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.”
The Times
