New Trade Financing Routes
AOP talks to Sebastian Wagner, Executive Director of DMWA Resources, about key trends in oil and gas trading for 2018 and the role traders can play in transforming operations in Africa’s oil and gas economy.
What do you see as the key trends for the oil and gas industry in 2018?
Now that the OPEC question is resolved, at least for the immediate future, I think everyone is looking at shale in the US, on a macro scale. We are still seeing great stories coming out of the shale basins in the US, especially the Permian, but from my personal point of view, it remains to be seen if shale is actually capable of maintaining its momentum on output increases. There are many contradictory views on this. Some analysts are very bullish about the shale play, while others are voicing concern about shale technology and the rate at which wells are being depleted. Look at the Bakken play, for example. But truly, we just have to wait and see how the output from the shale plays really develops. And I’m sure we will be revisiting the OPEC story in June, as well. I always say that there can be a 20-year extension to the OPEC deal, but as long as there is a review in six months from the last extension in November, it is a de facto six-month extension.
Do you see greater stability returning to the market in 2018?
If you look at it from a technical point of view, we are seeing positive signs that crude inventories are continuously being drawn down and this gives an impetus to the front-end of the curve. When you look at the back end of the curve, however, the big unknown is what is going to happen with US shale. It remains to be seen what the developers, both in the shale basins in the US and globally, are doing with a back-end price of $64, which, in my view, one can regard as the terminal value for oil at the moment.
Besides the technical side, what we are feeling on a very subjective level on the ground in Africa is positivity. Every week, if you look at Africa news, there is really a lot of movement in the oil and gas sector and that contributes to the bullishness of the sector, specifically in Africa.
How would traders be affected by a more stable and rising oil price in 2018?
OPEC has to some extent stabilized the market, but really, traders need volatility rather than stability. Aside from that, I think trading over the last five to ten years has really matured in Africa. What traders call “information arbitrage” has really disappeared in the African market. We are seeing more competition amongst traders, and the national oil companies are becoming more and more refined in how they do business, as well. So, traders really have to come up with alternative solutions to their business models. We in the industry have to ask ourselves the question: What is going to be the future arbitration play in Africa? Is it value chain integration? Is it financing?
In Africa, answering those fundamental questions to the business model has led to a marriage of pre-financing and commodity financing. Many traders are increasingly getting their economics out of financing. To put it crudely: just going to a national oil company and pitching for a crude offtake on a spot basis does not cut the mustard anymore. You have to come up with solutions — swaps, pre-financing, pre-payment, etc. — to justify your business model. That is a very interesting development that is happening independent of how oil prices evolve.
The trading margins are contracting continuously across Africa, across the barrel, so traders really have to come up with structured solutions for their customers to make their business models work.
How are traders incorporating different financing models into their business propositions?
Traders really have to offer turnkey solutions to national oil companies and ministries. A lot of African countries are endowed with natural resources, but they are cash-conscious. In order to bridge that gap, traders have to step in and become a sort of commodity financing bank.
Traders have the capacity to syndicate, and national oil companies can make us of this. This is something that has become a trend across Africa. On top of that, what is becoming more and more relevant is swap agreements. Nigeria’s DSDP program is the most prominent example, but swaps have become an option in many parts of Africa and can be seen as an alternative financing tool in our industry.
What you also see now is that mid-size traders — whose business model is even more under pressure given that margins are contracting — are actually becoming more and more successful because they are very flexible, very agile, they come up with very creative solutions, and they offer real commodity financing turnkey solutions to their clients.
What opportunities do you see for traders in Africa’s downstream market in 2018?
One of the big surprises of 2017 was Glencore taking control of the Chevron refinery in Cape Town. That was certainly brilliant deal-making there, but I think we are going to see more of these types of deals on the refinery side in 2018. The African storage and distribution market, in my view, has been very heavily consolidated in the last several years; just look at Trafigura’s moves with Puma Energy. To me, the question mark for 2018 is the African refineries — they are all in more or less precarious conditions, they are all running below capacity, so what is going to happen there in terms of deal-making?
The refinery question will be especially relevant for West Africa. Are the refineries going to turn into storage units? Will they sign a long-term financing agreements with traders (like Ivory Coast’s SIR refinery in the past)? Do they sign government to government agreements? Equatorial Guinea, for example, just announced the possibility of building a refinery with Venezuela.
We will certainly see a lot of movement in the African refinery market, and for some of the participants involved, it is really going to be a matter of survival.
What opportunities do you see in the oil and gas sector in Africa in the next year?
For 2018 and beyond, you will see an increasing trend towards the gasification of African economies. I think any trader properly positioned in the LPG and LNG markets will make a lot of money in 2018 and beyond, if they get the economics right.
There are a few heavyweights in the gas game, such as Shell with its brilliant BG Group transaction. I would like to believe that Shell has really returned to shareholder value, and the firm’s return on equity in the next five years or so may be second to none in the oil and gas sector. This is a powerful example, but there are many smaller traders who are beefing up their LNG desks. LNG is the market you want to be in, and there are great public-private partnership initiatives, like LNG2Africa, that are focused on solving the energy issues on the African continent through LNG.
Gas, and LNG specifically, is a very attractive play to be in right now.