Oil Multinationals Operating, Investing In Kazakhstan: Gargantua In Business/I

EXCLUSIVE: Swindling “investors” in Kazakhstan: when crime pays – and how

Astana. KazWorld.info – Three of Kazakhstan’s Seven Sissies, namely the Royal Dutch Shell and US Chevron and ExxonMobil have just published their annual results over 2016. Kazakhstan’s own national upstream corporation KMG-EP, a subsidiary of the state oil company Kazmunaygas, has only published its output figures. The other foreign investors/operators in Kazakhstan’s oil industry, namely France’s Total, Italy’s Eni, Russia’s Lukoil and China’s CNPC, will also take weeks to follow pace. One thing, however, is already clear: the Sissies are on the winning end of the market struggle and Kazakhstan’s national oil business is left on the losing end of it.

by Charles van der Leeuw, writer, news analyst

Oil Multinationals Operating, Investing In Kazakhstan: Gargantua In Business/I

The trouble with attempts to read from oil multinationals’ annual numbers their financial input in specific projects in specific locations is that such attempts are futile. The corporations’ reports do not indicate such particular cash flows. On the ground, they operate either through fully owned but independently operating subsidiaries, through joint venture with local partners (usually the state oil and gas company) or through production sharing consortiums together with both the local party involved and other multinationals. Such is the case in Kazakhstan. The bulk of the country’s oil and gas comes from three such consortiums: Tengizchevroil operated by Chevron which owns half of the enterprise and thereby gets half of its output, Karachaganak which is jointly operated by the Royal Dutch Shell and Eni, and Kashagan which has a rotating operatorship but partners are entitled to the output according to the amount of shares they have. None of the consortiums publishes quarterly and annual results as individual oil companies do, which is why it is extremely hard to get proper insight in their cash flow, revenues and expenditures.

Chevron: losses over 2016, return to profit in fourth quarter

Chevron’s global full-year 2016 results were a loss of $497 million ($0.27 per share – diluted) compared with earnings of $4.6 billion ($2.45 per share – diluted) in 2015.

Sales and other operating revenues in fourth quarter 2016 were $30 billion, compared to $28 billion in the year-ago period, according to a press release published on the issue.

Chevron’s income summary

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“At year-end, balances of cash, cash equivalents and marketable securities totaled $7.0 billion, a decrease of $4.3 billion from the end of 2015. Total debt at December 31, 2016 stood at $46.1 billion, an increase of $7.5 billion from a year earlier,” the press release reads further down. “Net oil-equivalent production for the full year 2016 was 2.59 million barrels per day, a decrease of 1 percent from the prior year. […] Cash flow from operations in 2016 was $12.8 billion, compared with $19.5 billion in 2015. Excluding working capital effects, cash flow from operations in 2016 was $13.4 billion, compared with $21.4 billion in 2015. Capital and exploratory expenditures in 2016 were $22.4 billion, compared with $34.0 billion in 2015. The amounts included $3.8 billion in 2016 and $3.4 billion in 2015 for the company’s share of expenditures by affiliates, which did not require cash outlays by the company. Expenditures for upstream represented 90 percent of the companywide total in 2016.”

Royal Dutch Shell: 2016 profits dwindle, cash flows soar

Even though the numbers differ, the overall trend is clearly visible in the results of Kazakhstan’s second-largest investor, the Royal Dutch Shell. “Full year 2016 cash flow from operating activities was $20.6 billion, which included negative working capital movements of $6.3 billion, compared with $29.8 billion for the full year 2015, which included favourable working capital movements of $5.5 billion,” a press release posted on the occasion elaborates on the full-year earnings and spendings in 2016.

“[For the] full year 2016 organic capital investment was $26.9 billion, which included $2.3 billion in non-cash items, some $20 billion below 2014 Shell and BG levels,” the press release reads further down. “Capital investment in 2017 is expected to be around $25 billion. Full year 2016 divestments were $4.7 billion. Full year 2016 underlying operating expenses decreased by $1.3 billion versus 2015, to $38.3 billion. Total dividends distributed in the full year 2016 were $15.0 billion, of which $5.3 billion were settled by issuing some 219.3 million A shares under the Scrip Dividend Programme. Return on average capital employed on a reported income basis was 3.0% for 2016 compared with 1.9% for 2015. Return on average capital employed on a CCS basis excluding identified items was 2.9% for 2016 compared with 5.2% for 2015.”

