TheChek News Flow

Producer ‘optimistic we’ll see $100 a barrel’ shuns insurance despite market wobbles

US oil producers cut back on price hedges this year in a bet that energy markets would rally again, a move that has left them suddenly vulnerable after turmoil in the banking sector knocked down the price of crude.

The collapse of Silicon Valley Bank triggered a sell-off in US oil markets this month from recent highs of $80 a barrel. Prices have recovered to about $73 a barrel but remain at a level that could force producers to curtail plans to grow output or reduce payouts to shareholders, analysts say.

Many producers were left more exposed after they had rolled back hedges, a form of insurance against commodity market downturns. They were emboldened to do so after a surge in oil and natural gas prices gave them record profits last year.

“The fall in prices has been a wake-up call,” said Matt Bernstein, an analyst at Rystad Energy.

Top publicly listed shale producers have locked in prices for only about 27 per cent of their output for 2023 at an average of approximately $66 a barrel, down from the more than 40 per cent of output that they hedged last year, according to data from Rystad.

Some of the largest US producers, including Pioneer Natural Resources, EOG Resources and ConocoPhillips, have little to no price hedges in place for this year.

Scott Sheffield, chief executive of Pioneer, defended the positions, saying the recent dip in crude markets “had nothing to do with the lack of oil demand” and that he was still “optimistic that we’ll see $100 a barrel before the end of the year”.

“We’re not going to hedge,” he said in an interview.

Producers pulled back on hedges to avoid a repeat of last year, when they left billions of dollars on the table by locking in prices at an average of about $55 a barrel before Russia’s full-scale invasion of Ukraine sent crude soaring well above $100.

“It’s a very psychological thing when oil is at $90 and you think it’s on the way to $130 and you don’t want to miss out on all this upside,” said Alex Beeker, an analyst at Wood Mackenzie.

Oil producers hedge prices in futures and other derivatives markets to guard against price drops and ensure they have cash to fund drilling, debt payments and other expenses.

Hedging has become less attractive as the oil futures curve has slumped along with the spot price. Producers can currently execute contracts for delivery in September 2023 at approximately $72 barrel, compared to about $90 if they had entered into the contract last summer when markets were more worried about adequate supplies.

Analysts warn that current oil prices could start to put financial pressure on some producers, especially after oilfield services inflation raised their so-called “break-even” price, the level they need to cover expenses and shareholder payouts.

Daan Struyven, an analyst at Goldman Sachs, said in a note that the “cost of US shale projects is now significantly higher than five years ago” and that rig counts, a proxy for drilling activity, were already falling.

Current prices are unsustainable “in a market that still needs shale to grow”, he added.

Analysts at Energy Aspects, a consultancy, said there was “downside risk to US production if current prices last” after the sector “entered 2023 with record-low levels of production hedged”.

Major lender was able to invest at a discounted rate before tokens were issued to public

Executives at a major lender to Sam Bankman-Fried’s defunct hedge fund had privileged early access to issuances of new tokens backed by the disgraced entrepreneur’s crypto exchange FTX, the Financial Times has learned.

Genesis, a leading crypto lender that collapsed in January, was long a key source of funding for Alameda Research, the trading firm at the heart of Bankman-Fried’s alleged theft of customer assets from FTX.

The close relationship included opportunities for some Genesis executives to invest in cryptocurrencies Bankman-Fried helped launch, at a discounted rate before the tokens were issued to the public, according to people familiar with the matter.

The access highlights the past closeness of the groups, both now in bankruptcy, and the broader intertwined nature of the crypto industry, which is dominated by a small number of companies with various overlapping investments and interests.

Genesis’s lending unit failed earlier this year after suffering losses from the failure of Bankman-Fried’s crypto empire and another collapsed crypto hedge fund, Three Arrows Capital. Genesis is FTX and Alameda’s biggest creditor and is owed $226mn, according to US bankruptcy court records.

Former Genesis employees said Bankman-Fried gave some executives at the lender the opportunity to invest in “presale” tokens of FTT, the FTX native token that launched in 2019, and Serum, which launched in 2020 with backing from FTX and Alameda.

The presale access to FTT and Serum, also offered to others outside Genesis within Bankman-Fried’s network of industry contacts, gave the Genesis executives an opportunity to profit after retail investors bought in.

It is unclear how widespread the access was within Genesis. One former executive told the FT they were unaware of any such offers from FTX.

Crypto token offerings to retail investors in recent years typically followed early funding rounds involving venture capital and other investors. In return for a discounted price, the early investors often agreed not to sell the tokens for a period that could range from a few months to years.

On launching FTT, FTX offered some Genesis executives presale access through a “very standard” one-page offering, a second former Genesis executive said.

They decided not to invest in FTT, but later rued their decision when the price of the token surged, the former executive added. “That was a big miss,” the person said.

Further opportunities followed, including Serum, a project launched on the Solana blockchain network with backing from FTX and Alameda. Solana itself was also championed by Bankman-Fried.

