Why investors are snapping up Iraqi bonds
John Stepek Jan 27, 2006
***Why investors are snapping up Iraqi bonds
***How McDonald's new deal could solve rising unemployment
***RECOMMENDED ARTICLES: Why America needs a flat tax... How we just lost 5% of the global oil supply...
Oil and gas can be elusive substances. You think you’ve got hold of some, and then it just slips through your fingers or disappears into thin air.
Just ask Royal Dutch Shell. In 2004, it had to admit that about 20% of the oil and gas it thought it had in its reserves had just vanished.
And now Europe's fifth-biggest oil company Repsol has come out and said that it doesn't have as much oil and gas as it thought it had either. The group has slashed its proven reserves by 1.25bn barrels - a full quarter.
And that might be just the beginning...
More than half of the Repsol downgrades were made in Bolivia, with most of the rest in Argentina, and a small amount from Venezuela. The majority was in the form of gas.
Some of the revisions were down to 'greater knowledge of certain fields' in both Bolivia and Argentina. But about half were due to changes in Bolivian law, which mean that royalties - ie taxes - have increased to 50%, from 18% last May.
This means that some projects which Repsol had planned to undertake simply aren’t worth doing anymore.
And if that wasn't bad enough, it could get worse still. Evo Morales, the new president of Bolivia, has said he will nationalise energy deposits. This could potentially wipe out all of Repsol’s Bolivian reserves.
It’s not just Repsol that’s vulnerable. About 0.4% of BP’s production comes from Bolivia, while BG Group relies on Bolivia for a full 2% of its production. Neither company has plans to change the way they account for these reserves – but they aren’t immune to the problems that Repsol is experiencing.
This should serve as a timely reminder to investors that emerging markets and exposure to such markets do carry very definite risks.
In these days of cheap money, investors don’t seem to care where they put their cash as long as there’s the sniff of a half-decent return. There can be very few periods in history when investing in the government of a warzone has looked like a good opportunity. And yet Iraqi government bonds started official trading this week at a yield of 8.65%. That’s lower than the yield on Argentina’s debt, which was 8.75%.
Sure, on past form, Argentina’s not the first place you’d choose to lend money to. But it does have some advantages over Iraq – the absence of a foreign occupation force, the notable lack of suicidal fanatics, and a functional civil society, to name just three.
But then Iraq does have oil, the one thing that everyone else seems to be running out of.
And it's not just companies that are writing down reserves - countries are too. A report by industry newsletter Petroleum Intelligence Weekly last week came up with a pretty dramatic conclusion. Apparently, internal Kuwaiti records suggested the country has about 48bn barrels remaining, as opposed to the officially stated 99bn barrels. You didn't read that wrong. Kuwait may have less than half of the oil that the world believes it has.
Kuwaiti officials have rushed to deny the report. But you can read more about why the unofficial figures sound so compelling in our recommended article below.
Back in the UK, the Government may have found the solution as to where to put all those people it plans to get off invalidity benefit. The Telegraph reports that McDonald's is piloting a scheme whereby employees can share their job with family members. The Family Contract allows husbands, wives, grandparents and children over 16 to jobshare without informing managers first.
Cardiff-based Rita Cross and her two daughters were the first family to sign up. Mrs Cross said: 'I'd love my husband to join up too, so that we can all plan our work and family life as one unit.'
McDonald's said the scheme was supported by the Department of Trade and Industry. We're not surprised. McDonald's currently employs about 67,000 people in the UK. If every one of those individuals brought mum, dad and big brother onto the payroll, just think how much better the unemployment statistics would look.
Of course, we're not convinced that a single job at McDonald's could feed a family of four any more than a single Big Mac could. But we're sure Gordon Brown can dream up a new and convoluted McTax credit to make up the difference.
Turning to the stock markets...
The FTSE 100 gained 18 points to 5,722. Insurers were in good form after Legal & General sales beat hopes. Prudential was top riser, climbing 4% to 575p. For a full market report, see: London market close.
Over in continental Europe, the Paris Cac 40 rose 85 points to 4,876, while the German Dax jumped 121 to close at 5,548.
Across the Atlantic, US markets made gains on strong quarterly results from Caterpillar and Honeywell. But carmaker GM slumped as it reported a quarterly loss of nearly $5bn. The Dow Jones climbed 99 points to 10,809, while the S&P 500 rose 9 to 1,273. The tech-heavy Nasdaq gained 22 to 2,283.
In Asian trading hours, oil was higher, at around $66.80 a barrel in New York, while Brent crude was trading at just below $64.
Spot gold slipped back, to trade at around $556 an ounce. Silver edged back from recent 19-year-highs, slipping to around $9.52 an ounce.
In Asian stock markets, the Nikkei 225 jumped 569 points to 16,460, its highest level since September 2000. Retailers and banks climbed as consumer prices increased for the second month in a row in December, with prices excluding fresh food up 0.1%, year-on-year. It may not sound like much, but it's the first time Japanese CPI has risen for two months in a row since April 1998.
And in the UK, ports operator P&O remains in the news as Dubai Ports World and Singapore's PSA International get stuck into a fully-fledged bidding war over the group. Yesterday DP World agreed to pay 520p-a-share for the group, putting the ball back in PSA's court. P&O said it will put the offer to shareholders on February 13th, unless PSA offers more than 546p a share.
And our two recommended articles for today...
Why America needs a flat tax
- US history - and the UK's, for that matter - is full of tales of civil rebellion fuelled by unfair taxes, says Steve Forbes in The Daily Reckoning. So how did America end up with the convoluted and corrupting tax system it has now? To find out why a flat tax would be a far better system, click here: Why America needs a flat tax
How we just lost 5% of the global oil supply
- The respected oil industry newsletter Petroleum Intelligence Weekly says that Kuwait has only half the oil that official estimates have claimed. That would mean that 5% of the global oil supply has vanished overnight, says Byron King in Whiskey & Gunpowder. But this might be just the tip of the iceberg. To find out why Saudi Arabia may well be facing the same problem, click here: How we just lost 5% of the global oil supply