Royal Dutch Shell’s upstream results overview 2016

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ExxonMobil: profit keeps flowing as though there were no crisis

The losses on the balance sheet of Chevron and the Royal Dutch are nowhere to be seen on those of ExxonMobil, which is a stakeholder in 2 Kazakh consortiums but no operator. “Exxon Mobil Corporation announced estimated 2016 earnings of $7.8 billion, or $1.88 per diluted share,” a company press release of early February posted on the occasion of the announcement was to read. “[…] Excluding the impairment charge, full year earnings were $9.9 billion compared with $16.2 billion a year earlier, reflecting lower commodity prices and refining margins. […]E xxonMobil completed five major Upstream projects during the year in Australia, Kazakhstan and the U.S., adding 250,000 oil-equivalent barrels per day of working interest production capacity. The company made three important new discoveries in Guyana, Nigeria and Papua New Guinea, and is growing its exploration portfolio, capturing 16 exploration blocks in 2016 with three additional awards to be finalised in 2017. […] During 2016, the corporation distributed $12.5 billion in dividends to shareholders.”

ExxonMobil’s 2016 earnings summary (in million US dollar,  shares in US dollar

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The upstream-downstream trick: keeping the billions rolling

Worldwide, the oil giants’ appetite for astronomic amounts of cash came close to a hundred billion greenbacks, meaning that pump-what-you-can is the main instruction for all involved. ExxonMobil spent close to $20 billion on its upstream business in 2016, down from just over $31 bilion in the previous year – but still. The Royal Dutch Shell spent more than $16 billion in the section through the year, excluding $15 billion paid for British Gas which turned the buyer into a partner and tandem-operator in Karachaganak. Exact figures on the companies’ expenditures in Kazakhstan are hard to obtain, but one can assume that in the last quarter century well over a hundred billion US dollar has been poured into Kazakhstan coming from these funds.

So what keeps these multi-hundred-billion corporations in business, apparently by and large aloof from the effects of the global oil price slump? The magic word is vertical integration. From an early stage, oil multinationals, led by Henry Deterding’s Koninklijke Nederlandsche Aardolie Maatschappij (“Royal Dutch”) in The Netherlands, later becoming Koninklijke Shell after the buy-out of Marcus Samuel’s business in England, and by its rival Standard Oil owned and led by Rockefeller across the Atlantic, have tried, rather successfully, to get oil streams “from the pit to the pump” under their corporate control.

In this manner, they achieved a situation which today keeps today’s oil multinationals to large extents trouble-free or at least able to control trouble. Say an upstream section pumpsup a barrel of oil at a cost price of $10 per barrel, and then sells it to refineries around the world for $100. Refineries can only sell that for competitive prices in accordance with demand and purchasing power on downstream markets. So their income per barrel on end sales cannot possibly exceed $20 dollar per barrel, on top of purchasing, refining and sales costs. If their purchasing price of crude goes down to $50 per barrel virtually overnight. But their profit margin goes thereby up from $20 to $70 a barrel. And since most refineries are majority-owned by the same multinationals which pump up and sell the crude oil from the fields, there is only a simple shift in cash flow from up- to midstream. And that, dear readers, is exactly why you still pay roughly the same price for your litre of petrol at the pumping station, whether you are in the USA, in Europe or in Kazakhstan, oil crisis or no oil crisis.

The secret of multi-subsector “vertical integration”

And it can be assumed that end customers in oil-rich Kazakhstan are even worse off than those in oil-slurping western countries. While Russian large oil companies have managed to maintain their multiple-level “vertically integrated” business model, their Kazakh counterparts have not. The result is that Kazakhstan’s multi-sector oil business as a whole has been in a mess ever since the break-up of the USSR and thereby of the all-Union oil industry. There is no reason to point fingers for it, since the lack of cash even for the most basic public expenditures in the early 1990s was sorely missing and the government was simply in no position to demand mid- and downstream engagements from foreign investors. This situation persists up till this day. As though to make things worse, Kazakhstan’s upstream sector, though a subsidiary of the state oil and gas company, is operating fully independently, reducing the position of the state to that of a mere shareholder.

At the time of posting, Kazakhstan’s national upstream enterprise Kamunaygas Exploration and Production (KMG-EP) had only published its production figures over 2016 and not yet its financial results. As soon as they arrive, more light can be shed on Kazakhstan’s major shortcoming: it has ho midstream sector under control of the national oil corporation Kamunaygas which could serve as a substation to shift enough cash flow from upstream to downstream sectors in order to keep the overall income at desired levels. This and little else is the reason why Kazakhstan suffers so much harder from the oil price near-collapse which spared the Sissies operating in the country.

Western multinationals investing in Kazakhstan were never interested in refineries and local sales networks. The only one who tried to do that was Hurricane, a so-called junior (meaning of medium size and heavily undercapitalised) operator, which later became known as PetroKazakhstan. They bought (on credit) the refinery of Shymkent, not far from the oil field they operated. In the end, they went bust and had to be bailed out… (to be continued)

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