Jubak's Journal
Oil producers reach for more power
Consuming nations are struggling to find valid energy strategies, but oil-producing nations have a plan. They'll control the price of refined petroleum, just as they control the price of crude.
By Jim Jubak
Well, at least somebody in the world has an energy strategy in place.
Unfortunately, for those of us who live in net oil-consuming countries, it's the oil-producing countries that have the plan.
It will give oil producers more control over the world's oil supplies. And it will put them in a position to control the price of refined petroleum products, just as they now control the price of crude oil.
And, quite frankly, I don't see any reason why the oil producer's energy strategy shouldn't succeed. No government in any oil-consuming country has come up with a strategy for fighting back.
In today's column, I'll explain the oil-producing countries' energy strategy. It's pretty depressing reading. See the news
that affects your stocks.
Check out our
new News center.
But I don't think we need to despair. Fortunately for us, we don't have to wait around for our governments to save us from freezing in the dark. As investors we can develop our own energy strategies and feed them with our own dollars. Individually, those dollars don't begin to match up with the money that governments have to spend, but collectively I think we've got more than enough cash to do the job. And in my next column, I'll outline some investing opportunities that will make money and can help oil consumers take back control of our own future.
Our plans
By now we're all familiar with the piecemeal and startlingly lame excuses for a comprehensive energy strategy that the oil-consuming countries have come up with.
In the U.S., the strategy, as articulated by President Bush, is to put all our hopes in new technologies like straw-grass ethanol, hybrid cars and coal-to-oil plants that might bear fruit over the next 15 years. And in the meantime, we'll all think about driving less.
--------------------------------------------------------------------------------
Related news and commentary on MSN Money • Why OPEC won't turn off the oil
• 5 stocks for the new oil reality
• Hard winter for the oil sector
• O Canada, can we have Alberta?
• Who's really to blame for $3-a-gallon gas?
--------------------------------------------------------------------------------
It's easy to poke fun at a plan that seems to have been brainstormed by a committee of ostriches with their heads buried in the, well, sand. But it's not like our economic allies and competitors have done a whole lot better.
The European Union has a two-pronged approach:
Produce more energy from nuclear plants and from renewable sources like wind and solar.
Buy more natural gas from the Russians.
I only see one tiny problem with each prong:
The European Union says member countries are falling way behind their relatively modest targets for nonpetroleum energy sources.
Russia's promise to be a reliable energy supplier is close to worthless.
China has come up with its own two-part strategy. Part One involves cozying up with any pariah regime that happens to sit on oil. So the Chinese are going to supply patrol boats to the Nigerian government so it can quash the rebellion in the oil-rich Niger delta. Last year, China signed an $800 million deal for 30,000 barrels a day of Nigerian oil. Arms for oil, anybody?
Of course, any government that is counting on the governments of countries such as Nigeria and Iran to honor deals is doing some major wishful thinking of its own.
Part Two of the Chinese strategy is predicated on building as many new nuclear power plants as it can, as quickly as it can. The nuclear industry promises that the new generation plants are a huge improvement over the last generation. China looks like it has signed on as a massive testing ground for this next-generation technology.
Their plans
Against that backdrop, the energy strategy set out by the world's net oil exporters is a model of clear thinking and simplicity. It, too, has two parts.
First, seize greater effective control of all the oil inside the national borders of the oil producers in the name of national oil companies.
Second, build new refineries in Saudi Arabia and the rest of the Persian Gulf to become the main global exporter of finished petroleum products such as gasoline, heating oil and jet fuel.
Strong arms at work
I'll start with Part One.
Because about 80% of global oil reserves are already under the control of the national oil companies of Venezuela, Mexico, Saudi Arabia, etc., this may not seem like a big strategic change. But it is, because the oil-producing countries are intent on changing the terms of the agreements that allow Western companies such as ExxonMobil (XOM, news, msgs) and Chevron (CVX, news, msgs) to produce and sell oil from their national reserves.
Demands for increased royalties from Western oil companies have taken up most of the headlines. In Venezuela, the world's fifth-largest oil exporter, for example, the government has raised oil royalties to 30% from 1%. And the government is demanding that Western oil companies pay what it calculates as $363 million in back taxes.
That change isn't an isolated case, either. For example, New Bolivian president Evo Morales has said that Spanish oil company Repsol (REP, news, msgs) should pay royalties of 50%.
Those royalty rates aren't by their nature ridiculous. Norway, after all, charges a 70% royalty for its North Sea oil.
The demand for higher royalties is only a sign of how much power is flowing from Western oil companies to their in-country "partners." Western companies are being forced to sell majority stakes in all their in-country projects to Venezuela's national oil company, Petroleos de Venezuela. Most of the 32 foreign firms have agreed to the new rules. ExxonMobil publicly protested and has become something of a whipping boy as President Hugo Chavez has, apparently, decided to make an example of the company. The company was forced out of a $3 billion petrochemical project in February 2006. And in December 2005 it sold its 25% stake in the Quiamare-La Ceiba field to a Spanish company rather than accept the new Venezuelan rules on ownership.
