No. 4, 2009

Oil of Russia magazine talks to Lawrence Neal, President of Platts

Platts is a leading global energy and metals information providers and a division of The McGraw-Hill Companies.  In the conditions of the world economic recession,  traders, risk managers, analysts, and industry leaders especially depend upon Platts to help them make better trading and investment decisions.

Q: First of all, let us congratulate Platts on the 100th anniversary! Mr. President, what would you name to be the most important events in Platts' history?

A: Beyond its founding, I would say four things: its acquisition by McGraw Hill in 1953; the gradual deregulation of oil markets in the late 1970's and early 1980's, which led to more open free trade in the world of petroleum; the launch of our real-time service, Platts Global Alert in 1984, which probably wouldn't have happened had it not been for that deregulation; and the internal and external acquisitions in the late 90's and early this decade that brought coverage of

natural gas, electricity, metals and other commodities under the Platts banner.

Q: What were the "first steps" of Platts in Russia?

A: We began covering Russia as simply a news story in the early 1990's with a full-time correspondent. We had long covered the market for Russian product and crude oil exports, but that had been done out of London, because that was where most traders were based. But as the country's importance grew, we created a full-time editorial, sales and marketing staff in Moscow. We also launched a joint venture publication with Interfax last year that has been very successful.

Q: How large is Platts' presence on the Russian market today?

A: Our sales revenue in Russia is strong and has been growing at a very respectable pace, even following the fall in oil and gas prices. Many Russian oil companies benchmark their sales of crude and products against our assessments for Urals or gasoil, so Platts plays a very key role with the Russian industry.

Q: What do you think of the prospects of Russian oil and gas companies

in the light of the economy globalization?

A: The immense reserves of Russia's oil and gas open the promise for an increasingly important role for the country, but there are some factors that need to be considered. First of all, in natural gas, the country needs to understand that its dispute with Ukraine last year over natural gas supplies, and previous disputes with other nations, have caused the global energy community to question whether the country is a reliable supplier. Increased supplies of LNG and new pipelines, such as Nabucco, may challenge Russian's market share for natural gas sales in Europe. In oil, Russia clearly has taken an approach that reflects a belief that outside investment is not necessary to tap its reserves. This strategy can be successful at times, as in Saudi Arabia and Kuwait, but often it is not, as evidenced in the declining fortunes of Mexico. If foreign investment in Russia's oil fields is going to be limited, it appears Russia would be best served to emulatethe former and not the latter.

Q: Has the world economic crisis influenced on the activities of Platts?

A: We have been fortunate in that our business has held up extremely well. Our customers clearly need our information. However, we have seen some customers go out of business, so we are not untouched. The most striking aspect of our business is that a year ago we were covering markets with very high oil and gas prices, and now we are covering very different markets, particularly in the case of natural gas. Its price plummeted with the world economic crisis, and unlike oil, has not bounced back.

Q: What conclusions, in your opinion, should energy companies make as far as the economic crisis concerned?

A: Companies should probably conclude that efforts to wring volatility out of the markets are doomed to fail. Therefore, a company with an exposure to prices that leaves itself unhedged, or not tied to some sort of pricing benchmark, is subjecting itself to some very strong crosswinds. Also, even some of the smartest companies did not budget or plan for $140 oil, and those that took on excessive leverage were damaged by the fall in prices.

Q: Some experts believe that the global oil pricing mechanism is not fair. What do you think about that?

A: We don't think that there is a global pricing mechanism per se. There are a series of markets that work on a very global basis, which helps lead to smooth supply and demand distortions. Excessive supply in one area can be exported to an area with a shortage of supply, and it helps ensure that prices globally are relatively in sync. However, it is true that the events of the last few years have left many people a bit puzzled. But consider what the markets have gone through. We had a period culminating in mid-2008 when demand worldwide rose considerably, led by a surge in Chinese demand, but supply was not increasing at the same time. Concurrently, we had regulations that helped tighten the diesel market - that was a key factor in 2008. But that was all followed by a stifling global downturn that wiped out millions of barrels of day of demand, sending prices plummeting. So while markets may seem excessively volatile to an observer, if seen through that prism, they are more easily understood. Further, it is difficult to understand what sort of mechanism would have been able to better bring stable prices in a period of such financial tumult.

Q: Platts has a long and successful experience in providing information concerning hydrocarbon resources. How about information on renewable energy? Can you say if it is becoming a really profitable business?

A: Renewable energy, outside of hydropower, generally has not been a profitable business. When it has proved profitable to the entrepreneur, it generally only has been profitable because of government largesse, like the ethanol tax breaks granted in the United States. For it to become profitable on its own, it is probably going to need a combination of higher oil prices and breakthroughs in renewable technology. However, one new factor has appeared on the market, and that's shale natural gas. The technology to unlock shale gas deposits in the U.S. has been a deal-changer in that country, and if that technology can be applied to other shale deposits around the world, it is going to have negative implications for electricity generation from wind, solar and biomass. Massive new quantities of natural gas from shale deposits are going to lead to weak natural gas prices, and those alternatives will be hard-pressed to compete.

One challenging area is biofuels. Since 2005, we have steadily expanded our coverage of the world's ethanol and biodiesel markets. It has become clear, even in that short space of time, that those markets will continue to struggle to help meet a meaningful share of world energy demand. Fundamental disconnects between world soft commodity prices, like sugar, soy bean and palm oil, and world energy prices have made it very difficult for companies in that space to maintain any sort of continuity in profitability.

Q:  Does Platts have plans to launch some new projects or services in the foreseeable future?

A: We have undertaken several new initiatives recently. Our web site, platts.com, has been redesigned, and we are very happy with the feedback from that. We continued to build our risk-management products, giving our customers a price assessment value for petroleum and natural gas far along forward curves. And in an era where so many companies are cutting back staff, we are adding staff, showing our faith in this business.