Can physical crude oil trading guarantee lucrative returns? One such investment scheme has arrived on Malaysian shores and a number of investors have signed up on the promise of 12% return per annum. The big question mark, however, is whether it is too good to be true. In a two-part series, KiniBiz talks to the scheme’s insiders to find out if the lucrative returns are for real.
With the Malaysian property market slowing down and the local stock market — currently the world’s longest-running bull market — losing momentum, where should investors put their money? In Malaysia, some are turning to investing in physical crude oil.
And they are apparently guaranteed returns to the tune of 12% per annum.
The investment scheme is relatively new, arriving on Malaysian shores in end-2012. Its premise is simple: those who sign up will be involved in a straightforward activity of buying and selling crude oil.
“We have about 5,000 running contracts at the moment,” said an official from Capital Asia Group (CAG), which has exclusive marketing rights for the investment scheme in Asia. “Each buyer usually has between two to three running contracts.”
How the scheme works
According to the Wealth Insider Group (WIG), a local financial education and investment outfit which promotes the scheme, the mechanism centres on a fixed discount for bulk purchase of crude oil by participating investors.
With the discount set at 3%, buyers would buy crude oil in bulk from Conserve Oil Corporation (COC), an oil and gas asset management company based in the city of Calgary in Alberta, Canada. In turn their purchased crude oil would be on-sold to oil giants at the original pre-discount.
When that transaction is done buyers would pocket the 3% difference, said Jonathan Quek, financial author and investment speaker who is part of the WIG team, to KiniBiz, adding that participants are called ‘Asian buyers’.
“When they sell back (to the oil giants), we get our 3% and the capital, the initial money we put in, are used to re-purchase oil again,” he said.
The cycle takes 90 days, explained the wealth coach, which means that Asian buyers would receive the 3% gain on their initial capital every three months — specifically, the 15th of January, April, July and October, with the most recent pay-out made last month, said Quek.
This continues for a pre-fixed timeframe, after which the initial capital would be returned to the Asian buyers.
“Some projects are probably around a year, some can be up to three years,” said Quek. “The current project (the ninth) is for around two years.”
Met by KiniBiz recently, Quek, a ex-licensed financial planner with the Monetary Authority of Singapore (MAS), said he took 18 months to undertake due diligence on the scheme before taking a bite. The process involved going to Canada to see the oil field and meet COC’s people himself.
“They hosted me for three days and then they brought me to look at the oil field, and then watch the entire operation,” said Quek on his visit to an oil field called Joffre, operated by COC, located roughly 16km northeast of Red Deer city in Canada.
What’s in it for COC?
One immediate question that arises, however, is why COC needs to go through the trouble of finding investors to be involved in the whole transaction in the first place. Why not sell directly to the big players and pocket the entire profits?
The motivation is cashflow, explains Quek. “In the past, COC would drill and then sell to BP (British Petroleum), Shell etc. They would give the oil today but then they have contracts where the money (for the oil) would only come back three months later.”
With the scheme, however, COC would sell to the buyers at the 3% discount and get cash upfront while they on-sell the crude oil purchased to the big players. This way COC can operate without having to wait for the 90-day maturity period for cash infusion, according to Quek.
“So if you look at our contract, it’s really a receipt — you are buying physical oil,” said the financial author. “You can collect the oil if you want. When I went there I actually looked at the barrels of oil.”
When KiniBiz tried to verify this with some of the big players named in the scheme’s brochure, however, Anglo-Dutch multinational Shell and Canadian oil and gas outfit Nexen did not respond.
“We’re not aware of this organisation,” said Robert Wine, group press officer of British Petroleum (BP), in a brief email response.
In response to this, Quek showed KiniBiz legal documents involving BP, US-based Tidal Petroleum’s unit Tidal Energy and Imperial Oil, which is majority-owned by Exxon Mobil Corporation.
“All these contracts that we have, we have brought them to an independent lawyer to make sure everything is real,” said Quek, adding that due to confidentiality obligations, the contracts or its copies cannot be taken out of the CAG office or distributed. “We even caught people photocopying it before — we gave a first warning.”
Drilling deeper than others
COC itself is into oil field optimisation specifically, elaborated Quek, belonging to a group of oil field operators that are smaller than the big boys such as Malaysia’s Petroliam Nasional (Petronas), BP and Shell — which drills roughly more than 100,000 barrels per day — yet bigger than some of the smaller operators who are doing anywhere between 1,000 and 5,000 barrels a day.
In comparison COC drills about 5,000-6,000 barrels a day, said Quek.