“The only reason we invested in Serum is we missed FTT,” the former Genesis executive said. At launch in August 2020, Serum’s price spiked 1,500 per cent.

Thomas Braziel, co-founder of 507 Capital, which has bought claims in several crypto bankruptcies including Genesis and FTX, said the revelations raised questions about Genesis’s lending and whether there had been a “weird quid pro quo” with Alameda.

Braziel added the practice was consistent with his understanding of how Bankman-Fried operated. “He really took care of people who he thought were important to him . . . He was doing a good job of keeping everybody’s bread buttered.”

FTX and Alameda, now under new joint management in bankruptcy, did not respond to a request for comment. Genesis did not respond to requests for comment. A spokesperson for Bankman-Fried declined to comment.

US-based Genesis launched in 2013 and is part of SoftBank-backed Digital Currency Group, one of the oldest investors in crypto companies. Genesis’s lending arm launched in 2018 and became a major source of credit for crypto ventures, originating $131bn worth of loans in 2021.

Genesis’s $226mn exposure to Bankman-Fried’s ventures when they collapsed had previously been much larger, but in the summer of 2022 Alameda repaid loans to Genesis and other lenders as crypto markets faltered. US authorities have accused Bankman-Fried of repaying Alameda’s creditors in 2022 with funds from FTX without telling them the true source of the money.

Bankman-Fried has denied any wrongdoing.

A Genesis entity, GGC International Ltd, is on the official committee of unsecured creditors in the FTX and Alameda joint-bankruptcy process.

The FTT and Serum tokens, along with Solana, were also accepted by Genesis as collateral pledged by Alameda to secure its borrowings, according to people familiar with the relationship.

Alameda was more than just a source of direct loan demand for Genesis, according to a former Genesis employee who said the hedge fund referred clients to the lender. “It was a tremendous pipeline for us,” they said.

Atomic fallout

A proposal by France to treat nuclear energy as equivalent to renewables is unlikely to be agreed in today’s energy ministers’ meeting, but the French fight to get a green stamp for their nuclear reactors does not end here.

Context: France is pushing for nuclear energy to be recognised as a low-carbon energy source and to count towards the EU’s planned target of producing 40 per cent of energy from renewable sources by 2030. Nuclear power plants generated around two-thirds of France’s electricity output in 2022.

Countries such as Germany and Austria argue such a move would undermine efforts to expand solar, wind and other renewable power sources that count towards the target.

The file on the ministers’ agenda today regards new rules for gas infrastructure, including hydrogen. This fuel can be made from solar and wind energy — and called renewable — or with nuclear power, defined as low-carbon hydrogen under the rules.

Paris has proposed low-carbon hydrogen to be counted towards countries’ renewable targets. In the latest version of the gas text seen by the Financial Times, the paragraph had been deleted, though a final agreement had not been reached yet, EU diplomats said last night.

“There is a minority of member states that requests that nuclear would be counted towards the renewable targets, and there is another minority that is against,” said a senior EU diplomat.

Before the meeting, both the pro and contra nuclear camps are having breakfast to formulate strategies, according to the diplomats.

The Swedish presidency, which is mediating the negotiations, aims for a deal today.

Even if the French proposal is taken out, the nuclear debate will continue during negotiations between the European parliament and the member states tomorrow over the so-called Renewable Energy Directive, which concerns the renewables target itself.

One solution that was discussed, according to diplomats, is for hydrogen made from nuclear power to be allowed to count only in part towards the countries’ targets.

Opening the renewables package this late in the negotiations is not popular with everyone, however, especially after a similar German move in already-concluded talks on combustion engines plunged Brussels into turmoil.

“If you allow this, especially after the combustion engine issue, it threatens legal certainty in the future,” an EU diplomat said.

The scale of Beijing’s efforts effectively provides a new system for international rescue loans

SINGAPORE—China’s emergency support for borrowers from its Belt and Road infrastructure program has ballooned as foreign governments struggle under heavy debts, highlighting the extent of Beijing’s bad loan problem as it works to overhaul its overseas lending strategy.

The scale of China’s often-opaque assistance to borrowers in distress means Beijing has effectively established a new system for international rescue lending that exists alongside the International Monetary Fund and other Western institutions, according to new research published by the World Bank.

Researchers say China’s willingness to lend more to struggling borrowers risks prolonging their difficulties by avoiding the need for painful economic changes. The opaque terms around China’s lending also risk complicating debt-relief efforts by obscuring countries’ true financial health, they say.

The detailed look at Chinese rescue lending comes as indebted countries grapple with rising interest rates, high inflation and the newer risk of financial instability while policy makers contend with the fallout of a trio of U.S. bank failures.

China has doled out more than $230 billion of emergency support in the past decade to foreign governments and central banks through new loans, rollovers of old loans and currency-swap agreements with the People’s Bank of China, China’s central bank, according to a tally by authors Sebastian Horn, Brad Parks, Carmen Reinhart and Christoph Trebesch.

