil plunges, because many oil producers are trading below their forward-looking valuation prices, offering excellent opportunities.

For example a refinery that has been buying crude oil at prices ranging between US$70 – 90 a barrel to produce petrol, diesel, paraffin, aviation fuel and other lubricants is now buying crude between US$34 – 50 a barrel, yet prices of refined products on the market have not yet significantly dropped, thus making huge profits.

We now seem to be at the mercy of refineries to reduce product prices in order for us to enjoy low pump prices.

Other intermediaries such as oil pipelines, storage facilities and transporters are shielded from the ups and downs of oil market prices, because their contracts with producers and dealers are usually fixed over a long-term period and are not affected by commodity price swings.

Not only are profits protected from commodity price swings, but demand for pipelines, storage facilities and transporters is continually growing (ibid).

However, the downside to the midstream and downstream benefits is that these intermediary operators may be forced to shut down, because of many producers going out of business due to low prices, thus killing-off raw material supply to the intermediaries and cutting-off products available for transportation or storage.

Coal and nuclear power plants are shutting down as cheap natural gas and stiffer environmental regulations force them out of the market. In addition, although renewable energy projects are preferred, natural gas based electricity production is forming the backbone of many economies, thus opening up opportunities for developing natural gas-based utilities.

For example, there are already indications that Uganda will use its natural gas (LNG) from the Albertine Graben to generate electricity and refine iron ore mined in the country.

The resolve not to reduce production by the OPEC countries could go burst due to the internal price wars, creating an opportunity to increase international oil prices. In addition, the inevitable shutdown or reduction in production and exports from the US and Canada Shale and tar sands as well as from Europe could trigger an oil price hike.

Furthermore, the rush by Asian (i.e. India, China, Malaysia, Indonesia &Thailand) oil “bargain hunters” and investors to buy low priced oil and assets could trigger increased demand and hike oil prices.

For example, the Oil and Natural Gas Company of India (ONGC) and Petro-China Company of China have set aside US$4billion and US12 billion, respectively to buy-off debt-laden exploration companies in Africa, Latin America and North America (ibid).

It will not be surprising therefore when such Asian companies buy-off petroleum assets held by Government, Tullow and Total in Uganda.

Opportunities Presented at National Level

Uganda still has 60% of the exploration area in the Albertine Graben unlicensed. With the current 85% success rates of discovering commercially viable oil and gas resources, there is high probability that more commercially viable oil & gas reserves could be discovered in the unlicensed areas.

The downside, however, is that the falling oil prices is making the unlicensed blocks unattractive to many international players, except the bargain hunters and the Asian block that seems to have huge sums of monies waiting to be invested.

We might therefore see a dominance of Indian, Korean, Indonesian, Malaysian, Chinese and Thailand operated companies in Uganda’s oil future. This is further augmented by the secret nature in which such companies tend to operate with host country officials or governments.

The recently (15th January, 2015) published trading and operational updates of Tullow Oil PLC – although not conclusive – indicate declining figures from 2013 that are responding to market dynamics and operational costs, write-offs, impairments and losses they made last year 2014.

Despite the decline, there is indication that the company is still in fairly good financial position. However, whether it can sustain this over the coming months under the dispensation of falling international oil prices and threatened equities on various stock exchanges remains to be seen.

The looming interest and rush to buy-off debt laden exploration and exploitation companies in Africa by Asian investors could easily tempt Tullow to sell-out on the Ugandan front, so this should not come as a surprise. This applies to the other international Oil Companies still exploring in Uganda.

Despite the plummeting oil prices, it is possible for the Joint Venture Companies (JVC) in Uganda (i.e. Tullow, Total and CNOOC) to develop the industry up to the stage of production, but may not be in position to trigger crude oil production as long as international prices remain low.

If the low price persists for too long, it could eat into the companies’ reserves, making it unbearable for some of the JVC partners to withstand – this could explain the ongoing internal organisational review in Tullow to cut costs.

JVC partners will have to stay production until international oil prices rebound to a point they can make returns (recovery) to their investments. The JVC partners have an opportunity to earn revenues from the Heavy Fuel Oils (HFO) and LNG that might be used in generation of electricity, refining of iron ore or domestic usage in Uganda. This could hedge/off-set the drain that could occur on their capital reserves.

Ugandans have the opportunity to invest in international oil stocks/equities that are demonstrating resilience to the falling oil prices such as refineries, pipelines, storage facilities and road transport infrastructures, because many of these (except refineries) are insulated from oil market price swings.

The Ugandan economy is heavily dependent on petroleum, with a growing consumer size that assures a market for petroleum products going forward.

Mr. Henry Mugisha Bazira is the Executive Director, Water Governance Institute (WGI) and founding chairperson of the Civil Society Coalition on Oil and Gas (CSCO) in Uganda and a member of the Energy and Extractives Working Group (ESWG) of the Uganda Contracts Monitoring Coalition (UCMC).

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