The smaller companies can only drill up to 30% at most, he added, and lack the capability to drill further beyond that. However companies like Schlumberger, which provided oil field services, has the technology to drill the next 30-35% of an oil field, he said, called Enhanced Oil Recovery (EOR).
While the big players work with Schlumberger and other similar service providers to do this, some oil fields are not worth their bother, explained Quek. What COC does is buy these oil fields and engage Schlumberger to undertake the EOR process, he added.
“They buy oil fields which are not too big, oil fields which the big boys do not want to do. But they also buy oil fields which are not too small, because the very small ones other (smaller) oil field operators can do,” said Quek to KiniBiz, adding that the oil drilled would be on-sold to the big players as smaller entities such as COC lacks the downstream structure to work further with the crude oil.
Facilitating such purchases would be petroleum consultancy Sproule, said Quek. “They will come and evaluate the land to make sure there is oil there. And their evaluation is based on 20%.”
In exchange for the Asian buyers easing COC’s cashflow, the company would be able to expand into other oil fields more easily, said Quek further.
When contacted by KiniBiz, Schlumberger confirms a working relationship with COC but declines to say further, citing confidentiality obligations.
“We appreciate your inquiry and confirm that Schlumberger holds an oilfield services contract with Conserve Oil Corporation (Canada),” said Joao Felix, Schlumberger Ltd director of external communications in response to KiniBiz queries. “Due to a confidentiality clause in this services contract, we cannot disclose any further information.”
Guaranteed returns against fluctuating prices?
However, guaranteed returns of 12% per annum sounds nearly too good to be true in the current investment climate.
In presenting the second-quarter financial results of Petroliam Nasional (Petronas) last week, chief executive Shamsul Azhar Abbas warned that there would be tougher times ahead as far as oil and gas goes.
“It’s getting harder to develop oil and gas, and cost continues to increase,” Shamsul was quoted as saying by Reuters, adding that crude oil prices are expected to fall closer to $95 per barrel in the remaining part of the year after averaging $108.9 per barrel in the first half of 2014.
On the other hand, on its website WIG introduces crude oil and the miracle commodity, one that pervades nearly every aspect of our lives.
“The demand for oil and gas is increasing at a 5–6% rate each year while it exhausts the limited oil sources around the world,” said WIG on its website. “There is simply no other industry in which the predictive nature of the future price can be realised with such confidence as crude oil prices continue to climb in an upward trend.”
It is no wonder then that sophisticated investors are flocking to oil field investment programs — even taking long-term positions — as an oil well’s value is nearly certain to appreciate over time as supply diminishes against increasing global demand, argued WIG further.
When contacted by KiniBiz recently, an oil and gas analyst thinks that even with the finiteness oil and gas reserves contrasted with steadily growing demand, returns on investment is not guaranteed.
“Trend for discoveries and future production is increasingly deep-water and unconventional (e.g. shale gas) which takes up high cost for developing technology. On all fronts, cost is going up fast, projects getting more complex unless they can replace existing operations with cost-efficient technology,” said RHB Research analyst Kong Ho Meng. “The days of easy oil are no more.”
Going forward Kong echoed the sentiment of Petronas’ Shamsul — rising costs is a key issue as many projects face delays in moving to production phase or in other words first oil.
“We think this trend will persist and companies may decide to terminate the projects if oil price crash below $80 per barrel, depending on the type of project,” added the analyst to KiniBiz.
Taking an example of WTI-grade crude oil in the market, prices over the past year have fluctuated as low as just below $90 per barrel and breaking past the $100 per barrel mark in recent months, according to data from Nasdaq OMX, US-based a multinational financial services corporation that owns and operates the Nasdaq stock market, among other things.
Even with other grades such as the Brent grade, crude oil prices seem to be roughly fluctuating along similar trajectories over the past years, based on data from the US Energy Information Administration.
The uncertainty is exacerbated by fluctuating currency exchange rates, which means investors’ outlay for this investment scheme would also fluctuate in relative value depending on the currency at which the crude oil is traded.
Against this backdrop of constantly shifting factors, how is COC guaranteeing an absolute return of 3% per quarter?
‘There are risks’
When posed the question by KiniBiz, Quek said COC is able to do this due to the relatively huge margins enjoyed by the oil and gas industry.
According to his own research, the cost of drilling in Canada comes to roughly $25 per barrel, which comes before the royalty payments to the government for oil drilled. “Even after all these costs, (there is a) maximum of $40 to $50 dollars per barrel (in profits).”
“So we are talking about pretty huge margins over here,” said Quek further, adding that in comparison, the small discount to Asian buyers is “not too much to ask for.”
