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Middle East Oil Producers Are Drowning In Debt

Middle East Oil Producers Are Drowning In Debt

Arab Gulf oil producers are losing billions of U.S. dollars from oil revenues this year due to the pandemic that crippled oil demand and oil prices. Because of predominantly oil-dependent government incomes, budget deficits across the region are soaring.

Middle East’s oil exporters rushed to raise taxes and cut spending earlier this year, but these measures were insufficient to contain the damage.

The major oil producers in the Gulf then rushed to raise debt via sovereign and corporate debt issuance. Bond issues in the region have already hit US$100 billion, exceeding the previous record amount of bonds issued in 2019.

Thanks to low-interest rates and high appetite from investors, the petrostates are binging on debt raising to try to fill the widening gaps in their balance sheets that oil prices well below their fiscal break-evens leave.

Saudi Aramco Taps International Debt Market Again

One of the latest issuers is none other than the biggest oil company in the world, Saudi Arabia’s oil giant Aramco, which raised this week as much as US$8 billion in multi-tranche bonds.

Aramco is tapping the international U.S.-denominated bond market for the second time in two years, after last year’s US$12 billion bond issue in its first international issuance, for which it had received more than US$100 billion in orders.

Saudi Aramco prefers to considerably increase its debt to cope with the oil price collapse than to touch its massive annual dividend of US$75 billion, the overwhelming majority of which goes to its largest shareholder with 98 percent, the Kingdom of Saudi Arabia.

Analysts warn that the dividend windfall from Aramco will not be enough to contain Saudi Arabia’s widening budget deficit if oil prices stay in the low $40s for a few more years.

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Oil Price Crash Costs Saudi Arabia $27.5 Billion In Revenue In 2020

Oil Price Crash Costs Saudi Arabia $27.5 Billion In Revenue In 2020

The oil price collapse is depriving Saudi Arabia of US$27.5 billion in oil revenues this year, Saudi Crown Prince Mohammed bin Salman said on Friday, admitting that the current oil income is not enough to cover the Kingdom’s salaries bill.

Saudi Arabia had projected last year that this year’s revenues for the state would be US$222 billion (833 billion Saudi riyals), of which US$137 billion (513 billion riyals) would come from oil, the crown prince said in a speech carried by the official Saudi Press Agency.

However, after the collapse in oil prices, Saudi Arabia’s oil revenues actually dropped to US$109 billion (410 billion riyals), Mohammed bin Salman said.

Thus, the price crash—which Saudi Arabia itself helped to create by flooding the market with oil in April—cost the world’s top oil exporter just over US$27.5 billion in oil revenues this year.

“These revenues alone are insufficient to cover even the salaries bill estimated at 504 billion riyals in this year’s budget, not to mention the difficulty of financing other items which include capital spending by 173 billion riyals and social security benefits by 69 billion riyals as well as operation and maintenance bill estimated at 140 billion riyals and others, which means an economic recession and millions of jobs lost,” Mohammed bin Salman said in his speech.

The collapse in oil prices has forced the Kingdom to take some very unpopular measures such as tripling the value-added tax (VAT), reducing payouts to poorer households, and discontinuing cost-of-living allowances for state workers.

Earlier this week, Fitch Ratings revised down its the outlook on Saudi Arabia’s long-term foreign-currency Issuer Default Rating (IDR) to ‘negative’ from ‘stable’, citing “the continued weakening of its fiscal and external balance sheets, which has been accelerated by the coronavirus pandemic and lower oil prices, despite the government’s strong commitment to fiscal consolidation.”

Shell’s Largest Refinery Reduces Crude Processing Capacity By 50%

Shell’s Largest Refinery Reduces Crude Processing Capacity By 50%

Shell will halve the crude oil processing capacity of its largest wholly owned refinery in the world, Pulau Bukom in Singapore, as part of its ambition to be a net-zero emissions business by 2050 or sooner, the supermajor said on Tuesday.

