Viva Hellas! The extractive industries might have taken a back seat now the saganaki's hit the fan, but there's still plenty to ponder. We were hoping to have news as to whether the economic sanctions against Iran - an old sparing partner of Greece - had been lifted. But the second deadline linked to negotiations on its nuclear programme has come and gone. So it seems the delegates are still struggling to resolve some of the thorniest issues.
It has been reported that Iran has been actively engaged in discussions with industry heavyweights such as Total SA, Vitol and Royal Dutch Shell (RDSB) with a view to absorbing renewed output - and a sizable offshore inventory - if, and when, it comes in from the cold. The effect on oil prices from Iran's pending rehabilitation is wholly negative, particularly if the Saudis maintain their stance on existing quotas. However, gathering fears over corporate profit growth in China - or more accurately, the lack of it - have also put the skids under crude oil prices. Forward contracts fell 7.7 per cent in New York and 6.3 per cent in London - the largest daily contractions since February.
Metals tarnished as Shanghai and Shenzhen tank
Meanwhile, prices for bulk and industrial metals have slammed into reverse after Chinese equity valuations slumped alarmingly in the early part of the week. In an interesting take on the market economy, around 40 per cent of China's listed companies have suspended trading in their shares; a move designed to engender market stability, which in all likelihood will achieve the exact opposite.
Commodity indices recorded their biggest reversals of 2015, as worries intensified over demand levels from the People's Republic. At the time of writing, iron ore prices had dropped below $50 a tonne, pushing the key commodity further into bearish territory after shedding 20 per cent of its June peak price. Nickel and aluminium also hit three-year lows. And LME copper prices fell by 8.6 per cent in just two trading sessions.
Interestingly, currency traders seem to have anticipated the turmoil. Recent weeks have seen a rotation out of commodity currencies with increased short positions in foreign-exchange pairs linked to currencies such as the Australian dollar and the Norwegian krone. Canada's dollar is also taking a beating on foreign-exchange markets. Commodity markets will remain under the pump if a view takes hold that China's stock market resurgence was essentially a bubble fuelled by leveraged short-term positions.
Nowhere to go for Chinese investors
The erratic performance of China's equity markets in recent months highlights a fundamental problem facing Beijing: a lack of investment options for Chinese households looking to retain asset value. The problem has been exacerbated by low interest rates and tighter controls on the country's overheated property sector. While trust funds and insurance companies offer some investment opportunities, the capital thresholds are usually too high for the average household or there are strict limitations on how much - and when - investors can withdraw their money (even in the event of emergencies). Managed money in London, New York and elsewhere has been angling for Beijing to liberalise the country's retail investment market for years - to no avail.
Will the unfolding crisis force a rethink on the matter, or will China's policymakers be content to pursue a crude interventionist line? They would do well to take on board some homespun Confusion wisdom: 'When it is obvious that the goals cannot be reached, don't adjust the goals, adjust the action steps'.
Taxing times in the North Sea
Closer to home, a recent report produced by the UK's budget watchdog suggests that the package of government reforms introduced to support the offshore oil and gas sector could ultimately fall under the heading of 'too little, too late'.
The Office for Budget Responsibility (OBR) now estimates that a total of £2.1bn could be raised in the 20-year period following 2020. No one obviously expected an upward revision following on from the collapse in crude oil prices, but it's quite a comedown from last year's estimate of £36.6bn.
Reduced assumptions on production levels are central to the OBR's revised figures. Government coffers will feel the pinch due to an effective reduction in the tax take through accumulated industry losses, in addition to increased repayments on decommissioning costs.
The good news - at least in relative terms - is that the impact of lower prices and output should be partially offset by lower industry costs and capital commitments. This, according to the OBR, leaves implied pre-tax profits from the North Sea in positive territory, albeit on the low side from an historic perspective.
However, if recent experience has taught us anything, it's that the pace of change in energy markets is far from predictable. And it's not as if the OBR hasn't been wide of the market before; the watchdog, itself, admits that its findings are "subject to considerable uncertainty".
To Russia, with love
So much for sanctions; Russia's Gazprom is forging ever closer ties with Royal Dutch Shell, no doubt much to the chagrin of state officials in Washington. Shell and its key gas customers in Europe - Germany's E.ON and Austria's OMV - have agreed to build two new Nord Stream gas pipelines under the Baltic Sea into Germany. The development will underpin the expansion of Shell and Gazprom's $20bn LNG venture on the eastern island of Sakhalin. And it will aid OMV in its plans to turn Austria into one of Europe's largest gas hubs.