In terms of crude oil price fluctuations and shifting foreign exchange rates, Quek responded that COC would have no problems in making up any difference given the profit margins involved.
“Today’s oil price is 100 dollars per barrel. Look at today’s world, wars in three nations. Is it possible for oil to plunge?” he asked rhetorically. “Almost impossible.”
That said, however, Quek stresses that the scheme is not without risk. “I believe in every investment you have risks.”
Fluctuating crude oil prices is also a risk to keep in mind, said Quek — specifically, the risk of prices going below $40 per barrel, which he does not rule out as it has happened before.
“If it drops below 40 dollars per barrel, can COC manage their cashflow fast enough?” said Quek. “This is the question I asked in Canada and they told me this would be their challenge — to manage costs.”
“I was also concerned — I’m an investor as well, with an investor’s point of view,” said Quek to KiniBiz, adding that COC later brought KPMG in to audit the entire process and make sure “everything is transparent”.
The other concern, said the financial author, is a scenario where COC does not pay the promised 3% to buyers. As assurance against this possibility, the particular oil field in question would be pledged against the collective buyers’ capital, said Quek.
If COC misses the payment deadline and does not make the payment within the next 90 days following the deadline, the oil field would be sold off and capital would be returned to investors, he explained, hence buyers’ capital is protected.
This process would be facilitated by a company in Singapore called Capital Asia Group Oil Management (CAGOM), added Quek.
“I won’t say that we have no risk. The risk is this: How long would it take for them to sell this land with oil reserves?” said Quek. “It might take three months, it might take six months, it might take one year.”
However, Quek stressed that while there is risk in terms of time in this case, “we are still talking about real assets” with oil reserves.
A deeper concern for those considering this investment scheme is perhaps one name that has been raised in connection to the scheme — Jürgen Hanne, who was behind several investment schemes that had since collapsed.
KiniBiz delves deeper into the connection and other issues in Part 2 of the issue series tomorrow.
Here are excerpts of the interview:
Quek: The scheme came to Malaysia in 2011. Capital Asia Group (CAG) is a Singaporean company and they have (marketing) rights to Asia so we (Capital Asia Group Sdn Bhd) actually own the rights to Malaysia.
The crude oil company is known as Proven Oil Asia.
KiniBiz: So the ones distributing it in other places like Hong Kong, for example, would be different?
Quek: That would be different. That would be CAG Hong Kong and there would also be CAG Singapore.
So it (the scheme) is in Hong Kong, Singapore, Malaysia. These are the three main
countries which is marketing this (scheme).
KiniBiz: For Malaysia, how many investors do you have for crude oil?
Quek: I can’t give you an exact figure because I no longer handle retail sales; my duty in the business is to go and do due diligence (on the scheme) in Canada. And so I went to Canada to do my due diligence. I took 18 months for the whole due diligence process.
(A CAG official later informed KiniBiz that there are about 5,000 running contracts, with clients often holding two to five contracts each.)
KiniBiz: There were a lot of interesting photos of you in Canada visiting the oil field. So how was the visit?
Quek: The visit was good. We managed to meet up with the partners. The oil operator is called Conserve Oil Corporation (COC) and they hosted me for three days. Then they brought me to look at the oil field, and then watch the entire operation.
So I went and visited an oil field called Joffre. Joffre is an oil field — I forgot the entire size — that was previously owned by an insurance company in Canada known as Manulife. As you know insurance companies need to give returns to investors, so Manulife used to own and operate Joffre and the returns from Joffre were pumped into their investment returns for insurance.
Before Manulife bought this Joffre oil field, the previous operator was Imperial Oil,
which was now bought over by Exxonmobil.
So we are really into oil fields and we are into oil field optimisation.
KiniBiz: When you say optimisation, how does that work?
Quek: Imagine if this (holding a glass of water) is an oil field.
In the world, there are three types of oil operators: A, B and C. A is what we call the big oil giants. We are talking about the likes of Petronas, which does something like 160,000 barrels a day — really big. Petronas, Exxon Mobil, Shell, BP; these are A-level.
The C-level are people who are drilling probably like 1,000-5,000 barrels a day.
KiniBiz: C-level sounds like companies such as Bursa Malaysia-listed Sumatec Resources in terms of size.
Quek: Exactly, yes, the smaller ones. Sumatec is into Kazakhstan. COC is doing around 5,500-6,000 barrels a day, so slightly bigger than Sumatec.
But these companies, even if you drill oil, you don’t have that end-user (distribution set-up). You can’t go set-up petrol stations and all (to distribute the product).
