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Oil Dinosaurs Face Extinction: State Oil Companies And The Meteor-Strike Of Low Oil Prices

Oil Dinosaurs Face Extinction: State Oil Companies And The Meteor-Strike Of Low Oil Prices thumbnail

State-owned oil companies that don’t slash expenses to align with revenues and boost critical investment in the infrastructure needed to maintain production will suffer financial extinction.

Domestic and international energy companies are responding to the 50% decline in the price of oil by doing what’s necessary to remain in business: they’re slashing payroll, postponing capital investments, delaying new projects and soliciting price cuts from suppliers and subcontractors.
This is the discipline of profit-driven capitalism: if expenses exceed revenues, profits vanish, losses pile up, capital contracts and eventually the company runs out of cash (and access to credit) and closes down.
Unfortunately for state-owned oil companies, the feedback of expenses, losses and access to credit are superceded by the need to feed hordes of parasites: the state-owned company exists not to generate profits but to fund large payrolls and support state officials and cronies.
Stripped of the discipline of markets and profits, state-oil companies exist to serve the interests of the state’s Elites and their cronies and favored constituents. As a result, critical infrastructure has fallen into obsolescence, capital investments have been hollowed out and the expertise needed to maintain production has eroded.
The state-owned oil companies are like dinosaurs: the extinction meteor of low oil prices has smashed their ecosystem, and all they can do is watch the sky darken as revenues crater and expenses and debt remain at unsustainably high levels.
Case in point: the Brazilian state-run oil giant Petrobas is heavily in debt ($115 billion in 2013) and in danger of defaulting:
Brazilian state-run oil giant Petrobas faces threat of default on US$54 billion in debt:

The firm has become one of the largest corporate borrowers in the world as it seeks to fund an investment program worth some $221 billion over the next five years, much of which is to develop huge oil fields that lie deep below Atlantic waters off the country’s southeast coastline.

Those efforts have turned Petrobras into the region’s most indebted company, with net debt of 268 billion Brazilian reais ($115 billion) at the end of 2013. That figure was 36% higher than at the end of 2012, in large part from depreciation of the Brazilian real against the dollar during 2013.

Brazil’s Petrobras May See Its Rating Downgraded

Moody’s Investors Service has placed Petrobras S.A.’s global foreign currency and local currency debt ratings on review for a possible downgrade. This would be the second time Petrobras’ debt ratings was downgraded by Moody’s after in October the oil giant’s debt ratings was downgraded from Baa1 to Baa2 stating that the company’s outlook remained negative.

In March, before the corruption scandal broke, another risk ratings company, Standard & Poor’s cut Brazil’s debt rating to its lowest investment grade ‘due to the erosion of the country’s public accounts and slow economic growth.’

According to S&P the state-controlled oil company’s smaller projected liquidity and lower cash flow generation led to the downgrade.

Correspondent Mark G. explains the mechanics of the financial extinction process:
If Moody’s follows through then Petrobras will drop to Baa2, or two notches above junk. By the way, Rosneft is already at Baa2. And so is Lukoil. There are plenty of other Russian (and Brazilian) corporate debtors in this situation.
The question – which is almost completely political at this point – is what happens when Moody’s reduces its ratings on this BRICS paper to Ba1 and below where it belongs. i.e. Junkland.
1. There are plenty of US institutions that legally cannot hold this degraded paper in their portfolios after it drops to Ba1. Beginning with those perennial yield hogs, US based life insurance companies.
2. At this point hard-currency interest rates charged to the submerging market debtors will soar for rollover refinancing.
Thank you, Mark, for laying out the path to extinction. Hard-currency means the U.S. dollar (USD) in most cases, and as the currencies of oil exporting nations crater (see Russia, Nigeria, Brazil, et al.), the state-owned oil companies attempting to roll over debt or borrow enough to stave off insolvency are being hit with multiple meteors:declining currencies, ratings downgrades and plummeting revenues.