As big as they are, the big international oil companies don't negotiate on an equal footing with sovereign governments. In Bolivia, for example, the government has issued an arrest warrant for the CEO of Repsol after charging that Repsol smuggled oil out of the country.
It used to be that national governments treated the international oil companies with loving care. After all, they needed the technology that these companies could apply to develop their oil fields. Venezuela, for example, invited international oil companies in to develop its heavy oil reservoirs in the 1990s because the country didn't have the internal means to do the work.
Things have changed. Either because the national oil companies can do the work themselves, which I call unlikely, judging from reports about the state of oil field infrastructure in Mexico and Saudi Arabia. Or because the national governments think the international oil companies are so desperate for their oil that they'll agree to just about anything. And maybe these governments are right. While protesting the arrest warrant issued against its CEO, Repsol pledged to go ahead with $150 million in investments with the Bolivian national oil company.
Controlling the oil and its products
If Part One of the oil-producing countries' energy strategy seeks to put an even tighter grasp on global oil supplies and production, Part Two would give the oil producers an entirely new kind of leverage on the global petroleum economy.
Very few new refineries are being built in the Western oil-consuming countries. In the United States, in fact, while oil refiners have added capacity at existing plants, no new refineries have been built for more than 20 years. We have used imports of refined petroleum products from the Caribbean and Latin America to meet growth in domestic demand for gasoline, heating oil and other refined products.
But the oil-producing countries of the Middle East are about to go on a refinery-building boom that, according to energy consultants Wood Mackenzie, will boost refining capacity in the region by 60% over the next 10 years. OPEC (Organization of Petroleum Exporting Countries) members alone would increase their refining capacity by 50%.
That's great news for the companies that engineer, supply and build refineries throughout the world: The International Energy Agency puts refinery spending in the Middle East at $89 billion between 2004 and 2030. Jim Jubak's newsletter
Get the latest from Jim Jubak. Sign up to receive his free weekly newsletter.
Your e-mail address:
Learn more about newsletters
But it's not good news for oil-consuming countries striving for energy independence. If Part Two of the oil-producing countries' energy strategy works, the countries of the Middle East -- which really means Saudi Arabia, since that country has the cash flow to build the most refineries -- will dominate the supply of refined-petroleum products at the margin, just as they do with oil. And that will give the oil producers control over the global price of gasoline, heating oil, jet fuel, feed stock for plastics, etc.
So much for gaining energy independence.
Placid politicians
You'd think somebody is Washington, D.C., the home of our elected leaders, would be up in arms about a trend, which, if not countered, will push the United States even further down the oil well than it is now. But I don't see concern, worry, panic, anger -- any of the emotions that a politician needs to exhibit, and then tap, in order to move a country off dead center.
Politically, I think there are things that each and every one of us can do to help get us started on a realistic fix to a problem that is only getting worse. If you want to send me ideas or just vent on this topic, I'll be glad to get your e-mail and I'll try to respond. If the correspondence gets interesting enough, I'll turn it into a column.
This is an investing column, though. Fortunately, as investors, I think there are things we can do, too. I think there's surprising agreement on the need to change the energy status quo right now. And I think a vote or two with our investment dollars can encourage companies that are looking for solutions to our energy problems to keep looking. Nothing will quash an idea quicker than a lack of capital. And, conversely, nothing gives an idea more life than the willingness of investors to back belief with cash.
In my next column, I'll look at where you can put your energy dollars to make money and to change the future.
--------------------------------------------------------------------------------
New developments on past columns
5 stocks playing catch-up with oil
You wouldn't know it from the way the stock has behaved, but Noble (NE, news, msgs) knocked the cover off the ball with its fourth-quarter earnings, announced on Jan. 26. Earnings per share of 73 cents were up 87% from the fourth quarter of 2004 on a 13% increase in revenue. But this being the weak "shoulder" season for oil stocks, shares of Noble fell with the rest of the sector, dropping 12% from the Jan. 23 high through the end of February. Most years (see my Feb. 17 column, "Hard winter for the oil sector") this seasonally weak period draws to a close in early March. I think the recovery could be delayed this year but I think it's well worth holding onto these shares for the upswing. The end of 2005 also puts losses from Hurricanes Katrina and Rita -- about $40 million in the period -- behind the company. (When the rigs don't work, the rig owner doesn't get paid.) Day rates for the company's international jack-up rigs continued to climb, rising 16% from the fourth quarter of 2004. Day rates in the company's Gulf of Mexico market climbed even faster, jumping 52% from the fourth quarter of 2004. With ocean-drilling rigs in such short supply around the world, Noble is now able to cherry pick contracts and send its rigs to the markets that pay the best. The Wall Street consensus calls for earnings to grow by 146% in 2006. The stock now trades at 13.4 times projected 2006 earnings per share. With the current strong pricing environment, I think investors won't see an earnings top until 2008 at the earliest. As of March 3, I'm raising my target price on Noble to $86 by June 2006. (Full disclosure, I own shares of Noble in my personal account.)
Editor's Note: A new Jubak’s Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For suggestions to help navigate the treacherous interest-rate environment see Jim's new portfolio Dividend stocks for income investors. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares of the following equities mentioned in this column: Noble. He does not own short positions in any stock mentioned in this column. |
