Hi all, maybe a couple of additional thoughts which are showing...

Hi all,

maybe a couple of additional thoughts which are showing how fast the picture is changing.

Take a look at the developments on Monday in Europe:

• Gazprom is redirecting its South Stream pipeline. Turkey will develop into some kind of a gas superhub in case they proceed to build the pipeline. Gas to Turkey will be coming in from Russia, Azerbaidjan, Irak etc.
  Reason for the redirection was officially that Bulgarian authorities were forced by the EU to decline the project (after the Bulgarian government had been very supportive in the past). This is only one example of the many tough economic fights between Russia and the EU/USA that are ongoing at the moment.
  http://www.gazprom.com/press/news/2014/december/article208505/
• German utility E.ON has decided to split its activities into a "classical" part with its nuclear, coal and gas activities and a renewable part with some energy related consulting activities. The former is already termed as a bad bank as the classical activities are seen to have limited chance to survive. Press calls this a radical step, which it is.
  In my view this is the beginning of the demise of the large European utility companies and national champions which have shaped the energy market for many years. As a consequence the underlying market for the customers buying power, oil and gas will be changing.
  If I had to pick a reason why the big utilities have huge problems, than my first answer would be that energy politics have become very unpredictable, political decisions have a lifetime certainly a lot shorter than investment cycles for power stations. There is a hard to digest mix of trying to concur with climate change targets, financial constraints and internal NIMBY activists in political parties and in public. This makes definition of a successful utility strategy almost impossible. As consequence the utilities do the only thing that they can. They get rid of the stuff that will with high likelihood be loss making in the future.
  E.ON also has significant activities in Russia and now faces the difficulties to keep that business alive as many other companies do as well.
  That is an important step in the decline of one of the once almost largest utilities worldwide. Other European utilities will follow.
• Nato is putting together a quick response team, which is clearly aimed at Russia, as first dispatch is going to be somewhere along the Russian border. Which could mean direct conflict or war in the medium term.

In the end the final consequence of all this could be cutting of energy and business ties between Russia and Europe. Europe would be forced to get its oil and gas from other sources than from Russia. Russia would need to find other outlets for its energy, which is not that easy as you cannot change the routing of pipelines easily.

Even though I think this is most likely not going to happen, it again shows how good the location of FAR assets in Senegal is, outside of the known conflict areas as yet. International oil companies will become ever more sensitive to the stability of countries and applicable sanction lists in particular.

The constant information flow we are experiencing every day shows that we live in an absolute breathtaking time. Developments are fast, furious and in many instances not logic. What the private investor needs today is patience. That is the only chance he has to win in this huge casino.

In many places I have given up to try and understand why things are happening. Let them happen as long as the course of action comes back to the logical path which allows you to predict what will happen and thus place proper long term investments which stand a reasonable chance to succeed.

I must confess that taking this position does use some "personal energy".

A couple of final thoughts on the current OP development. There were rumours today that Shell was in process to bid for BP. True or not doesn´t really matter. What is for sure is, that in case the OP stays low for a longer period of time we will see a huge shake up in the industry. It will be similar to what has been happening in the mining industry in the last year, where companies were going through a really tough time to either consolidate, close uneconomic projets, cut cost, merge or go broke.
Once you have taken the FID on a oil and gas project and you built it there is no turning back. This especially applies to all the shale oil or tar sand projects.

Looking at FAR again it has the opportunity to test the robustness of the Senegalese projects under the new price environment prior to FID. This will certainly not be a 100$/bbl base case, probably more in 50-70$/bbl range. Which means, should the price rise at a later point in time it will be a very robust project, generating a lot of cash. Potential predators will see this as well and make their own assumptions. These will depend very much on the long term inhouse POG forecast they use in their models.

It is always least risky to test the robustness of a project knowing the price will be low for some time, than when blue sky thinking dominates the market. So the only thing I am afraid of is that at base case scenario the Senegal projects will not fly. I nevertheless think that in a country like Senegal the wish to get an offshore oil project up and running is almost overwhelming, i.e. should economics of the project be on the edge I think there is room to maneuver.

I found a draft of the Senegal Petroleum law on the internet (draft is from 1998 but even though termed unofficial the current applicable Petroleum Code is from 5 January 1998) and it starts with the following explanatory "mission" statement which displays the expected openness to do everything to develop a petroleum industry to the benefit of Senegal:
"Over the last ten years, the international petroleum industry has been characterized by a significant reduction of exploration budgets by the oil companies. This situation has reduced the competitiveness of a country like ours in terms of investments into petroleum exploration, to the benefit of countries that have confirmed petroleum prospects.

In order to be competitive, Senegal must not only take into account the evolution of the worldwide energy data, but also offer to prospective investors of the petroleum industry, conditions which are attractive and susceptible of promoting the development of petroleum investments in the exploration or production of our national territory."
http://investinsenegal.com/IMG/pdf/petroleum_law.pdf

This combined with the fact that the Prime Minister is a geological engineer and geophysicist is an excellent mix.
(CV : http://www3.law.harvard.edu/orgs/ha...ky-sall-president-of-the-republic-of-senegal/ )
I have to admit that the Petroleum Code was enacted when the OP was at or below 10$/bbl so the openness for discussion of the terms might be a little more limited today. Nevertheless the drop in OP and the resulting difficulties will eventually result in a similar situation. It is so important to develop the "ice breaker project" for Senegal and the FAR group is in the pole position. They will have to set up the support infrastructure - which means new work for locals - and with the harbor of Dakar close by this is a lot easier to achieve than for example in Kenya in the middle of nowhere.

As always happy to hold.

Cheers

R1