Pulau Bukom hosts the largest wholly-owned Shell refinery globally in terms of crude distillation capacity, 500,000 barrels per day (bpd), and it also has an ethylene cracker complex with a capacity of up to a million tons per year and a butadiene extraction unit of 155,000 tons annually.

As Shell is looking to cut carbon dioxide (CO2) emissions and is transforming its refining business for the new future, it will cut the crude processing capacity at Pulau Bukom by about half, the company said. In that new future, the Pulau Bukom Manufacturing Site will be one of Shell’s six energy and chemicals parks, and will pivot from a crude-oil, fuels-based product slate towards new, low-carbon value chains.

“Our businesses in Singapore must evolve and transform, and we must act now if we are to achieve our ambition to thrive through the energy transition. Our decisive action today will help Shell in Singapore stay resilient and build a cleaner, more sustainable future for all of us,” said Aw Kah Peng, Chairman of Shell Companies in Singapore.

The reduced refinery capacity in Singapore will result in fewer jobs at the site, Shell said, while a Shell spokeswoman told Reuters that the supermajor would cut around 500 jobs by the end of 2023. Currently, Pulau Bukom employs around 1,300 people.

Shell is implementing a new downstream strategy to reshape its refining business towards a smaller, smarter refining portfolio focused on further integration with Shell Trading hubs, Chemicals, and Marketing.

As part of this strategy, Shell has sold the Martinez Refinery in California to PBF Holding Company for US$1.2 billion.

Shell is also set to shut down its 211,000-bpd refinery in Convent, Louisiana, after failing to find a buyer for the site.

Africa Is The Undeniable Final Frontier For Oil

Africa Is The Undeniable Final Frontier For Oil

The pandemic has been devastating for the oil industry globally. Explorers suspended drilling, producers, idled wells, Big Oil majors put up assets for sale. But the world continues to need oil, albeit lower amounts of it than a year ago, and it will continue to need it. Exploration is not dead. It is especially not dead in Africa—a hot spot in oil and gas before the pandemic.

The East Africa Crude Oil Pipeline

Earlier this month, French Total and the Uganda government signed an important deal, for the construction of a pipeline that will carry Ugandan oil to the Kenyan coast. Two weeks later, the presidents of the two countries signed their own deal about the $3.5-billion infrastructure.

The final investment decision on the pipeline is expected by the end of the year in a rare good sign about the future of oil demand. Uganda and Kenya are both newcomers on the oil scene with hopes to join the oil exporting community soon. If the construction of a $3.5-billion oil pipeline still makes economic sense for countries that are not among the wealthiest in the world, there may be some hope for oil demand.

The South African oil discovery

Africa Energy, a Canadian exploration company, said last week it expected to strike a lot of oil in an offshore block in South Africa with reserves that could exceed those of an earlier discovery made by Africa Energy and Total in the same block. Earlier this year, Africa Energy doubled its stake in the consortium exploring the block to 10 percent. Total is the operator. Africa Energy should announce the results of the drilling project by the end of next month.

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The Debt Crisis Is Mounting For Oil Economies

The Debt Crisis Is Mounting For Oil Economies

Dubai. Abu Dhabi. Bahrain. And, of course, Saudi Arabia. The two emirates this year issued debt for the first time in years. So did Bahrain. Saudi Arabia stepped up its debt issuance. The moves are typical for the oil-dependent Gulf economies. When the going is good, the money flows. When oil prices crash, they issue debt to keep going until prices recover. This time, there is a problem. Nobody knows if prices will recover.

In August, Abu Dhabi announced plans for what Bloomberg called the longest bond ever issued by a Gulf government. The 50-year debt stood at $5 billion, and its issuance was completed in early September. The bond was oversubscribed as proof of the wealthiest Emirate’s continued good reputation among investors.

Dubai, another emirate, said it was preparing to issue debt for the first time since 2014 at the end of August. Despite the fact the UAE economy is relatively diversified when compared to other Gulf oil producers, it too suffered a hard blow from the latest oil price crash and needed to replenish its reserves urgently. Dubai raised $2 billion on international bond markets last week. Like Abu Dhabi’s bond, Dubai’s was oversubscribed.

