Adamant: Hardest metal
Tuesday, March 25, 2003

President Chavez Frias thanks Qatar for gasoline supplies

www.vheadline.com Posted: Monday, March 24, 2003 By: Robert Rudnicki

President Hugo Chavez Frias has thanked Gulf state Qatar for sending 265,000 barrels of gasoline to help Venezuela with the gasoline shortages that were troubling the nation during January and February this year.

"I would like to thank our brother country Qatar, all the Venezuelan people thank and applaud you," the president said during his weekly "Alo Presidente" radio show.

According to the President, once Qatari Emir Sheik Hamad Bin Jalifa Al Thani heard of the acts of sabotage against the Venezuelan petroleum industry and its people he "immediately ordered a ship to be sent" and it arrived in the port of Carenero on Saturday.

The gasoline will be sent to Caracas and the center of the country as soon as possible ... but the worst of the supply situation is now over as Petroleos de Venezuela (PDVSA) informs that current production levels have risen above three million barrels per day.

War winners and losers

,a href=www.rediff.com>To invest BS Smart Investor Team | March 24, 2003 15:31 IST

If the war turns out to be a long-drawn affair it could impact some sectors considerably.

Steel and engineering companies could gain due to Iraq's reconstruction, but technology companies may suffer due to slow decision-making by American corporations.

Gainers

Metals: The biggest beneficiary of the US-Iraq conflict may turn out to be domestic steel manufacturers. As part of its preparation for war, the US government has instructed steel manufactures in America to considerably reduce their exports to countries like China and build up inventories for the expected post-war reconstruction work in Iraq.

This is music to the ears of domestic steel companies as US companies have been exporting around 1.5 million tonne per month of high grade steel to China.

"Currently, Indian manufacturers account for less than five per cent of the total steel imported by China. But their contribution could rise as domestic companies like Tata Steel and Jindal Iron & Steel would try to fill in at least part of this void created by US steel companies," feels Bhavin Chheda, research analyst, Pioneer Investcorp.

This apart, the rise in demand from the overseas market could result in another price hike by domestic manufacturers.

On the flipside, the sharp rise in fuel prices will push up transportation and manufacturing costs and this is expected to adversely impact margins if the steel producers are not able to fully pass on the extra cost to customers.

There is no significant impact on other metals like aluminium, copper, zinc and nickel.

Heavy engineering: The heavy engineering sector may be a major beneficiary of the war, if it prolongs. This is primarily pitching on the fact that they may be able to garner additional business on account of Iraq's post-war reconstruction.

Analysts, however, are not optimistic on Indian companies getting a significant share of reconstruction activities. They highlight the fact that post the Gulf war in 1991, only one order came to India.

This was bagged by BHEL under the 'food for oil' programme, because of which it constructed a power plant in Iraq.

They say that even this was bagged at a time when the chances of an Indian company getting a share of the reconstruction activity was much better than it is today.

Especially since the power sector in US is in a recessionary phase. So this might lead to aggressive bidding by foreign companies, resulting in a squeeze on margins.

Losers

Technology: US sneezes and the Indian information technology industry catches a cold. This is the kind of effect US markets have on domestic software services companies.

And rightly so as domestic firms generate around 75-80 per cent of their revenues from US.

Though the long-term impact of war will largely depend on how quickly the US is able to achieve its objectives, domestic software companies are already feeling the heat of delays in decision making by US clients.

Industry officials admit that large US corporations have been postponing major outsourcing decisions in the past couple of months.

Moreover, with the outbreak of war many clients may postpone their visits to vendor premises. Both these will further elongate the  sales cycles and add to the marketing expenses of software services companies.

In the recent past also a similar trend was noticed when the tension between India and Pakistan had flared up after the terrorist attack on Parliament in December 2001.

Worse still, a prolonged war could unsettle the staggering US economy even more and companies may choose to lower capital spends further.

Apart from this, analysts are concerned about the possibility of the US-Iraq war playing on the minds of Infosys' management while providing growth guidance for the next fiscal.

The annual guidance by Infosys is seen as an important event for the entire universe of tech stocks on domestic bourses.

Thus, if Infosys decides to take a conservative view, it could impact investor sentiments at tech counters considerably.

