Exxon & the $74 Billion Fine

Your money or, errr ...

How the world changes, as amply illustrated by this story.  Chad proposes to fine Exxon $74 billion for - well, who really knows why?  Because they think it's the way to get 4 billion?  Because Exxon has 10 billion of local assets to seize?   Because they are desperate?  Because they can?

Well, can they?  I am sure their courts are sovereign in their own country and their adherence to the rule of law is impeccable, etc etc.  Just like everywhere else on the planet, in fact, and everyone will start taking a pop if this one works - there are enough US companies exposed around the globe.  And British, and German ...  

Global hostage-taking and blackmail is hardly new, indeed it's an entire industry, with consultancy services and all.  But it's mostly been at a *tolerable* below-the-radar level.  Piracy has been on the uptick in recent years, and at one stage got beyond a joke.  Russia has long felt at liberty to impound oil company assets at will, as BP, Shell, Conoco, aye and even the mighty Exxon have discovered over the past 15 years or so.   On the subject of BP, even the sainted Obama wasn't above outright theft.   VW hasn't fared much better there: and even more broadly America's de facto claim to universal jurisdiction has long been a cause of chuntering in many quarters.

Another straw in the wind of the end of globalisation as we thought we knew it?  It could be viewed even more simply: Might is Right.  But treason doth never prosper, etc, so when the USA does it, it's *globalisation*.

Maybe it explains TTIP et al.  Maybe the US saw this coming a mile off, and is trying to build a new layer of defence - short of sending in the drones, that is.  Trump's attitude will be interesting: he's said to be agin TTIP.  It might not only be Chad that discovers what the balance of international power looks like in 2017.

ND

BP In The News - For All the Wrong Reasons

With everyone else away, I'll do a short silly-season run of company-based pieces - energy, of course - starting with BP.   

CU always told me that BP's efforts to get back in with the Russians were ill-fated. 

My BP insiders said otherwise.  Yes, they said, we were burned last time around (like Exxon and Shell and Chevron and Marathon and ...) but this time, *nudge nudge*, everything is going to work out.

What is is with oil companies and Russia ?  Well, huge reserves, for one thing.   And somehow it will all be different next time.  But it never is, because the Russians don't change their ways in a hurry: they never have, and why would they start now ?  Might is right, contracts mean nothing, win-win is for wimps.

Anyhow, against all better judgement I sort-of believed them (though not to the extent of going long BP, oh no, not with Two-Faced Obama still on their case).

So BP's travails continue. It's a measure of their size and underlying muscle that they can survive all this in any kind of shape at all.  But for how long can a company soldier on with such poor judgement on big issues ?

ND

Energy Update: Pulling The Oily Levers

There is a lot happening in energy just now, not least in the UK where Ofgem is vainly lashing out in all directions: but the policy contradictions are beginning to become so evident that something will have to give.

And the sooner the better: the 'Big 6' suppliers who make such convenient punchbags for politicians are being squeezed from all directions and their patience is thinning by the month. There is no way they can be leaned on for £200 billion of capex for 'decarbonisation', and yet be beaten up on every occasion. As we've said many times before, the official way of squaring this circle - increase electricity prices so much that everyone can be bought off with subsidies - falls at the twin hurdles of (a) industrial companies packing up and emigrating, and (b) the general inflationary impact.

But today we must focus on the great opening of the oil floodgates announced by the IEA. What do we make of this ?

Well firstly, note that Brent is still in 3 figures: and if that's how OPEC likes it, believe me OPEC can keep it there. The Saudis may have been increasing production a little of late, but here we have a nation that is investing in solar and nuclear as fast as anyone will sell them the kit, which kinda tells us something ...

Secondly, it is not hard to detect the increasingly confident, if not competent Hand of Obama in this. Perhaps, as some have suggested, this is the opening salvo of QE3-in-disguise. Personally, I think the oil measure alone would not have the longer-term effect he's hoping for, but we shall see because it does at least remind us that the Big Boys have several Big Levers they can pull.

And pull them they will, because things are looking truly awful at the moment, are they not ?

