CREDIT PROFILES AND RATING MIGRATION OF PETROLEUM INDUSTRIES IN MIDDLE EAST

Kastubh Madhavan

Semester V

B.B.A. LL.B. (Hons.)

PETROLEUM INDUSTRY

Petroleum Industry

• The petroleum industry includes the processes of exploration, extraction, refining, transporting, and marketing petroleum products. The largest volume products of the industry are fuel oil and gasoline (petrol). Petroleum (oil) is also the raw material for many chemical products, including pharmaceuticals, solvents, fertilizers, pesticides, and plastics.

• Petroleum is vital to many industries, and is of importance to the maintenance and very existence of industries, and thus is a critical concern for many nations. Oil accounts for a large percentage of the world’s energy consumption, ranging from a low of 32% for Europe and Asia, to a high of 53% for the Middle East.

• The industry is usually divided into three major components: upstream, midstream and downstream.

Petroleum Industry in Middle East

• The Middle East is the region that encompasses a major part of Western Asia and Egypt.

• The following countries are included within the Middle East Region:

Bahrain, Cyprus, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Northern Cyprus, Oman, Palestine, Qatar, Saudi Arabia, Syria, Turkey, United Arab Emirates Yemen

• Middle East is well known for its petroleum reserves. There are Middle Eastern nations such as Saudi Arabia, the UAE and Kuwait that are heavily dependent on export of only oil and oil-related products.

• The Middle Eastern Nations hold huge reserves of Petroleum and houses the biggest petroleum industries.

• Some of the major petroleum corporations of the world are based in Middle East and are government owned such as Saudi AramCo, National Iranian Oil Company, Iraq National Oil Company and Kuwait Petroleum Corporation

Credit Rating

• Credit Rating is a forward-looking opinion about credit risk.

• Credit Rating is an opinion about the ability and willingness of an issuer to meet its financial obligations in full and on time.

• Credit Rating can be of an entity or of an issue by the entity

• It is a rating given to a particular entity based on the credentials and the extent to which the financial statements of the entity are sound, in terms of borrowing and lending that has been done in the past.

• Credit ratings can also speak to the credit quality of an individual debt issue, such as a corporate note, a municipal bond or a mortgage-backed security, and the relative likelihood that the issue may default.

• Credit ratings are opinions about relative credit risk.

• Credit ratings speak about of probability of default in fulfilment of financial obligations and are not investment advice, or buy, hold, or sell recommendation.

• Credit ratings are not indications of the market liquidity of a debt security or its price in the secondary market.

Credit Rating Process

Source: Standard & Poor’s

Main Elements of Rating Methodology

Business Risk Analysis• Industry Risk• Market Position of the Issuing Entity Within the Industry• Operating Efficiency of the Borrowing Entity• Legal Position

Financial Risk Analysis• Accounting Quality• Earnings Protection• Adequacy of Cash Flows• Financial Flexibility• Interest and Tax Sensitivity

Management Risk

Credit Profile

• A credit profile speaks in terms of credit worthiness of a borrower.

• Credit profile takes into consideration various factors to decide upon the merit or worth of an issuer.

• A credit profile constitutes various factors that affect the repayment ability of a borrower that vary from general to industry specific.

Benefits of Credit Rating and Profiling

For Investors• Saves time and effort• Facilitates comparative assessment of investment options• Complements investors' own credit analysis• Facilitates asset monitoring, as ratings are kept under review until the rated

instrument is repaid

For Issuers• Provides independent credit information from a credible third party to the

community of potential investors• Enhances issuer's access to investor funds• Helps issuer differentiate itself in the market

Credit Profile of a Petroleum Company

Primary Factors• Reserves of Core Operations (Depleting Reserves) • Cost Competitiveness (Price Taker) • Market Volatility (Commodity-Based) • Business Mix and Diversification (Integration, Diversity, Size and

Royalty Regime) • Capital Spending and Capital Management (Capital Intensive) Additional Factors • Political Risks • Regulatory/Environmental Factors Common Business Considerations • Country Risk • Corporate Governance

Credit Migration

• Credit Migration is an indication of volatile nature of credit rating.

• Credit Rating Transition is the migration of rating of a debt instrument which can be both a downgrade or upgrade.

• This movement indicates the change in the credit quality of the instrument assessed by the rating agency.

• The rating provided is based on consideration of various factors and is thus subject to change with a change in these factors.

• Qatar Petroleum is a state owned petroleum company in Qatar. The company operates all oil and gas activities in Qatar, including exploration, production, refining, transport, and storage.

• QP's Chairman & Managing Director is also the head of the Ministry of Energy and Industry of Qatar. QP's operations are therefore directly linked with state planning agencies, regulatory authorities, and policymaking bodies. Together, revenues from oil and natural gas amount to 60 percent of the country's GDP.