Export-oriented industries: With shipping freight rates set to go up and the war premium also inching higher, importers across the board may just decide to defer their imports. Worse still, if the war is prolonged, there could be order cancellations as well.

Export-oriented units may actually witness losses or see their receivables pile up. Notably, commodity exports such tea, textiles and gems and jewellery could be hard hit.

Tea could be one of the worst affected commodities as tea manufacturers were depending on newer markets such as Iraq and other Middle East countries to make up for the fall in demand from traditional markets such as Russia and Europe. In fact, sales to Iraq under the 'food-for-oil' programme had tripled to 40.25 million kg last year.

Similarly, analysts say ready-made garment manufacturers such as Arvind Mills and Raymond and cotton yarn producers like Nahar Exports and Mahavir Spinning, who have considerable exports, could be adversely impacted as they may see some cancellations or order deferments.

Another industry where exports play a significant role is pharmaceuticals. Most home-grown companies such as Ranbaxy Laboratories and Dr Reddy's thrive on exports.

However, analysts don't see any adverse impact on the industry. They say medicines are essential and war is unlikely to alter demand.

In fact some of them see a spurt in demand for medicines, especially, anti-infectives, as war casualties begin to mount.

Shipping industry: Though freight rates have been rising due to the increase in fuel prices and war premiums, the shipping industry sees no reason to panic as any increase in costs will be passed on to customers. However, there are other reasons for worry.

The London War Risk Committee has listed 29 ports where a war risk premium ranging from 0.01 to one per cent will be levied on the value of cargo transported. Indian ports of Kandla and Mumbai are amongst those 29 ports listed.

The freight rates on oil tankers from the Persian Gulf region too have gone up substantially in the last few days.

However, if the war continues on a sustained basis, they say cargo volumes are likely to see a dip and  this will hurt business.

Volumes have already been hit by the lack of movement of ships to Iraq and its neighbouring countries as insurers were unwilling to extend insurance to these regions.

Hotels: The hotel industry was beginning to show signs of recovery from a long sluggish phase. In the last few months inbound traffic movement was increasing and flights in and out of the country were fully booked.

But unfortunately, the US-Iraq war could undo all the positive developments very soon.

To begin with, air travel fares are expected to increase on account of an increase in insurance premiums and re-routing of flights to avoid war-affected areas.

Industry sources say that about 10 per cent cancellations have already taken place and cancellations may reach as high as 60 per cent if the war drags on for an extended period. This could spell disaster for the Indian hotel industry.

On slippery ground

Oil prices spiralled on the eve of the Gulf war only to collapse by half soon after it broke out. But this time around, it was somewhat different. In the run-up to the US war with Iraq, oil prices spiked to $35 per barrel.

But after OPEC's decision to release excess capacity to make up for the shortfall, if any, after the Vienna meet on March 11, the pressure eased and prices fell to $33 per barrel. So when war broke out, expectations that it would be a short one pushed prices lower to $28 per barrel.

However, as days pass and if the market turns sceptical and feels that the war may last longer, concerns about a supply shortage could crop up again, driving prices higher. The medium-term outlook is still not clear and analysts fear that an increase in crude prices is a distinct possibility.

Oil prices are just as fickle as any other commodity's, despite the industry being the strongest oligopoly in the world. And as things stand today, the demand-supply situation points to rising oil prices.

The demand for oil has been surprisingly strong despite global economy being on a weak footing. The statistics arm of America's energy department, the Energy Information Administration has reported that oil stocks at the end of February stood at 16 per cent below their levels a year ago, and 12 per cent below the average for the past five years.

On the other hand, the supply side has been fragile. Iraq happens to be the second largest supplier of oil in the world, with a daily production of 2.5 million barrels per day and proven reserves of 100 billion barrels. The prospect of Iraqi exports coming to a halt, is, therefore, quite scary.

Not only that, the Venezuelan oil sector is just recovering from a workers strike launched in early December. As per official figures, the country slashed crude production from around 2.9 million barrels per day in November to an average of two million barrels per day.