Oversubscription is certainly a good sign. It means investors trust that the issuer of the debt is solid. But can the Gulf economies remain solid by issuing bond after bond with oil prices set to recover a lot more slowly than previously expected? Or could this crisis be the final straw that tips them into actual reforms?

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The Net Zero Emissions Lie

The Net Zero Emissions Lie

Cutting carbon emissions has become a central focus of countries and companies alike in the past decade. The oil majors are racing to ‘go green, Microsoft has pledged to go ‘carbon negative’, and over 20 nations have either committed to or achieved net-zero carbon targets. For public companies, the incentives to go green are clear, with a recent boom in ESG investing, the continued threat of activist divestment, and a growing body of government regulation. Meanwhile, for governments, the environment is becoming an increasingly important electoral issue and political parties are eager to be seen as being proactive on the issue. But just as the ESG investment boom has led to an increase in the phenomenon of ‘greenwashing’, countries who are eager to make grand statements about being carbon zero within a decade or two may be overselling exactly what it is that they are doing.

Climate change is, by its very nature, a global problem. With that in mind, it is possible for one country to reduce its carbon emissions to zero without any reduction in the level of carbon emitted worldwide. As long as that same country continues to trade and consume, the carbon-reliant products it needs will simply be imported from a nation without any limits on carbon emissions. To claim ‘real’ net-zero emissions, countries would have to go significantly further.

That isn’t to say that the net-zero initiatives are entirely without merit. Increasing renewable energy usage, building more energy-efficient homes, and electrifying transportation would all have a tangible effect on decreasing global carbon emissions. But, as economist Dieter Helm points out in his recent book, if an individual state wants to truly become a net-zero carbon emitter, then it would need to have a carbon tax at its border as well as reducing its production of carbon domestically.

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$65 Oil And $5000 Gold: Traders Expect Volatility In Key Commodities

$65 Oil And $5000 Gold: Traders Expect Volatility In Key Commodities

The year of the pandemic put two commodities under the spotlight, but for different reasons. Gold prices hit an all-time high in August, while crude oil slipped into negative for a day in April, when demand crashed and inventories soared.

Both oil and gold have seen much volatility this year. Oil prices started 2020 at over $60 a barrel, dipped to the low teens in April – with front-month WTI Crude futures settling one day at a negative price – and rose to $40 in the summer, staying rangebound since then. The crash in demand pushed oil lower, while increased uncertainty over the economic and oil demand recovery, as well as the fears of a second COVID-19 wave, pushed investors to seek safe havens such as gold, driving the precious metal’s price to an all-time high of $2,075 an ounce last month.

The wild rides in the two commodities could represent buying opportunities, analysts argue, expecting oil and gold to rise in the medium term.

For oil, the uptrend may not come as soon as it could in gold, because of the heightened concern about the stalled demand recovery. Still, investment banks and analysts expect prices to increase from current levels over the next one to two years, especially if an effective vaccine hits the markets in 2021.

For gold, low or negative interest rates, continued economic stimulus, and the perception that gold is a hedge against uncertainty about the economy and the upcoming U.S. presidential election are expected to drive prices higher.

Alissa Corcoran, Director of Research at Kopernik Global Investors, told MarketWatch’s Myra P. Saefong that the short-term volatility in commodities could be an opportunity instead of risk.

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Private Equity Is Bargain Hunting In Canada’s Oil Patch

Private Equity Is Bargain Hunting In Canada’s Oil Patch

After two months of an encouraging—if not half-hearted–rebound, oil prices have gone into reverse gear once again. Futures tied to WTI crude were down a whopping 8% on Monday morning to trade at $36.35/barrel, a level they last touched two months ago as the markets come under a fresh wave of pressure from a stalling recovery in demand as well as a mistimed expansion of production by OPEC that threatens to reverse the gains by the cartel’s latest production cuts.  The latest rout has elicited another round of price cuts by Saudi Arabia in a situation eerily reminiscent of the oil price war that sent the markets crashing into negative territory for the first time ever.

