Chinese Takeaway is Certain

Beyond the Headlines: Dec. 25, 2012 Protesters in Ramadi hold a picture of Finance Minister Rafa al-Essawi a day after his security forces were rounded up by anti-terrorism forces in Baghdad. The protests claim the acts are without due process and are outside the law. (JAMAL NAJI/Iraq Oil Report) Beyond the Headlines highlights key incidents and developments that didn't make the past week's news, giving readers a ground truth view of Iraq. Our custom research division regularly publishes a far more extensive version of this feature, called Beyond the Headlines Premium. To purchase access, or to commission customized research, please contact us. For sample reports, please click here. By Staff of Iraq Oil Report Published December 25, 2012 Halfaya farmers protest PetroChina HALFAYA – Farmers in Missan province staged a protest in front of PetroChina's offices in Halfaya, claiming their land had been acquired without the payment of any financial compensation. Protesters say their land has been seized in order to allow the development of the Halfaya oil field, operated by PetroChina - a subsidiary of China National Petroleum Corp. (CNPC). They called on the Missan Provincial Council to take up their case and bring it to the ... ============= Author biggordy Vi Message Hi everyone, compliments of the season to you all. I have a little time on my hands at the moment and I’ve been doing my own research – not only on Kurdistan but on Iraq as a whole. I’ve been thinking out of the box on Boxing Day. This is a long post so hopefully you will have the time to read it and find it worthy of doing some more research yourself on the subject of the Chinese in Iraq. I don’t have the eloquence of a BBBS or a Scaramouche however this may get them interested enough in the topic of the Chinese to post one of their blockbusters. I saw on this iii board recently that the CNPC had made its first shipment of oil from Halfaya in a new supertanker with a capacity of 2 million barrels. I decided to research this news and other news about Iraq oil exports to China. I wanted to try to understand what the Chinese are up to at the moment with regards to Iraq since newsflow on the iii board about them is relatively quiet. I especially wanted to do so with a view to a potential Chinese takeover of GKP so I suggest that you read the referenced articles and you think about their strategy. From my research I was able to see that Halfaya is a new port project developed by the Chinese which was completed 15 months ahead of schedule. Big things are planned for further stages. Iraq has recently been struggling to achieve full price for its oil due to strong competition and technical issues ( more later). Nevertheless it is still achieving an average sale price for its oil of around $105/barrel. By applying that price to one supertanker worth of crude the value becomes $210m. I then converted that price to GKP’s market cap – Monday’s closing sp of £1.64 or $2.64 multiplied by 876m shares - $2.32bn. GKP’S market cap equates to only ELEVEN supertankers worth of crude!!!! Now that equates to 22 million barrels of oil at sales price ( I fully appreciate this is not the profit oil element but bear with me). GKP currently has a share in recoverable oil of approximately 2.7 billion barrels – you can make your own estimate of how much they currently have and how much they are likely to have when all exploratory drilling is complete but this figure is in the ballpark. 2.7 billion barrels converts to 1350 tankerloads. Now, if I was Chinese I would be thinking about THE PRIZE and the importance of my imports from Iraq (I’m pretty sure they are light years ahead of me in their thinking and planning). China needs to secure many billions of barrels worth of oil. The USA, in fact the Americas, and Russia are now self sufficient in oil and China knows the most important thing for them is to have enough oil to secure their continued GDP growth of 8%. During the first year following the Iraqi elections the Kurds were often referred to as Kingmakers in terms of who would rule Iraq. I haven’t heard the term recently and it now appears that M&S rule Iraq and its oil with an increasingly strong arm approach. They have successfully thwarted any attempts to introduce a vote of no confidence in their leadership and some forecasters think they will continue to do so until the next national elections in 2014. M&S have become much more aggressive towards the Kurds and talks of an Oil and Gas Law have been on the backburner for several weeks. Oil exports from Kurdistan have all but stopped and there seems no likelihood in the short term of them being resumed. There has even been talk of Maliki running for a third term and his behaviour has become more and more dictatorial. All of this has had a major impact on share prices of Kurdish oilies and GKP in particular. Iraq is currently exporting annually around 2.62 billion barrels of oil of which 0.42 billion goes through the Ceyhan pipeline to Turkey. Exports to at least 6 different Chinese entities (China Offshore, Petrochina, Sinochem, TOTSA TOTAL, Unipec, Zhenhua Oil ) are currently around 0.52 billion and are forecast to increase by over 8% next year. Chinese state refiner Sinopec will nearly double the amount of term crude it buys from Iraq next year to 270,000 bpd as it looks to replace oil from Iran, sources said. I’m not sure if Sinopec and CNPC are alternate names for any of these six and if TOTAL is the French version. In the south the western majors are leaving in droves and seem totally disinterested in bidding for new licences since they perceive the risks to their employees to be too high for a minimal return. Whilst there is talk of new contracts in the south ( similar to Kurdish PSC’s) Shari and co seem to be taking an eternity to recognise that they have to improve the contracts on offer to make it worth the risks for the majors to invest. The Russians have already declined to buy WQ from Exxon and the Chinese look like they may be the last of the majors standing. Iraq’s customers are concerned about variable oil quality not being