But international agencies say that the unofficial figures are significantly lower. The EIA reckons it will be late May or June before the output recovers to pre-strike levels. Besides, the energy watchdog of OECD countries International Energy Agency, has estimated that Venezuela has permanently lost around 400,000 barrels per day of production capacity. Oil analysts also point that the impending election in Nigeria next month may impact oil supplies.

Even though OPEC officials have been reassuring the world that they will ensure a stable supply by utilising available excess capacity, experts suspect that it may not be able compensate for the loss entirely.

The excess capacity available with OPEC countries (excluding Iraq and Venezuela) is estimated to be around 2.5-3 million barrels per day, which may be enough to compensate for the loss on account of Iraq, but nothing more.

The bigger worry, however, is whether the war will damage Iraqi oilfields -- and for how long. A US defence official is reported to have said that there was some evidence that Saddam Hussein might be planning to cause extensive damage to Iraq's oil infrastructure.

With its cup of woes overflowing, the price of Brent crude spiralled to hit a 2-year high prior to the war only to fall back. But fundamentally, nothing has really changed, and prices may inch up once again say analysts.

Apart from the threat of a rise in crude prices, domestic oil companies have more to worry about. The deregulation of oil prices effected in April 2002 hasn't really meant pricing freedom for oil marketers.

"In effect, oil companies have been bearing the brunt of rising oil prices as they have been unable to pass on the high product prices to customers," says Satyam Aggarwal, oil analyst, Motilal Oswal Securities.

Product prices are still lower than import parity prices. Consider this: crude price was ruling at around $21 a year ago and the price of petrol and diesel was pegged at Rs 27.54 per litre and Rs 17.09 per litre during that time in Delhi.

Currently, crude prices are up by more than 40 per cent (at $30 per barrel), while petrol and diesel prices at Rs 33.79 per litre are Rs 21.21 per litre are up only by 22 per cent at 24 per cent, respectively.

If crude prices move higher, it could get worse. Petroleum minister, Ram Naik indicated in a press conference last week that oil PSUs may not pass on the entire price hike to customers.

He said public sector oil companies had earlier taken a commercial and conscious decision not to increase prices of these fuels to international levels.

The adverse effect of this could show up in the forthcoming quarterly results of oil companies, unless oil prices fall and companies are able to sustain prices at the current level thereby recouping part their earlier losses.

Besides, refining companies have also been forced to hold a high level of inventory to due to war-related uncertainties. Currently most public sector companies are carrying two months inventory compared to less than a month's inventory that they carry normally.

Usually companies stock about 10-15 days of crude oil and about the same level of petro products, totalling about one month's inventory.

Since September, however, public sector companies have upped their capacity utilisation levels to keep their tanks full.

Holding this additional inventory costs an additional investment of Rs 2,000-3,000 crore (Rs 20-30 billion), meaning a cost of about Rs 200-300 crore (Rs 2-3 billion) if this is financed at an interest cost of 10 per cent.

Besides, oil companies have been burdened with higher duty in this Budget -- an additional cess of Rs 0.50 per litre of petrol and diesel and Rs 50 per tonne towards the National Calamity Contingency Duty on domestic and imported crude oil.

Though oil companies have sought a relaxation in the excise duty on petro products and a reduction in the import duty of crude, there has been no supportive action from the ministry of finance yet.

"The additional cess, plus the cost of holding additional inventory will only exert more pressure on oil companies' bottomline," says Aggarwal.

Also, the government is yet to take a call on the amount of subsidy available on kerosene and LPG, and companies continue to incur losses on account of these subsidies.

Based on the current product price, the estimated loss to BPCL is around Rs 180 crore (Rs 1.80 billion) and for HPCL around Rs 230 crore (Rs 2.30 billion).

In the last one year, inflation has risen from 1.9 per cent to 4.6 per cent due to sustained increase in oil prices. In all likelihood the government may not be fully in favour of another round of upward revision in fuel prices.

Possible rise in crude oil prices, and the inability of companies to pass on this escalation in the form of high product prices, may dent the profitability of oil companies in the forthcoming quarters.

