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Ukrainian Money-Go-Round

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COMMENT: Applying the time-honored adage of following the money works in Ukraine. We have noted in posts and programs that Ukraine has 25% of the world’s proven natural gas reserves. The Eastern part of the country is richer in natural gas than the West.

(We have covered the ascension of the OUN/B heirs in the Ukraine in a number of programs: FTR ‘s 777778779780781782, 783784.)

There’s a map here show­ing the dis­pro­por­tion­ate num­ber of gas fields in the east­ern half of Ukraine. In the hotly-contested area around Sloviansk, Shell has a contract to develop shale gas.

Two recent developments should come as no surprise to an experienced observer:

  • Exemplifying the very crony capitalism that the U.S. decries when it occurs elsewhere (including Russia), Burisma–a Cyprus-based company with significant investments in Ukrainian natural gas fields –has hired Vice President Joe Biden’s son R. Hunter Biden. The company’s board of directors features Devon Archer, the former college roommate of Secretary of State John Kerry’s Stepson Christopher Heinz (of the wealthy food-empire family. Put THAT on your hamburger!) Archer was national co-finance chair of Kerry’s Presidential campaign in 2004.
  • Ukraine has issued $1 billion bonds, backed by the U.S. taxpayer. The bonds were guaranteed through the U.S. Agency for International Development, which was involved with channeling money to finance the coup in Ukraine.

“Why Did an Energy Firm with Big Assets in Ukraine Hire Joe Biden’s Son?” by Olivia Knox and Meredith Shiner; Yahoo News; 5/14/2014.

EXCERPT: In the span of a few weeks, an energy firm little-known inside the United States added two members to its board of directors — scoring connections to Secretary of State John Kerry and Vice President Joe Biden in the bargain.

On April 22, Cyprus-based Burisma announced that financier Devon Archer had joined its board. Archer, who shared a room in college with Kerry’s stepson, Christopher Heinz, served as national finance co-chair for the former senator’s 2004 presidential campaign.

Then, on Monday, the firm announced that Biden’s younger son, R. Hunter Biden, would join the board of directors.

Why would the company, which bills itself as Ukraine’s largest private gas producer, need such powerful friends in Washington?

The answer might be the company’s holdings in Ukraine. They include, according to the firm’s website, permits to explore in the Dnieper-Donets Basin in the country’s eastern regions, home to an armed pro-Russian separatist movement. They also include permits to explore in the Azov-Kuban Basin of the strategic Crimean peninsula, annexed earlier this year by Moscow. . . .

“Ukraine Just Issued $1 Billion Bonds Backed by The US Taxpayer” by Tyler Durden; zerohedge.com; 5/14/2014.

EXCERPT: The bailout floodgates are open and the US taxpayer is footing the bill once again – whether through IMF loans or more directly. Today saw Ukraine issue $1 Billion 5-Year Notes at a stunningly low risk of only 28bps above US Treasuries and dramatically cheaper than the cost of capital in the public markets (and from the IMF) which yield over 10%. The reason for the 1) low cost, and 2) actual ability to raise debt… the bond is guaranteed by the US Agency for International Development and “assures full repayment of principal and interest” based on the full faith and credit of the US (Taxpayer). We assume Gazprom will be happy…

So why not pile into these bonds? 28 extra basis points for no apparent additional credit risk… some liquidity risk but we are sure your friendly local central bank will enable you to swap them for infinitely rehypothecatable cash with no haircut…

They’re gonna need moar [sic]… (and this does not include Gazprom)

Oh and Ukraine says “thanks America”… (as WSJ reports)

The $1 billion loan guarantee that (U.S. Agency for International Development) will implement will help the government of Ukraine access capital at reasonable rates and manage the transition to a prosperous democracy,” Mark Feierstein, assistant administrator at USAID, said in April.

“The guarantee assures investors of full repayment of principal and interest.”

The deal follows similar guarantees provided for bonds issued by Tunisia in 2012 and Jordan last year.

But – there is a catch…

Bank of America Merrill Lynch said Tuesday that Ukraine’s bondholders could face losses if separatists in the country’s southeastern regions successfully gain independence.

The bank said a breakup of the country could potentially force the International Monetary Fund to tear up Ukraine’s current $17 billion aid package and trigger a debt restructuring program that would hit private investors. An IMF spokesperson said the fund is monitoring the situation.