The rationale for increased cooperation is plain enough, although the timing will doubtless raise eyebrows. Gazprom - which is still subject to US sanctions (although unencumbered by the EU) - is looking to drive up its market share in Europe, despite a continental supply balance that has become increasingly unfavourable for prices.
The deal potentially provides another avenue for Shell to drive up the proportion of its revenues generated through natural gas supplies, following on from its agreement to snap up UK rival BG (BG.) for $70bn earlier this year. Gazprom's chief executive, Alexei Miller, revealed that the strategic alliance with Shell would include upstream asset swaps, perhaps including oil products and other fuels. Above all, it suggests that oil company executives are bound by a long-term view of the industry, above and beyond political considerations - well, most of them, at any rate.
Unconventional loan books
The upcoming interim reporting season, both here and in the US, could shed some light as to whether loans books across the banking sector have deteriorated due to the slump in energy prices. Certainly, the situation across the pond gives cause for concern. Earlier this year, a survey conducted by the Federal Reserve showed banks stepping up oversight for borrowers within the oil and gas sector, particularly for highly geared companies in the unconventional space.
If that wasn't bad enough, many of the price hedges issued by banks and financial intermediaries prior to the price slump are now reaching expiration point. The hedges - the bulk of which were struck at $85-$90 a barrel - helped to stave off an acute cash shortage for shale companies and kept lenders happy. Banks in the US typically review their credit lines to the industry twice a year. The next reckoning is due in October; by then many of the drillers' hedging contracts will have run their course. If the taps are turned off we could either witness more production being driven out the market, or a step-up in industry consolidation when scale producers step in to buy up assets at knockdown prices if, as seems likely, the number of producers coming up for sale increases.
BP draws a line under Deepwater Horizon
Any buyers for an industry heavyweight that's been touted as a potential takeover target will at least have a clearer idea of their contingent liabilities after BP (BP.) agreed to pay $18.7bn to settle all federal and state claims arising from the 2010 Deepwater Horizon oil spill.
If approved - the agreement is subject to further court oversight - the payout will be $8.2bn short of the worst-case scenario that BP faced under the federal Clean Water Act. The group estimates that total costs relating to the disaster will amount to around $53bn - equivalent to 13 times reported earnings in 2014.
Although the settlement will be the largest in US corporate history, BP's shareholders will probably welcome the deal. That's because BP's lawyers managed to stretch the repayment period to 18 years. The unexpectedly drawn-out terms have alleviated the drain on the group's cash resources, although the oil price slump will still come into play. Chief financial officer Brian Gilvary subsequently described the impact of the settlement on the group's cash flows and balance sheet as "manageable". (It's worth remembering that a sizable proportion of the settlement can be deducted from the group's tax bill.)
Above all, the settlement removes valuation uncertainty; the group could still be liable for perhaps another $2.5bn in related liabilities, as the settlement doesn't cover banks, insurance companies and businesses or residents in areas of Texas and Florida. It also didn't include shareholders or businesses that are pointing the finger at BP for the Obama administration's moratorium on deepwater drilling in the Gulf of Mexico subsequent to the spill.
Nevertheless, it seems the key question has been addressed. The market immediately marked up the group's valuation, while JPMorgan upgraded BP's shares to Overweight from Neutral. Moody's Investors Service joined the love in, changing the outlook on the group's long-term debt from negative to positive.
A year or so after Deepwater Horizon - with oil trading at around $118 a barrel - a number of City analysts mused on the group's break-up value. Separating BP's refining and marketing operations from its upstream oil and gas activities seemed a viable option at the time, particularly in light of a contemporary example provided by ConocoPhillips. An estimate by JPMorgan Cazenove implied that BP was then trading at a 40 per cent discount to the underlying value of its asset base - around £165bn in aggregate.
The deal draws a line under years of uncertainty, and although there's no longer any talk of break-up options (at least we're not privy to them), the group will be subject to renewed takeover speculation. It's far from clear which independents or NOCs have the requisite financial clout to launch a bid. And that says nothing of the hurdles linked to regulatory/anti-trust issues. Anyway, in this case, sanctions do prevail; the group is currently off the menu due to its 20 per cent stake in Russian energy giant Rosneft.
