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Where the “Wired” Money is Going Next

by | published December 31st, 2013

The Internet has been spotty, the phones are out, and the only people who can fix it are “off island” for the holidays.

Welcome to the Bahamas.

Of course, Marina and I can hardly complain. The temperature is in the low 80s, the rain falls after dark, and the friends we have built up over more than two decades are here to ring in the New Year.

The down time is certainly welcome…but it hasn’t all been sleeping on the beach.

Among the guests are folks from four continents. I call them the “wired money.” They include the bankers and investors who finance oil and gas ventures, along with the big company execs.

They’ve joined us for what has become the most important gathering of the year.

It’s a time to look back at the good, the bad, and the ugly and discuss the part I always find the most intriguing: Where the “wired” money is going next.

On this occasion, two interesting and profitable trends emerged…

A Lucrative Way to Start the New Year

As cases of Kalik(the local beer) disappeared from the shelves (another “tradition” down here it seems), our two days of discussions have moved from oil and gas financing to the latest developments in South America.

This first trend is the subject for today’s OEI.

The second will have to wait until after our annual New Year’s Night bonfire by the water. This affair is something Marina and I hold each January 1-2 for our friends on the island. Many of them have become a second family. We have watched their children grow, held their hands during tough economic and personal times, laughed at weddings, cried at funerals, and watched each other’s backs throughout decades of change.

Normally, this is a social event. But this time, there may be a slight twist.

We assemble late in the evening, following Junkanoo – the traditional January 1 festival. Junkanoo is a local version of Carnival. It involves costumed revelers parading to cowbells, goatskin drums, whistles (many and loud) and home-made instruments.

By 10 o’clock or so, we are back on the beach. Most years, we are still there to greet the rising sun before heading off to breakfast.

However, this time around I have invited a few select other guests…

And while the socializing is underway, we may be back in the house setting up a network for a new energy initiative. I’ll let you know all about it on Thursday. But be advised. This one will be written after the festivities, so it may take some effort on this end!

Looking Beyond the American Energy Boom

But back to the weekend sessions and our discussions on oil and gas financing.

You see, there are a few experiments in finance that are currently being phased in, along with several new holding structures designed to oversee developments in every portion  of the product stream: involving further integration of upstream (production); midstream (gathering, storage, initial processing, transport), and downstream (refining and distribution) operations.

That means there will likely be numerous investment options for individual retail investors as we move into 2014. So stay tuned on this front.

In fact, the New Year should include significant revisions in where energy investors are going to make their money.

And here’s the key: Much of this will not be solely centered on American-based products.  So don’t be surprised if we begin casting a wider global eye to bank even bigger gains in the year to come.

That includes a situation I’ve had my eye on for some time. And by mid-morning on Saturday, there was an occasion to move the discussion in that direction.  I took it, addressing a pointed question to several of the guests.

They represented two of the biggest Chinese oil and gas producers. I know them well. We have worked with them for several years on a large refinery project in Ecuador.

As many of you will recall, I employ Chatham House Rules at such meetings. Those rules allow the mention of what was discussed during meetings but oblige participants not to associate any particular position with a named individual. It’s what allows for a frank and open exchange.    

And that certainly was the case last weekend. Everyone had noticed the massive amounts of Chinese money pouring into South American energy, most of it in loans to national oil companies or straight to the budgets of central governments.

In fact, I recently discussed how the Chinese have come to control oil exports from Ecuador as a result and how large financial injections into Venezuela, Brazil, and Peru are mirroring similar moves elsewhere.

So I decided to breach the subject and ask point blank where our Chinese colleagues intended to go with all of this commitment of funds.

China’s Growing Sophistication in Oil Finance

Now in years past, one would expect the answer to be control over oil and gas exports. In short, the first phase of Chinese global expansion always centered around feeding its insatiable energy demand.

Not anymore.

Of course, there is still the concern over addressing the accelerating demand back home. But these days the approach is more sophisticated. Beijing is now more interested in controlling the finance flow from South American hydrocarbon sales than directly exporting the product to China.

Now there are still ways to augment the import concerns. Controlling either domestic market sales in northern South America or exports abroad does not simply mean controlling the revenues. That happens automatically because energy-producing countries receiving Chinese loans will pay them back using proceeds from energy sales.

What amounts to the new sophistication involves using exports anywhere, with the direct proceeds from the exports or the trade volume itself serving as the basis for a contract swap

Here, for example, oil moving out of Ecuador to North America or out of Venezuela to Cuba and the Caribbean, has its contract exchanged for oil coming into China from closer producers (say in Australia). 

The current direction of Chinese interest in such energy loans provided to South America, therefore, is introducing an interesting new way for Beijing to control sources of oil and gas closer to home.

Yet for such an approach to continue, Chinese “loan investments” need to expand as well, preferably in a network already being utilized.

China Sets Its Sights on Argentina

In South America, that can only mean one direction…

Further south – to the vast unconventional basins about to be developed in Argentina.

We have already talked about this here in OEI. But what we are now experiencing is a merging of Argentinean and Chinese matters we had been considering separately.

In this case, there are two new parties entering the scene. One includes state gas interests in Buenos Aires; the second are banking and finance interests in several South American centers as well as the international fiduciary branches in places like Nassau and Freeport here in the Bahamas.

All of which sets the stage for the invitees to my “other” New Year’s event.

I will fill you in on how that plays out next time….

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  1. Kurt J Balmus
    December 31st, 2013 at 15:56 | #1

    Dear Mr Kent,
    As a non-US citizen (Living in the Netherlands and Spain) I cannot participate in your direct investment into oil. Is there a possibility that your next project will be accessible for foreigners as well??
    And…Why is it necessary to be an “accredited investor” if the lowest amount to participate is 12500 USD?? So you need to have > 1000000USD to invest 12500 USD??
    regards

  2. Burnham Moffat
    December 31st, 2013 at 23:41 | #2

    Any Brazilian ADRs that you see as imminent beneficiaries of Chinese energy plays? FYI my first job out of grad school (Harvard) in 1951 was in Pittsburgh, at Mellon Institute ! As a comfortably retired aerospace engineer since 1989 I am currently busily enjoying several volunteer civic activities. Happy New Year to you!

  3. January 3rd, 2014 at 14:16 | #3

    Dr. Kent,
    With all the interest in shipping Bakken oil by railcars are there any car manufacturers or railroads that you like? Seems like a trend that will be around for quite awhile, no?
    Thanx

  4. March 26th, 2014 at 05:04 | #4

    My interest is in the fracking process to release deep gas deposits.
    How much of this is happening world wide?

    UK is its own market place,is there a study on this matter that can be read. Are you able to copy me same.

    Regards. Clive Christian.

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