Which brings me to an uncomfortable conclusion. Back here in Blighty, I look at Cameron and Osborne and I don't see men who know how to pull the levers. They don't seem to have the creativity for it, or the vision. I'm not even sure they know where the levers are. Mandelson, and even Balls - they know how these things are done. Cameron just stands blinking at the cameras, saying that the nice Mrs Merkel has promised him no-one will be asking us for any Greek bail-out money. (Does he have a piece of paper from her, I wonder ...) Pathetic.

When the incoming Conservative government took Sterling off the gold standard in 1931, a former Labour cabinet minister (history is divided as to which one) said: they never told us we could do that !

The hour needs to call forth the man. He seems to be hiding his light under a bushel just now.

ND

BP: The First Trillion dollar estimates

I said yesterday some crazed US courts will start saying BP's costs for the Oil crisis will be a trillion. Little did I expect to be proved right in 24 hours. However, this link is the most bearish you could possibly see. The fun begins and also BP has come out to say today it is not 'planning' for bankruptcy.


No wonder BP's share price continues to sink. It's really sad for everyone affected, I hope they can plug the well soon.

BP Again: Edging Into Enron Territory

The downgrading of BP’s credit-rating to BBB – on the very brink of ‘Investment grade’ - takes the hapless firm into Enron territory, which ain’t a good place at all.

It increases their cost of debt, which is bad enough: but the problem goes a lot further than that. BP’s business model, like that of Enron (though not to the same extent), leans heavily on wholesale energy market transactions – trading and other deals, including derivatives - on a very large scale: far more so than other oil majors.

Very many companies have a prudent policy of never dealing in derivatives or other forms of long-term contract (beyond, say, 1 year) with any firm that is below Investment grade – for the simple reason that they want to be sure the counterparty will be around to stump up in due course, be that to make a payment, or to deliver a cargo of oil or whatever. BP had made forward purchase commitments beyond 1 year ahead of $62 billion at year-end 2009, and held $ 4.9 billion of in-the-money positions on derivatives of more than 1 year maturity - exactly the type of business that can't be done at sub-Investment grade (figures from BP's 2009 AR).

If BP is thereby excluded from such lucrative markets, and/or forced to post a great deal more collateral (and this may have started already), it is in ever deeper doodoo.

Enron was famously ‘asset-lite’, but it still managed to retain Investment grade until near the end. Its tortuous efforts to maintain this precarious position, which finished it off eventually, were 100% driven by the need to keep doing those profitable long-term and derivative deals.

Obviously BP is an asset-rich company: but it has been brought to the brink of the very same precipice.

ND

BP Update: Still not buying this

The news out of BP just gets worse. When it comes to trading those who read my posts know I tend to go for a high risk shit or bust approach. Sadly Mrs Unslicker's spending means this is the only path available to me.

So only a week ago I had looked at BP and thought, well below £4 has to be a steal. Well the share price has dropped far below that and is still falling.

But I can't buy yet. The news flow is horrible. The US President is gunning for the company, that just isn't good news. The US Class action suits are going to be horrific. I can see mad US lawyers putting trillions in damages on the table, not billions (this is their bid-em-up tactic after all).

I am looking at a new level of under £3.30 for my entry now. There should be a technical bounce at this level, but the flow of oil and bad news has to be stopped.

BP Update: Time to buy yet?

Tony Hayward announced this morning on the UK Andrew Marr TV show that the new cap put in place by the company is bringing up 10,00 of barrels of oil per day. This is most likely the majority of the oil and BP are working to optimize the rest over the next few days.

This is the first piece of good news for BP for weeks. Although the terrible catastrophe that was unleashed will remain as an environmental challenge for years to come.

Also there are now some good contrarian indicators coming into place. The US President has been talking about taking every penny from BP and stopping dividends. The UK bank analysts have been talking up the prospect of a take-over. When things get this bad you are normally at the nadir of a crisis.

Earlier in the week I said I would buy BP at under £4.00, but with this news and the price at £4.33 now may be a good chance to pile in. I don't doubt the dividend is going to get cut for political purposes if nothing else. just like Tony Hayward will get sacked.

This will mean the long-term share price of BP is not going to recover towards £6.00, however, at £5.00 with an 8-10% dividend that will be a pretty good investment.