Companies that are being operated as going concerns are responding quickly and decisively to the meteor-strike of collapsing prices. State-owned oil companies that don’t slash expenses to align with revenues and boost critical investment in the infrastructure needed to maintain production will suffer financial extinction.

Charles Hugh-Smith of OfTwoMinds blog

18 Comments on "Oil Dinosaurs Face Extinction: State Oil Companies And The Meteor-Strike Of Low Oil Prices"

  1. westexas on Sat, 24th Jan 2015 6:28 am 

    Re: “State-owned oil companies that don’t slash expenses to align with revenues and boost critical investment in the infrastructure needed to maintain production will suffer financial extinction.”

    Given that global Crude + Condensate (C+C) production, excluding high decline rate US production, has been flat to down since 2005 (as annual Brent crude oil prices doubled from $55 in 2005 to the $110 range for 2011 to 2013), I wonder what happens to global production levels if state-owned companies don’t make the “critical investment in the infrastructure needed to maintain production?”

  2. Fishman on Sat, 24th Jan 2015 7:19 am 

    Sweet, the market takes out Socialism again. Who couldn’t have seen this coming?

  3. bobinget on Sat, 24th Jan 2015 7:34 am 

    China, the ultimate ‘state owned’ oil company
    has become ‘lenders of last resort’ for the world’s
    state owned operations.

    As long as oil trades below $50 no E&P is making money. Publicly owned (shares) or state.

    State owned have the advantage credit wise. Since China and India have foreign reserves, still believe oil and gas have a future, are lending.

    Most recent, hardly commented on in US media,
    confounded by under inflated footballs, is the case of Venezuela and fellow exOPEC member Ecuador. China. China managed to buy up distant future exports for pennies on the dollar.

    AS early as 2009 China’s strategy of lending
    (37 billion as of 2010) in Latin America opened up
    markets for goods and assuring steady oil supplies.

    China locked up Venezuela’s future exports
    for decades while US sent troops 7,000 miles,
    spends three trillion dollars, tens of thousands of American lives in what could turn out to be fruitless efforts to corner Iraqi (and Iranian) State run oil exports.

    China gets most of its African oil in Angola.

    to give readers an Idea of the kind of money China
    has to lend; Libya, Iran, Russia, Nigeria to secure petroleum:

  4. Davy on Sat, 24th Jan 2015 7:43 am 

    Read this on ZH yesterday. There is allot of truth to this article and this represents a BAU ending situation for oil producers and the commodity and export driven Brics alike. The Brics have been talked up as the new global growth engine and the west in decay. The west in decay is spot on but the Brics as the new global growth engine is a reality lie. All those countries that have breached their population and economic carrying capacity per BAU standards will collapse to lower economic levels. This decay will be harder and faster than the west. The west began its decay with hyper BAU globalism of the past 15 years. The west will also drop hard yet it is already in that mode.

    Places like China that are massively overpopulated and have pursued hyper cancerous western style wasteful and environmentally destructive growth patterns will be the hardest hit. China and Asia alike are increasing in population and consumption which is the worst possible situation. The ME with a huge population in a region that has little carrying capacity is also greatly at risk. Africa is likely nearly done growing population.

    Oil and finance are going to bring BAU down if a black swan conflict doesn’t do it in stealth fashion sooner. All locals are exposed from delocalization and exposure to a declining global support. This oil price drop is an omen for what is ahead. It will likely be debated and opined by the talking heads and corn porn economists. Because we are in an environment of financial repression with an economic oil glut we may continue to see BAU limp along per the digital reporting, yet, the real economy is being destroyed by cannibalism from the digital economy the global plutocrats run. The real economy is being gutted by wealth transfer, limits of growth, diminishing returns, and carrying capacity breeches.

    We can talk all we like about winners and losers and who is better BAU adjusted. We can say who is in the front row and the back row to see the bomb go off. The back row may have a split second more time but the results for all involved are the same. This situation is like saying who is mentally better adjusted to an insane system. Sane is insane and insane is sane. That is the paradox of BAU and modern man.