• Qatar Petroleum is the third largest oil company in the world by oil and gas reserves

Credit Rating: Qatar Petroleum

Rating and Outlook

STANDARD & POOR’s

Long Term Issuer Credit Rating AA (Outlook Stable)

MOODY’s

Long Term Credit Rating Aa2 (Outlook Stable)

Credit Migration: Qatar Petroleum

Date Rating Action

25 Jul 2007 Aa2 Upgrade

05 Oct 2006 Aa3 Upgrade

07 Sep 2006 A1 On Watch-Possible Upgrade

07 Apr 2006 A1 New

Source: Moody’s

Source: Moody’s

British Petroleum PLC

• BP is one of the world's leading international oil and gas companies. BP has been working in the Middle East for over a hundred years, going back to the foundation of the Anglo-Persian Oil Company in 1909.

• BP's businesses include Upstream activities in the Middle East that range from joint ventures with the Abu Dhabi National Oil Company to the development of gas resources in Oman and Iraq.

• Current production from the BP Middle East Region is around 235,000 barrels of oil equivalent per day.

• BP has major investment in Iraq with the development of the Rumaila field, which is currently producing around 1.4 million barrels of oil per day.

Credit Rating: BP PLCRating and Outlook

FITCH

Long Term Issuer Default Rating A

STANDARD & POOR’s

Long Term Corporate Credit Rating A (Outlook Positive)

Short Term Corporate Credit Rating A-1 (Outlook Positive)

MOODY’s

Long Term Credit Rating A2 (Outlook Stable)

Credit Migration: BP PLC.Date Rating Action

16 Sep 2010 A2 CONFIRMED

18 Jun 2010 A2 On Watch – Possible Downgrade

18 Jun 2010 A2 Downgrade

03 Jun 2010 Aa2 On Watch – Possible Downgrade

03 Jun 2010 Aa2 Downgrade

01 Apr 1999 Aa1 CONFIRMED

21 Dec 1998 Aa1 Upgrade

11 Aug 1998 Aa2 On Watch – Possible Upgrade

19 Dec 1996 Aa2 Upgrade

02 Nov 1995 Aa3 Upgrade

12 Sep 1995 A1 On Watch – Possible Upgrade

09 Jun 1995 A1 New

Source: Moody’s

• Occidental Petroleum Corporation is an international oil and gas exploration and production company based in California, United States of America with operations in the United States, the Middle East, North Africa, and South America.

• Occidental has been an active investor in the Middle East region for more than four decades.

• Occidental's Middle East and North Africa operations accounted for 37 percent of its worldwide production in 2011, producing approximately 273,000 barrels of oil equivalent. The region also holds 24 percent of the company's proved reserves. In the Middle East, Occidental has operations in Libya, Oman, Qatar, Bahrain, Iraq, United Arab Emirates and Yemen.

• Oxy is the second-largest oil producer in Oman. In Qatar, it is a partner in the giant Dolphin natural gas project, which delivers gas to Oman and the United Arab Emirates.

• The company's only North African operation is in Libya. In 2005, Occidental and partner Liwa won eight out of 15 exploration spots on the EPSA-4 auction, making both companies among the first to enter the Libyan market since the United States lifted its embargo on that country.

• In early 2011, Occidental won a contract to join Abu Dhabi's state oil company in developing the Shah natural-gas project, one of the largest natural gas fields in the Middle East.

• Occidental is the second-largest oil producer offshore Qatar and has for two decades, worked in close cooperation with Qatar Petroleum to develop and operate offshore oilfields.

Credit Rating: Occidental Petroleum Corporation

Rating and Outlook

FITCH

Long Term Issuer Default Rating A (Outlook Stable)

STANDARD & POOR’s

Long Term Corporate Credit Rating A (Outlook Negative)

Short Term Corporate Credit Rating A-1 (Outlook Negative)

MOODY’s

Long Term Credit Rating A1 (Outlook: Ratings Under Review)

Short Term Credit Rating A1 (Outlook: Ratings Under Review)

Credit Migration: Occidental PetroleumDate Rating Action

18 Feb 2014 A1 On Watch - Possible Downgrade

19 Apr 2012 A1 Upgrade

14 Aug 2008 A2 Upgrade

22 Jun 2005 A3 Upgrade

02 Sep 2003 Baa1 Upgrade

10 Jun 2003 Baa2 On Watch - Possible Upgrade

18 Sep 2001 Baa2 Upgrade

11 Jul 2001 Baa3 On Watch - Possible Upgrade

08 Mar 2000 Baa3 CONFIRMED

19 Nov 1999 Baa3 CONFIRMED

04 Mar 1999 Baa3 CONFIRMED

02 Feb 1999 Baa3 Downgrade

28 Jan 1999 Baa2 On Watch - Possible Downgrade

20 Mar 1998 Baa2 CONFIRMED

06 Oct 1997 Baa2 CONFIRMED

16 Dec 1996 Baa2 Upgrade

08 Jun 1995 Baa3 New

Thank You