The only exception to this rule will be the crude producer in the country Oil & Natural Gas Corporation which sells crude oil at import parity prices. A one dollar hike in crude price means an accrual of Rs 850-900 crore (Rs 8.5-9 billion) to its bottomline. On the contrary, if crude prices continue to fall, albeit less likely, and oil marketers are able to sustain product prices at current levels, they may be able to improve their refining margins.

THE POST-WAR OIL SHAKEUP

Source By NICOLE GELINAS

March 24, 2003 -- FOUR nations absent from our long list of allies in Operation Iraqi Freedom are also those whose leaders stand to lose the most when Iraq's oil fields are liberated along with its citizens.

Saudi Arabia, Russia, Venezuela, Mexico - each thrives on the permanent chaos of the crude oil market. Competition from a democratic Iraq will force the oil-exporting governments of these nations to find new ways to make money.

Saddam Hussein and 24 years of tyranny in Iraq have served as a buffer between stagnant oil states and the fluid free markets. Since Saddam came to power, new discoveries have increased the estimate of Iraq's untapped oil fourfold to represent 11 percent of world crude reserves, second only to Saudi Arabia.

But Saddam's Iraq has done little to increase oil production. The government hasn't even performed much routine maintenance on its oil wells since 1979.

A free Iraq infused with new dollars and pounds could double its oil production in less than five years to rival the export capacity of Saudi Arabia and Russia.

The prospect of regime change in Iraq, now nearly realized, will be a shock to the energy world that will rival the shock caused by the original formation of OPEC, Cambridge Energy Research Associates analysts said two weeks before the war began. Other energy analysts are now slashing the average crude price outlook for 2003 from $30 a barrel to below $20 and falling.

Stable, moderate oil prices fostered by an OPEC-weaned, free-market Iraq with economic interests aligned with those of the western world will force the world's oil exporters to implement massive political and economic reforms at home.

Saudi Arabia stands to lose the most from a freed Iraq. OPEC aside, Saudi Arabia has always belonged to a club of one - the nation owns a full quarter of the world's discovered oil reserves. The Saudis rely almost exclusively on $55 billion in annual crude oil exports to maintain their welfare state, but still come up short - the country's budget deficit is equal to its annual GDP.

Saudi Arabia must export eight million barrels a day at a price of $22 per barrel to fund its bloated budget. With an efficient Iraq producing more oil, Saudi Arabia could no longer cut its own production to keep prices high. The Saudis would have to cut back severely to keep prices in line - and they can't do that because they need the money.

Lower prices would force the Saudi royals to look for the first time to their own repressed people as a potential wealth-producing natural resource.

Russian president Vladimir Putin morphed into an instant pacifist when President Bush asked him to support the war against Saddam. The reason why is no great mystery - a free Iraq vying for international investment will pose a direct threat to Russia's economy.

Russia still derives 40 percent of its export revenues from oil sales, but Russian oil production is just two-thirds what it was during the Soviet days. Russia is depleting its reserves faster than it can bring new wells on line.

Russia has implemented cosmetic political and economic reforms to attract global capital. But its oil industry is still crippled by an ever-changing corporate tax structure and persistent financial opacity.

Russia attracts foreign investment only because the U.S. government's Export-Import Bank has been willing to guarantee commercial bank lending to Russia's oil industry as part of our mandate to diversify our oil supplies.

But with the support of a democratic Iraq, the U.S. would have little incentive to back risky investment in Russia. Without a government guarantee to back capital, "anyone who does business in Russia is insane," the head of one oil investment team at a U.S. bank told me recently.

Rational oil prices will also jump-start stagnant economies in the Americas. The governments of Venezuela and Mexico derive one-half and one-third of tax revenues respectively from oil exports; neither will lend its name to the Coalition of the Willing.

Like Saudi Arabia, Venezuela and Mexico depend on persistently high oil prices to fund their federal budgets. Low prices would force governments in both nations to invest in the talents of their citizens to diversify the tax base.

With a freed Iraq competing against it for investment, Venezuela, especially, will be forced to evolve. Oil companies and banks invested more than $5 billion over the past five years in Venezuelan crude projects only to lose 30 cents on the dollar to political crises.

Asset values in Venezuela have plummeted as President Hugo Chavez re-wrote Venezuela's constitution and imposed new limits on the ownership rights of foreign oil companies. International oil companies in Venezuela could only watch this year as striking oilworkers cut crude exports to nil.