  5. Davy on Sat, 24th Jan 2015 7:45 am 

    Bobby don’t get your panties in a wade over China. They can make all the deals they like but if BAU decays many of those deals are doomed.

  6. bobinget on Sat, 24th Jan 2015 8:32 am 

    lately we’ve been seeing ‘lists’ of last years Winners
    and Losers.

    At this minute most observers believe the US is a big winner. USD record highs, gasoline six year lows, EU reluctantly, too late it seems, doing half hearted stimulus.. Greece may drop eu.
    Watch ‘Super China’ swoop in, lend Greece USD’s
    and trade long sought after consumer goods and
    natural gas.

    All the while, world oil wars, pretending to be about religious tolerance, rage, almost unnoticed.

    In this coke fueled, super computer controlled markets, it easy to see the US as an early winner’
    By June however, the US will be in a one million barrel per day (oil) deficit. By fall of 2015,
    I predict two million barrels p/d missing imports.
    (Venezuela’s oil going to China & India)

    When Canada’s West to East pipeline opens in 2016
    another 900,000 B p/d slips away.

    Not to worry, President O will send another 10,000
    ‘advisors’ to Nigeria or IRAQ or Mali, or Syria, or Libya or S.Sudan or Saudi Arabia or Yemen.

    US short time winner! Long Term, loser!

  7. rockman on Sat, 24th Jan 2015 10:42 am 

    Bob – And folks should also remember that every one of those millions of bopd shipped from Alberta to the Texas coast can be legally exported TODAY to any foreign buyer that can outbid the US refineries.

  8. bobinget on Sat, 24th Jan 2015 3:26 pm 

    Yes, I understand. A careful reading of the DETAILED Weekly EIA report reflects crude exports as well as crude imports.
    Here in Nicaragua, the govt. resells discounted crude it gets from Venezuela. As allocations, from Ven, drop off it will be interesting to see if diesel and gasoline prices fall or rise. No sign of either
    in the last three months. Everyone knows about this scam. It must be similar to .17 cent a gallon inside
    Venezuela. One of those deals no one “can refuse”.

    Here’s a bit most news services missed, accidentally of course.

    Libya Oil Production Plummets as Tribes Fight to Control Field in South
    McClatchy Foreign StaffJanuary 23, 2015 Updated 19 hours ago

    Read more here:

  9. bobinget on Sat, 24th Jan 2015 3:55 pm 

    My biggest gripe on consumption numbers has to be fuels used in Combat Situations. Since it’s never imported (or exported) those numbers remain kinda secret. The DoD publishes weekly contracts let, the amounts paid, the materials, including fuels, but never break-out what’s used in foreign battle-field situations. I’m sure it’s considerable number. That never gets figured into ‘lifting costs’ of publicly owned US and Canadian oil companies.

    My point, if there is a point. Allied, Carrier based air strikes currently in motion on several fronts must be using as much fuel as some small nation. No wonder oil wars are always forgotten wars.

    As for state owned oil companies, do we ever see ‘security’ listed as a per barrel expense? When Saudi per barrel prices are mentioned, who adds
    62 Billion per year? KSA ranks 4th in military expenditure.

    One reason all flags in the UK were at half mast
    today. The Brits may be mourning possible loss of future defence contracts.

  10. Speculawyer on Sat, 24th Jan 2015 4:15 pm 

    Meh. Yes, they are being squeezed right now. And it is foolish to be so reliant on a single industry.

    But the price will go back up and everyone will forget this.

  11. Makati1 on Sat, 24th Jan 2015 6:51 pm 

    China is the big winner in most every category today. They are “investing” (dumping) USDs all over the world and locking in resources and ‘friends’. If you have hundreds of billions of USDs coming in every year from the US, and they are declining in real value, you spend it on real things of value as fast as you can. Add in about $4,000,000,000,000.00 in reserves to burn and you can buy most anything/anyone.

