[ 2014-12-15 ]

Financial stability at risk as oil debt grows
Some analysts believe oil prices could drop as low
as $30 a barrel

London (UK) - 15 December 2014 – The Times -
Plunging oil prices are creating fresh risks to
the global financial system, with figures showing
that emerging market energy companies have built
up more than $100 billion in offshore debt.

The total borrowings of oil and gas companies in
countries including Russia, Brazil and China, hit
$135 billion at the end of September, according to
the Bank for International Settlements, which has
warned about the problems that falling energy
prices could have on many developing countries.

Nearly $85 billion of energy sector debt raised by
emerging market oil and gas businesses has been
issued through offshore financial centres, while a
further $50 billion has been sold through “other
countries”, according to the bank, the
Geneva-based body that acts as the talking shop
for the world’s main central banks.

The use of offshore centres can make it harder to
track real debt levels as some companies use them
to shift borrowings off their group balance sheets
to opaque subsidiaries.

Falling oil prices have thrown a spotlight on the
financial strength of leading players in the
industry, particularly heavily indebted operators
based in emerging markets that invested in new
production on the basis of a much higher price.

Last week, oil fell to a five-year low of less
than $65 a barrel and some analysts believe prices
could drop as low as $30, seriously damaging the
profitability of many oil producers and
potentially causing large losses.

The offshore debt piles of emerging market
producers are likely to be sitting on the books of
many Western banks and in the portfolios of
leading international fund managers, meaning any
problems in repaying their borrowings could have a
knock-on effect on the global financial system.

Brazilian energy company Petrobras had outstanding
borrowing of $140 billion at the end of the first
half of the year, according to figures published
on its website, of which $57 billion came from
selling its debt on the capital markets. This
compares to debt of below $100 billion two years
ago.

Many of the world’s largest lenders, including
HSBC, Britain’s biggest bank, have been among
the main providers of debt to Petrobras, and the
company is among the 20 largest global issuers of
bonds for the last four years, according to the
data provider Dealogic. Chirantan Barua, senior
banks analyst at Sanford Bernstein, likened the
oil companies’ indebtedness to those that sank
the shipping industry after the financial crisis.
In that case a glut of ship building saw banks
take huge losses for several years as lenders were
forced to write down the value of the vessels they
had financed.

“This is going to be like shipping, but on a
vastly greater scale. This is by far one of the
biggest problems heading the banking industry’s
way,” he said.

Abdullah al-Badri, secretary-general of Opec, said
yesterday that the cartel would be able to survive
the drop and that output would remain unchanged
despite the falls.

“We agreed that it is important to continue with
production [at current levels] for the . . .
coming period,” Mr al-Badri said in comments
reported from a Dubai conference.

Mr al-Badri dismissed conspiracy theories, adding:
“Some people say this decision [to leave
production unchanged] was directed at the United
States and shale oil. All of this is incorrect.
Some also say it was directed at Iran and Russia.
This is also incorrect.”

Source - The Times(UK)

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