Banks and oil companies with a new venue for their investment dollars will leave Venezuela if Chavez won't.

When the war is over, the U.S. and Britain will surely face pressure from the Saudis and others with a vested interest in the status quo to leave Iraq something short of a true democracy. Sensitive to the charge that we fought a war for oil, we may be tempted to allow Iraq to remain an enabler to the black box of the current crude market.

But stunted governments who use oil as a crutch go beyond using their exports to keep their own people facing backward. Their dysfunction stalls the global economy.

Oil hasn't changed in 150 years. Yet price controls imposed by colluding oil producers keep the economies of forward-looking nations like the U.S. and Britain in a state of co-dependency on the budgetary needs of oppressive leaders who are accountable to no one, least of all their own citizens.

A $10-per-barrel price drop is the equivalent of an immediate $40-50 billion tax cut to the U.S. economy, oil historian Daniel Yergin said recently. That level of economic stimulus would benefit all the world's citizens - including those who have been held down by their oil-rich governments long enough.

Nicole Gelinas covers the oil and gas industry for a British magazine.

President of Venezuela Calls on UN Secretary General to Condemn Aggression Against Iraq

Pravda 12:21 2003-03-24

President of Venezuela Hugo Chavez called on the UN Secretary General to condemn the aggression against Iraq.

Chavez made a traditional TV and radio address on Sunday in Guanar, Venezuela.

According to Chavez, "it is necessary to tell those who hold the highest power that we do not want new wars." He also asked the UN to fulfil its role on the planet Earth, for the organisation exists for some purposes, he said.

Chavez stressed that Venezuela joins the majority of the world's countries, including Russia, which demand that the UN Charter, human rights, sovereignty of the peoples and their laws as well as God's laws be respected.

Pointing to the photograph of an Iraqi child with a burnt face, the president declared that "this cannot be justified."