up to the export spec required and one of the reasons appears to be that due to the erratic flow of Kurdistan oil into the Kirkuk stream and the start up of new fields in the south. These concerns about price and quality persist, deterring some buyers. Now where is all this leading me to you may ask? If you are Chinese and wanting to secure oil supply for the next couple of generations then the stars are starting to align in your favour. I mentioned kingmakers and now its time for aces. IMHO Chinese hold more aces than anyone else right now and they may well start to show them. First Ace - Let’s assume that the Chinese want to emerge from the shadows to takeover GKP and indeed a few more Kurdish oilies. We know TK loves a Chinese take-away and there is a suspicion that some non-disclosures in the cc are related to the Chinese ( some of whom attended court for a day – why?). They may already have bought a sizeable portion in the high teens percent through the six companies mentioned above. Nobody outside of China and possibly the KRG and GKP really knows since they only need to declare a holding of 3% but each of these companies could own 2.99%. The Chinese are smart and if they are going to make a bid for GKP then they will strike when the market least expects them to which is probably when they reckon that the sp is at lowest. They will have been watching the cc and may have formed the same opinion as the majority of readers on this bb that GKP are likely to either win the case or be exposed to a relatively small award to Excal – let’s say the legal costs and award amount to £50m – or 6p on the sp. This is peanuts in the grand scheme of things to the Chinese and is more than built into the sp already. The Chinese will also want to strike when they think they can get the lowest T/O price. If they are reading these bb’s they may form the opinion that GKP shareholders are likely to accept a lower offer than the £8/share previously rumoured to have been rejected. Why not try £5 / share since the impatient investors have been waiting too long already and don’t have the stomach to wait around for another 15 months until the elections happen when there is a chance, but no guarantee, that there will be a govt voted into office who are likely to pass an O&G Law. Second ace – M&S are in a very vulnerable position in light of electricity shortages in south Iraq, 30+% unemployment, accusations of corruption, Arab Spring, Syria and fall outs with Kurdistan and most of the western world oil majors. They are struggling to hold it together and it wouldn’t take much more to topple them. Who could do it? The Turks, Kurds and western oil companies are trying albeit progress is slow. Well if the Ceyhan pipeline is blocked by the Turks/Kurds then bang goes an export rate of 0.4 billion barrels a year. It doesn’t look like the Kurds are going to switch on the supply of their own oil any time soon. If the Chinese were then to threaten M&S with technical issues in the oil they supply or maybe the new tanker needs to go into dry dock for major repairs there is the possibility that another 0.5 billion a year could slow up. If the export run rate falls below 2.0m barrels a year then M&S are not going to last much longer in power. Now if the Chinese played their first ace and told M&S to usher the O&G Law through Parliament within a month I for one think that this would happen on time ( no biscuits – jfdi) - M&S have very little option. Third Ace – China alone has the ability to not only guarantee they will buy 0.5 billion barrels of Iraqi oil they can also guarantee to buy 5 billion barrels in the longer term if the Iraqis allow them to produce it using existing licences in the south. With an O&G law in place and new contracts – similar in profitability terms to the Kurdistan PSC’s the Chinese would have a huge incentive to get the oil flowing both in the south and in Kurdistan. The main issue in the south is security however one hears very little about attacks on Chinese in the south. The Chinese are not to be messed with and there is no troubled history or fundamental reasons for any of the factions to tackle them. Fourth Ace –the Chinese have the ability to provide infrastructure and electricity cheaper and faster than any other country on the planet. They can demonstrate how they have done this not only in China but also in other developing countries. Whilst the Turks may be able to demonstrate how well they have done in helping develop Kurdistan there is very little chance of them being allowed to do so in southern Iraq due to history and security issues. The Chinese could negotiate lucrative contracts to help rebuild Iraq and at the same time negotiate payment guarantees using the oil they are buying from Iraq. The ancient civilisations in the world have been bartering their goods for ever. There is no need for money – better to trade oil for goods and services. The Chinese would not be exposed to the non payment issues the Kurds are experiencing – they would simply stop buying oil until Iraq settles. With the pricing and quality issues Iraq is currently experiencing no doubt the Chinese could negotiate better long term oil pricing than they could get from the rest of the worlds suppliers. So before you sell more GKP shares ask yourself who holds all the aces in GKP and indeed Iraq – the long term investors or the shorters. If you think that the technical analysts are right and likely to help drive the sp down to £1.40 then feel free to help them do so. If you think that an RNS saying that a Chinese company has bought more than 3% of GKP (or indeed a take-over offer) could come at any time then hang on in there. The upside could be measured in £’s/share whilst the downside is more likely to be measured in pence per share. I have googled “Iraq oil exports to China” and “oil exports from Basra to China” in my research and suggest you do the same. There are many interesting articles including one from the Oman Times and there are also official Iraqi oil export statistics. Happy hunting and a have a good New Year – we may celebrate two shortly the western one and the Chinese one!