 

 

 

 

 

Discussion

2 comments for “Ukrainian Money-Go-Round”

  1. Look what just got added to the EU’s still empty economic stimulus pipeline: public grants for private pipelines:

    Prague Post
    European Commission to fund increased energy security

    Category: Technology
    Published: 18 May 2014
    Written by Peter Taberner

    Ukraine crisis cited as impetus to upgrade infrastructure and connections

    Cross-border energy infrastructure projects are to receive a boost, with the European Commission allocating 750 million euros under the Connecting Europe Facility (CEF) to finance key energy schemes.

    The main priority areas will be the gas and electricity sectors, where the aim of the Commission is to increase energy security within the EU, and to end energy isolation for some of the member states.

    The funding will increase investment in cross-border links that currently are not in place, as the financial support will leverage the necessary private and public funding.

    Also the Commission said the allocation will contribute toward the completion of the EU’s internal energy market, and to further integrate power from renewable sources into the energy grid.

    Following the European Council and Parliament agreeing on the budget for the financial framework for 2014-20, the CEF is set to receive a total of 5.85 billion euros over that period to increase energy capacity.

    “This is a crucial step. Such a huge amount of EU financial support will make a solid difference. The current Ukraine crisis underlines the importance of upgrading energy infrastructure and building missing interconnections between member states in order to enhance the energy security in the EU,” said European Energy Commissioner Günther Oettinger.

    “In general member states can only help each other with energy supplies, if they are well connected. Moreover, improving the energy infrastructure is a prerequisite for completing the internal energy market for the benefit of consumers and businesses in the EU.”

    In order to be considered for a grant, any energy project proposal has to prove that it has common interests, ensuring that benefits would be gained by at least two member states.

    The grants can be directed toward the financing of studies, and construction works. Last October the first list of 250 projects was first adopted by the Commission, having met all the requirements of the strict criteria.

    To qualify for construction grants, the criteria stipulate a cost-benefit analysis that has to embrace benefits to enhance the security of supply of energy, energy solidarity, or technological innovation.

    If there is any disagreement between national governments on the commercial value of a project, the decision will then be passed on to the Agency for the Cooperation of Energy Regulators (ACER).

    There is also a cap on how much support can come from the EU, as this cannot exceed 50 percent of the total of the eligible costs, although in some cases the cap will be lifted to 75 percent, if there is a significant level of energy supply that will be garnered from a project proposal.

    The application deadline for new energy proposals is on 19 August, after that date the final decision on which projects will receive the CEF funding from the Commission will be taken by November.

    Posted by Pterrafractyl | May 18, 2014, 7:20 pm
  2. ith Koch industries signing a two year European natural gas distribution deal with Norway’s Statoil, it’s worth pointing out that the Koch’s new international liquid natural gas trading house that was just started in 2012 is already pretty huge:

    Natural Gas House of the Year: Koch Supply & Trading

    Author: Energy Risk staff

    Source: Energy Risk | 06 Jun 2014

    With a swift launch in European gas and global LNG, oil heavyweight Koch Supply & Trading becomes a global player in natural gas

    Koch Supply & Trading (KS&T), a unit of Kansas-based Koch Industries, is well known as a major trader in crude oil derivatives, particularly in North America, where its parent company has deep roots in refining, fertiliser production and other energy-intensive businesses. But in 2012, KS&T began a drive to deepen its involvement in global natural gas markets by launching a Europe, Middle East and Africa (Emea) gas business, as well as a liquefied natural gas (LNG) trading arm.

    Since then, KS&T has become a truly global player in gas. The Geneva-based Emea business now has about 60 counterparties, up from zero less than three years ago, and is active in 15 countries, from the North Sea to the Mediterranean. The LNG business – based in London with offices in Dubai, Houston, Rio de Janeiro and Singapore – has taken delivery of and supplied its first cargoes, and trades financial contracts linked to several LNG markers.

    Notably, this has taken place as banks have retreated from gas and power, causing liquidity to dry up and leaving utilities and other energy firms scrambling to find reliable trading partners. Although Hagert stresses KS&T does not offer the same services as a bank, he says the gap in the market has created opportunities for his team to enter into physical deals with various types of firms, including gas distributors, municipalities and industrials.

    “It has been very sad to see the retreat of highly respected financial institutions from the marketplace,” Hagert says. “On the other hand, though… it creates demand for other players such as ourselves, and it allows companies with our sort of pan-European, cross-value-chain breadth to step into the fold.”

    Many of the key people in KS&T’s Emea gas business – including managing director Stephen Cornish, who oversees both the Emea and LNG groups – are veterans of the trading arm of Netherlands-based utility Essent, which was acquired by German utility RWE in 2009. Another large part of the Emea team previously worked at Switzerland-based commodity trader Gunvor, while others came from various banks, trading firms and oil majors.