    China also has a few million men of military age who have little chance of finding a wife in China because of the male/female ratio, so they can be exported to those new ‘friends’ to protect China’s interests. And the US cannot do anything to stop them because China has a USD noose around the US’ neck. The world’s switch to non-USD trade is picking up speed and the hockey stick is coming into view. Buckle Up!

  12. Makati1 on Sat, 24th Jan 2015 6:53 pm 

    BTW: Related to my comment above: China is willing and able to support any national oil company that is willing to do business with them. At China’s benefit, of course. Troops not needed if you have big, fat bags of gold.

  13. Tom on Sat, 24th Jan 2015 7:48 pm 

    Brazilian deepwater oil – unbelievable large upfront energy investment for infrastructure (much not yet in place), oil output of unknown amount and duration to come much later. Net energy or not? If low net energy, can’t possibly succeed. Brazil down the drain, or only the lenders?

  14. Davy on Sat, 24th Jan 2015 7:49 pm 

    Mak, the harder you try to sell the meme “China is great” the worse you and your sales pitch looks. It is obvious you’re selling an agenda by your excessive talking up of China. You are like a poorly dressed used car salesman with bad breath and dandruff trying to hard sell a knowledgeable customer that sees right through your ridiculousness.

  15. GregT on Sat, 24th Jan 2015 11:40 pm 

    Spec said,

    “Meh. Yes, they are being squeezed right now. And it is foolish to be so reliant on a single industry.”

    Good for you Spec. Sounds like you’re finally starting to ‘get it’.

    “But the price will go back up and everyone will forget this.”

    You still obviously have a ways to go though.

  16. shortonoil on Sun, 25th Jan 2015 9:41 am 

    The Saudis did it; the Russians are responsible. Central Bank monetary policy is the culprit! Prices are going down because someone did something?

    That someone was the human race. Humans have been pumping on the world’s oil reserves “like homicidal maniacs” for a hundred and fifty years. We have spent a century and a half, and hundreds of $trillions to squeeze the last few drops out of the earth. Then how can it be a surprise that we have finally taken all that was worth taking? Yet, there is a ubiquitous denial that could be what is happening!

    Prices will go back up to $100, and the market will again settle into a never ending flow of the precious black goo that brings life to our civilization. It is believed that this as inevitable to happen as the daily rising, and setting of sun. There is no need for analysis, to calculate, evaluate; it is what it is, it is because it is what has to be.

    And yet like a mile high sign on the horizon, the coming end to the age of oil is advertising its arrival. Flashing in Russian, Greek, English, in every language known to man,an ominous message is being delivered. “Earth has very little remaining that it will give to you!”

  17. Davy on Sun, 25th Jan 2015 12:26 pm 

    Short said (humans) are “like homicidal maniacs” short I wish it were that easy then we could blame someone. Humans whether individual or as a species are not to blame for these actions. There is a Taoist saying “the clever will be deceived”. Our clever knowledge has deceived us into a delusional cornucopian exceptionalism. As a species we belong as hunter gathers in smallish tribes with tight behavioral structures. Our hyper civilization has developed during a quiet geologic and climatic period that has been a rare occurrence on earth. Humans have not evolved properly to be in a hyper global civilization maybe not civilization at all. When this geologic and climatic stability is gone so likely will be any form of a higher agricultural civilization. Our modern development has been self-organizing and knowledge driven. We are hard wired to adapt through knowledge and technology. It was the stable earth geology and climate that allowed us a brief period of global expansion. This will likely be over with runaway AGW. Humans may go extinct or return to ecological harmony we once had. BAU is a rare earth occurrence that may never happen again.

  18. Northwest Resident on Sun, 25th Jan 2015 1:21 pm 

    “It was the stable earth geology and climate that allowed us a brief period of global expansion.”

    And lots and lots of (relatively) easy to get oil.

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