Post-Saddam Iraq Could Be A Supergiant Producer, Says Fadhil Chalabi

<a href=www.menafn.com>More Middle East Economic Survey - 24/03/2003

With favorable political and financial conditions, post-Saddam Iraq could become a supergiant oil producer, according to Fadhil Chalabi, Executive Director of London's Centre for Global Energy Studies (CGES). Speaking at the CGES seminar A New World Oil Market Structure: Developments in Iraq, Venezuela and US Oil Policies in London on 14 March, Dr Chalabi, a former OPEC Deputy Secretary-General and Under-Secretary of the Iraqi Ministry of Oil, said that Iraq's officially quoted oil reserves base of 112bn barrels would enable the country's production capacity to be built up over six to eight years to a total 8mn b/d. (For text, see D-Section) "However," he added, "there is lots of oil still to be discovered in Iraq. A recent CGES/Petrolog study says that yet-to-be-discovered reserves could amount to 200bn barrels, which would be in addition to the 112bn barrels of discovered oil. If we believe what the IEA, EIA and OPEC forecast for worldwide oil demand, this additional oil will be badly needed. According to these forecasts, the world will need by 2020 an additional 44mn b/d in the EIA's opinion, an extra 31mn b/d in the view of OPEC, and about 28mn b/d more in the IEA's reference case. This would be no problem for OPEC, so long as there was enough demand to absorb all the increases in supply that are possible from Iraq, Saudi Arabia, Nigeria, Russia and others." Proving up of the undiscovered resources would enable Iraqi production to be raised as high as 10mn b/d, he added. Assessing the potential impact of growing Iraqi production capacity on world oil markets typically requires a study of supply/demand forecasts. Dr Chalabi warned that these have generally been over-optimistic in the past: "What is better is to examine trends in the world oil industry and in politics. Over the last 10 years the rate of growth of oil demand has been 1.3% a year, but over the last five years this has fallen to 0.8% a year." He noted that IEA, EIA and OPEC long-term forecasts put anticipated oil demand growth at about 2.8% a year: "But these forecast growth rates cannot be sustained. The best that can be expected in the future is 0.8% a year." Among reasons for declining demand growth rates, Dr Chalabi listed environmental programs calling for energy conservation and reduced carbon dioxide emissions as well as investment in alternative energies, technological progress reducing consumption in transport and industry, increased taxation of oil products, the prospect for lower growth rates in the world economy and an increasing trend for industrialized countries to invest in less energy-intensive sectors such as services and hi-tech industry. "All these indicators," he said, "suggest that the world economy will grow at a lower rate than before, with the result that less oil is needed." Dr Chalabi warned that there were grounds for fears that conditions of weak demand and increasing supplies would make Iraq's potentially huge incremental capacity a negative factor for the oil market. Rapid development of Iraqi capacity could lead to lower oil prices and even an over-supply of oil, in which case OPEC would find itself unable to stabilize the market or control price movements: "To maintain the $25/B OPEC Basket target price in such conditions, either Iraq would not have to increase capacity or Saudi Arabia should not expand production, which it cannot do because of its financial constraints." OPEC's oil price policy has helped to shift investment from traditional low cost exploration and production areas such as the Middle East into high cost areas, he noted: "The amount of production outside OPEC and the FSU grew from 16mn b/d in 1974 to 31.7mn b/d in 2002, whereas OPEC production fell from a peak of 31.4mn b/d in 1974 to 25.2mn b/d in 2002." Dr Chalabi continued: "Lower prices resulting from additional Iraqi oil could help to create a shift in emphasis from high cost areas to low cost areas. But this would depend not only on prices but also on a restructuring of the Middle East industry. State ownership is also behind the shrinking of development in traditional areas to areas outside OPEC." One spur to Iraqi capacity growth could be increasing emphasis in government policies on oil supply security: "Since 11 September there have been growing concerns about supplies from the Middle East. Now Saudi Arabian oil is the pillar of the world market: 20% of total oil trades comprise Saudi Arabian exports, and production is more than 9mn b/d. If anything happened to Saudi oil, there would be great oil market disruption." Dr Chalabi said that Iraqi oil was important as the only alternative source of oil reserves of sufficient magnitude to compare with Saudi Arabia's, and that increased Iraqi production capacity could be seen as establishing a more stabilized and secure system of supplies. "The isolation of the Iraqi oil industry has led to shrinkage," Dr Chalabi said, "but allowing equity participation to international oil companies would help the reintegration. Without this, the numbers I have mentioned cannot be realized and the economic problems cannot be solved." He estimated that before capacity could be expanded, an investment of $5-6bn would be required to rehabilitate Iraq's war-damaged oil industry, with a lead time of at least two years. This would not be possible through the use of the government's already sparse finances. At the same time, the production sharing agreements negotiated with international oil companies during the mid-90s would not be conducive to expanding capacity, since the investors would not be entitled to equity oil and there would be a cap on returns. Dr Chalabi concluded that an ambitious program of capacity expansion would not be achieved easily in Iraq: "It would require political stability and the existence of a credible government, along with reforms to the oil industry with a view to higher rates of growth and contributing to solving the economic problems of Iraq. This can only be done if a new structure for the oil industry in Iraq is created. Iraq has politically always been against the presence of international oil companies, but in order to secure capital, good management and good market outlets, Iraq would have to allow the participation of foreign oil companies. Iraq would have to be realistic, and allow at least partial privatization." He recommended the creation of an independent Iraqi oil company, supervised by government but self-managed. Importantly, a 25-40% privatization through the sale of shares in stock markets would enable the Iraqi industry to be managed jointly by international companies and Iraqi nationals, some representing the government, giving Iraq a majority share in decision-making. This radical reform in the structure of the oil industry in Iraq would need a thorough study by experts in legal and financial affairs, and it could take time before clear-cut measures are taken, Dr Chalabi noted. He drew a parallel to the case of Statoil of Norway, which was first 100% owned by the Norwegian Government and is now 20% privatized, a share which could be increased in the future. He added: "It is also worth studying the case of the Russian oil industry after the collapse of communism and the conversion of the oil industry into the private sector. In fact, the present privatized Russian industry has achieved progress for expansion in the industry. However, this kind of radical reform may face particular resistance in Iraq, especially by the older generation, which may still be attracted by outdated concepts of oil nationalization."