    Counterparties say KS&T’s experience makes it a solid trading partner. “What I appreciate is that they are fast and efficient,” says a senior energy trader with an Italian gas company. “They have strict rules, but they are clear in advance, and once you understand these constraints and rules, it is easy to work with them.”

    The physical capabilities of KS&T’s Emea team include the ability to source gas directly from the North Sea and, in some countries, to transport it all the way downstream to industrial customers. Moreover, KS&T has accumulated a significant storage portfolio, giving it a great deal of optionality that it can use to create structured products for clients in places such as eastern Europe, according to Hagert. “Our ability to channel volatility and optionality across the value chain, with us in the middle, is part of our core strategy to add value to the market and its participants,” he says.

    On the LNG side, KS&T has been chartering vessels and building a supply portfolio with short-, medium- and long-term durations. Hagert believes KS&T is well positioned to become a major new player in global LNG as the market evolves.

    “The LNG business has gotten off to a strong start,” he says. “To date, the LNG industry has operated with only a few dominant player types. We believe a healthy market should also have industrial players like KS&T, with a strong credit rating, a global presence and an industrial background.”

    Yep, Koch industries certainly has grand ambitions for the global markets that go far beyond oil and coal, so it’s also worth pointing out that those ambitions might be include becoming a global Enron. The Kochs are getting into EU electricity trading:

    Bloomberg
    Koch to Start EU Power Trading as It Plans LNG Expansion
    By Anna Shiryaevskaya Jun 25, 2014 4:52 AM CT

    Koch Supply & Trading, a unit of Koch Industries Inc., will start buying and selling European electricity and expand its liquefied natural gas business to take advantage of a globalizing market for the fuel.

    The trading unit of the second-largest closely held U.S. company by revenue is hiring one or two power traders in Geneva and plans to be ready for trading next year, Stephen Cornish, director of Koch Supply & Trading, said in a telephone interview from London. The company will expand into Turkey and the Caspian region in 2015 and open an office in Tokyo for its LNG business this year, he said.

    Koch is expanding in power as companies from Bank of America Corp. to Cargill Inc. pull out of the market as prices trade near a nine-year low after the euro region’s longest recession cut demand. As many as 120 European power and gas traders lost or changed their jobs last year in the biggest shakeout of the industry since the collapse of Enron Corp. more than a decade ago.

    “We don’t build our business based on whether the markets are up or down,” Cornish said. “There are a lot of counterparts out there that are re-evaluating their business models and are looking for high quality counterparts to do deals with. In that scenario we think we can add value.”

    German year-ahead power, a European benchmark, fell to the lowest since 2005 in April and traded at 34.50 euros ($46.93) a megawatt-hour at 10:17 a.m. London time today, according to data from European Energy Exchange AG. Thirty-day volatility fell to 4.3 percent today, its lowest since June 2003.
    Gas, LNG

    Koch is looking to expand into mainland European power markets from Geneva, its base for gas trading and origination in Europe, the Middle East and Africa, after a separate London-based business focused on the U.K. exited the market in 2011, Deanna Altenhoff, a spokeswoman for Koch, said June 23 by e-mail. Koch Energy Europe Ltd. traded natural gas, power and emission credits, according to a company statement in 2010.

    Koch started trading crude oil in 1969 and added global gas and LNG to its portfolio in 2012, according to the company’s website. As part of a large industrial conglomerate, which itself is a gas consumer, Koch benefits from dealing with industrials, which “want to talk to like-minded companies,” Cornish said.

    “When it comes to power, we believe there should be an opportunity for us there too,” Cornish said by telephone from London on June 13. “We are getting requests to get involved in that market to map over the success that we have had in European natural gas.”

    Koch Supply & Trading plans to enter Turkey and the Caspian region next year, he said. In addition to Geneva, the company has an Amsterdam office for its gas sourcing needs and a presence in Dusseldorf, Germany, for some of its marketing activity, he said.

    ‘Natural Need’

    The company’s LNG business is based in London with trading and origination operations in Singapore and Houston and satellite offices in Rio de Janeiro and Dubai. The company may expand further in the Far East and in South America, if opportunities arise, he said.

    Renewables, shale gas, the 2008 economic crisis and the Fukushima nuclear disaster in Japan have all impacted the market, Cornish said. While the global LNG market will remain tight through next year, trade will start to increase in 2016 as Australian projects now under construction start producing the super-chilled fuel and U.S. exports begin, the International Energy Agency said in its medium-term natural gas market outlook on June 10.

    Good times for all are on the way.

    Posted by Pterrafractyl | August 26, 2014, 9:01 am

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