The financial assistance, which the authors describe as “bailouts along the Belt and Road,” have steadily grown in recent years as debt problems in low- and middle-income countries have gotten worse. China’s emergency support for borrowers reached $40 billion in 2021—up 32% from 2020 and more than 40 times the amount of similar aid extended in 2011.

Recipients have included Pakistan, Angola, Sri Lanka, Venezuela and more than a dozen others that borrowed from Chinese banks to finance the building of roads, railways and bridges under China’s $1 trillion Belt and Road Initiative, or BRI, according to the paper. In all, 22 countries have accepted some form of emergency support.

In an interview, Mr. Parks, executive director of AidData, a research lab that tracks development finance at William & Mary, a university in Williamsburg, Va., said he believes the rescue effort will continue as long as debt problems continue to rock indebted countries.

“I think this is here to stay as long as debt distress on the BRI is around,” he said.

China’s Belt and Road Initiative was launched by leader Xi Jinping in 2013 as a way of spurring economic development and winning influence in Africa, Asia and South America. The scale of Chinese lending has meant China eclipsed the World Bank as the largest lender to the developing world.

But amid souring loans and stalled developments, lending for new projects is more or less on hold while officials overhaul the troubled program to make it more conservative in scope and more rigorous in evaluating potential investments.

Borrowers’ difficulties in repaying their loans meant Chinese lenders’ tactics in recent years shifted toward rolling over old loans, revising repayment terms and extending more credit to stave off defaults, strategies reminiscent of the “extend and pretend” practices of Western banks eager to avoid loan losses in the run up to the 2007-09 financial crisis.

Through a network of currency-swap agreements, the People’s Bank of China has played a role in alleviating borrower distress by permitting other countries’ central banks to draw on those facilities to boost their foreign-exchange reserves.

Such strategies haven’t always worked to prevent borrowers from sinking deeper into trouble. Sri Lanka, Pakistan and Zambia have all sought IMF help after their debts became unmanageable. Other governments have accused China of dragging its heels over restructuring stricken borrowers’ debts, though some analysts say China isn’t behaving any differently than the U.S. and other Western creditors have in the past.

Mr. Xi said last year that the international environment had become more complex and stressed the need to strengthen risk management around projects. Officials have said China will work with the international community to promote economic development through the BRI.

Supporters say China’s actions compare favorably with the sometimes unyielding stance toward debt of bondholders and other private creditors, and may even help some countries ease urgent debt default risks.

In their new paper, the authors, from AidData, Harvard University, the World Bank and Germany’s Kiel Institute for the World Economy, for the first time present a detailed analysis of Chinese rescue loans to BRI borrowers and People’s Bank of China assistance via its swap lines.

The data underlines how support for troubled borrowers has become a bigger and bigger slice of overall Belt and Road financing, especially as loans for new projects have slowed.

In 2011, China extended $1 billion in rescue financing in the form of loans, loan rollovers and swap agreements, rising to $9 billion by 2014. By 2020, it was $30.7 billion. In all, China extended some $232 billion in emergency help in the 10 years through 2021, the authors found, with $172 billion of that total through People’s Bank of China swap lines and another $60 billion in rescue loans and loan rollovers from Chinese banks.

The bailouts are equivalent to around a quarter of the roughly $1 trillion of infrastructure financing pledged under the Belt and Road program, and a fifth of the sums the International Monetary Fund lent to troubled countries during the same 10-year period through 2021.

The People’s Bank of China’s swap line network “has become an increasingly important tool of overseas crisis management” for countries in financial or macroeconomic distress, the authors say. Swap agreements, which allow one central bank to exchange its currency for an equivalent sum in another currency, are usually reversed after a few months but in many cases the PBOC has rolled them over again and again, the authors say. The PBOC says its swap lines are there to facilitate trade and make it easier for countries to use Chinese yuan internationally.

Including loans extended in 2008 and 2009, the authors identified 70 rescue loans to 13 emerging-market governments from Chinese commercial lenders, policy banks and state-owned enterprises. Pakistan alone received $20 billion. Other beneficiaries included Ecuador, Sudan and Tanzania. Most of the loans were in U.S. dollars and many appear to have been used to pay off old debts to Chinese institutions, the authors say. They say such operations are similar to the kind of bilateral lending the U.S. Treasury undertook in the 1980s in Latin America to ensure U.S. loans were repaid, or the facilities established to funnel loans to eurozone member states during that region’s debt crisis.

One difference between Chinese rescue loans and those on offer from the IMF is the cost, the authors say. Chinese loans are typically extended at interest rates of around 5%, compared with an average of 2% for the IMF. Another difference is a lack of transparency around terms, which can make it hard for creditors and international debt-surveillance authorities such as the World Bank to assess countries’ true financial health, the authors say.

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