So you have to sell your oil to the big oil giants, people like BP, Shell. The model is exactly the same. When Conserve Oil Corporation drills oil they would sell to the big boys.
What happens is that COC is slightly bigger than the normal C-level operators because
most of the other C-level companies can probably only drill up to 30% of the
reserves (drinks part of the water in the glass).
Let’s say they drill 20%. They don’t have the technology to drill more. Therefore
companies like Petronas, they can work with companies like Schlumberger which
has a technology called enhanced oil recovery (EOR) that allows you to drill
the next 30-35%.
When SLB comes in to drill extra, this also means that the oil field had already been
proven to have oil. This is not exploration.
When they are allowed to go in with EOR technology, they will drill more and again they will sell to the big boys.
They are not allowed to drill the extra last 40% simply because in Canada, they have rules and regulation called ethical oil, which means you are not allowed to dry up the whole thing because this would be very hazardous to nature.
KiniBiz: So basically what COC does is they go into proven oil fields and extract more than what most other players can.
Quek: Correct. So they do two things. First, they buy oil fields that are not too big because the big ones would be taken over by BP, Shell and all. But they also buy oil fields which are not too small, because the very small ones other oil field operators can do.
Therefore they buy those which fit their business model because the very small operators cannot do EOR. They don’t have the resources to do it. So COC would buy these oil fields, do EOR (drilling) by working with Schlumberger, and then sell to BP, Shell, Exxonmobil, Tidal and Nexen. These are the five companies that we have.
If you check out my photos (from the due diligence visit), you probably see a photo
where I was in an office called Sproule.
KiniBiz: The petroleum consultancy?
Quek: Exactly. They will come and evaluate the land to make sure there is oil there before COC buys an oil field. And their evaluation is based on the 20%.
KiniBiz: Before you go further on that, what is the company structure like? Is there a parent company for the global scheme of things?
Quek: COC is the oil field operator and then Proven Oil Asia is the one that sells oil in Asia. How the structure works really is like this:
When company like COC want to expand the business, what they need to do is increase
their cashflow. Why do I say so? In the past, COC would drill and then sell to BP, Shell and all. They would give the oil today but then they have contracts where the money would only come back three months later.
So what we are doing is this: they allow us to come in, to allow them to sell it to
Asian buyers first. I’m talking about Malaysia, Singapore and Hong Kong.
When they sell the oil to Malaysians for example, when they sell oil to us today, we will pay the money today. But we don’t collect the oil. So if you look at our contract, it’s really a receipt — you are buying physical oil.
You can collect the oil if you want. When I went there I actually looked at the barrels
If we buy RM100,000 of oil, they will give us RM103,000 worth of oil — 3% more. So they
give us a discount, it’s like a bulk purchase. Then they will take our oil and sell it to Shell, for example. And then three months later when Shell gives us the RM103,000, the 3% is given to Asian buyers and then the RM100,000 is used to re-purchase oil.
KiniBiz: So basically what happens is COC gives regular investors a cut of the profits they would get in exchange for easing their cashflow in the interim.
Quek: You can put it that way, but in the contract it’s clearly stated that Asian buyers, because it’s a bulk purchase, get a discount of 3%. This discount of 3% they use to sell it to the big oil corporations. When they sell back, we get back our 3% and the capital, the initial money we put in, are used to re-purchase oil again.
This continues according to (a pre-set) timeframe according to (each) oil field.
KiniBiz: How long is the timeframe?
Quek: It really differs. Some projects are probably around a year, some can be up to three years. So it really depends on the oil field.
KiniBiz: So where are we at the moment in that sense? Does each project mean a new oil field?
Quek: A new oil well. The current project I think is around project nine. The current project is for around two years. Every time we finish a project, there will be a new one coming in.
KiniBiz: When was the last payment made, the most recent 3%?
Quek: Every year, the clients’ discounts would be gotten back in January, April, July and October. Four times a year. The last was just last month on the 15th.
KiniBiz: So it’s the 15th of these months.
Earlier this year there was one project which was fully exited because it was a one-year project. So clients got back their returns and they got back their capital which was around RM33 million ringgit. That figure I remember because it was on my Facebook page.
KiniBiz: However the price of crude oil fluctuates. So how does it work in terms of the 3% guarantee? Is there a fixed-price agreement for crude oil?
Quek: It’s very easy because if you look at the whole oil business, the profit margin is rather huge. If we look at 20 of the most profitable businesses in the world, eight of them are oil, including Petronas which is ranked among the top 20 of the world.
In Canada, if we look at the — I have done my own research, I went there and talked to the oil operators there — the cost of drilling oil, it is around $25 per barrel. Of course there are other costs as well including royalty to the government.
But even after all this, you’re only talking about 3% every three months.
After all these costs, (there is a) maximum of 40 to 50 dollars per barrel (in profits).
So we are talking about pretty huge margins over here. For them to give these minor returns it is not too much to ask for.
KiniBiz: In return for more security in terms of cashflow?
Quek: Yes. That allows them to expand their business, go into more oil fields.
KiniBiz: What about fluctuating foreign exchange rates?
Quek: They would have no issues making up (the difference). Today’s oil price is $100 per barrel. Look at today’s world — wars in three nations.
Is it possible for oil to plunge? Almost impossible.
KiniBiz: On the website there was one interesting line: “Capital Protection With Oil Fields Pledged Against Your Purchase”. How does that work?
Quek: There are two very important assurances that you must understand.
One is how do we make sure that if they take our money they would use it to buy oil
and that they won’t use it to do something else?
So this was something that was just added recently because for the past few months when
they just started, I was also concerned. What if COC takes our money and do something else with it? You have to understand that I’m an investor as well, with an investor’s point of view.
So we kept pushing them, give us assurances. “How do we make sure that you won’t take our money and do something else.”
Then they brought KPMG in to audit the entire process to make sure that the money put in
by Asian buyers is used to purchase crude oil.
KiniBiz: So KPMG is in the picture.
Quek: Yes. We hired KPMG to make sure that everything is transparent.
Two, another thing we asked for is what if they don’t return to us our 3% every three months.
So one other thing we did was with every oil field…let’s say we were to raise a RM10 million project. A RM10 million oil field, you has to remember that the valuation of RM10 million is based on 20%.
And then the first charge on this land would only be activated if the 3% is not returned within 90 days as it is supposed to be.
So let’s say on July 15 they’re supposed to return us 3% but they didn’t, and within the next 90 days if they still don’t return the amount, then the land which owns the oil will be sold off and then capital will be returned back to investors.
So that’s why I put it in a way where the capital is actually protected. I won’t say that we have no risk. The risk is this: How long it would take for them to sell this land with oil reserves?
And then all this facilitation will be done through a company in Singapore called Capital Asia Group Oil Management (CAGOM).
KiniBiz: So in that sense your money is pledged against proven oil fields?
Quek: Yes, with Sproule coming in to do valuation. Sproule is an independent party and every employee in this company is not allowed to hold any shares out there. And Sproule is even hired by parties like the United Nations when it comes to any arguments. Even
Petronas are their clients.
So I went to Sproule office and to be honest, as a company they gave me great confidence
when I met everyone.
KiniBiz: What did they show you when you were there?
Quek: They are very conservative and their approach is very different compared to any Malaysian companies I have met. They even came up with the COGEH (Canadian Oil and Gas Evaluation Handbook) which is a set of oil and gas regulatory rules adopted by the whole of Canada.
KiniBiz: According to oil and gas industry observers, it is hard to guarantee returns in the industry. How is COC managing that challenge?
Quek: I would say we have two risks.
One risk is what if oil prices were to drop below $40 per barrel. This is the exact same
thing I tell everyone. It has happened before, I won’t rule out the possibility.
So that’s one risk. If it drops below $40 per barrel, can COC manage their cashflow fast
It’s just like the whole gold and silver industry right now. The price of gold and silver
has dropped below mining cost and that’s why a lot of gold and silver mines are closing down. I would relate it to the oil and gas industry as well because it’s also commodities.
It’s possible that they would face this trouble — what if it drops below 40 dollars?
This is the question I asked in Canada and they told me this would be their challenge — to manage costs.
Second risk is if there’s any cock-up in this entire process, how long would it take for us to sell a piece of oil field land that has oil reserves, that has been drilled 20%?
This process of getting new buyers might take a bit of time. This would be a risk in terms of time. We are still talking about real assets here, with oil. The question is how long to sell this land. It might take three months, it might take six months, it might take one year.
So that is a risk. So I will say that I believe in every investment you have risks. These are the two risks that everyone must remember.
KiniBiz: BP responded to our queries saying they are not aware of COC. Was the name just an example of the type of companies that buy crude oil from COC or is there a relationship in place?
Quek: There is a longstanding contract upstairs. If you want I can bring you upstairs and show it to you. And all these contracts that we have, we have brought them to an independent lawyer to make sure everything is real.
(KiniBiz sighted the legal documents involving COC and BP after the interview session).
Tomorrow: Is the scheme too good to be true?