But as the debt-riddled U.S. shale patch braces for a new reality of ‘Lower Forever’ with massive asset writeoffs amid a growing wave of bankruptcies, its equally distressed neighbor further north has resorted to a different trick: Mergers and Acquisitions.

Starved of vital capital by weary banks and shareholders, small- and mid-sized oil and gas companies in Canada are scrambling to find partners in a bid to become bigger and– hopefully–more solvent.

Meanwhile, bargain-hunting private equity firms have pounced on the opportunity, hoping to buy distressed assets for pennies on the dollar.

WTI Oil Price 30-Days Change

Source: Business Insider

Source: Visual Capitalist

Orphaned Businesses

After years of continuous underperformance and paltry returns following a six-year downturn by the sector, cheap credit for Canada’s oil and gas companies has dried up, forcing them to look for less conventional means to survive.

The Covid-19 crisis has only served to worsen the situation, with the S&P/TSX Capped Energy–Canada’s equivalent of the U.S.’ Energy Select Sector SPDR Fund (XLE)–down 46.8% in the year-to-date vs. -41.9% return by XLE.

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California’s Renewable Energy Conundrum

California’s Renewable Energy Conundrum

Amid a heatwave in the West, the largest U.S. solar state, California, is grappling with power issues and with keeping its electricity grid stable as demand exceeds supply. And in a looming renewable future, those power disruptions just might be a sign of things to come.

California energy consumers were warned of rolling outages as there is insufficient energy to meet the high demand during the heatwave, the California Independent System Operator (ISO) said over the weekend.

The warning to Californians about the outages and strained grid should serve as a warning for policymakers and system operators across the United States and elsewhere: a rush to boost renewable energy power generation should be coupled with – and even preceded by – more careful planning on how to ensure the reliability and stability of the power grid.

California’s Struggles With Power Reliability

In the case of California, where solar power supplies more than 20 percent of electricity as per the Solar Energy Industries Association (SEIA), the rolling outages this week were the worst such outages since the 2000-2001 energy crisis in the state.

Some blame the current power crisis on California’s aggressive renewable energy rollout and retirement of natural gas-powered plants. Others say that there is a way for the state to reconcile renewables with reliability, although this would not come in the near term and certainly not soon enough to help with the current power supply issues.

It would seem that California has put the renewable cart before the proverbial horse.

The blame game and the debate about how exactly to cope with reliability in a heavily renewable power grid highlight the fact that meeting clean energy goals and reducing emissions should be made only after careful planning on how to ensure reliable power supply to customers and how to prepare the grid for an increased share of solar and wind power.

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Saudi Arabia Refuses To Learn From Its Two Failed Oil Price Wars

Saudi Arabia Refuses To Learn From Its Two Failed Oil Price Wars

Having failed to achieve the slightest semblance of success in the two oil price wars that it started – the first running from 2014 to 2016, and the second running from the beginning of March to effectively the end of April this year – it might be assumed that key lessons might have been learned by the Saudis on the perils of engaging in such wars again. Judging from various statements last week, though, Saudi Arabia has learned nothing and may well launch exactly the same type of oil price war in exactly the same way as it has done twice before, inevitably losing again with exactly the same catastrophic effects on it and its fellow OPEC members. At the very heart of Saudi Arabia’s problem is the collective self-delusion of those at the top of its government regarding the Kingdom’s key figures relating to its oil industry that underpins the entire regime. These delusions are apparently not discouraged by any of the senior foreign advisers who make enormous fees and trading profits for their banks from Saudi Arabia’s various follies, most notably oil price wars. It is, in the truest sense of the phrase, a perfect example of ‘The Emperor’s New Clothes’, although in this case, it does not just pertain to Crown Prince Mohammed bin Salman (MbS) but to all of the senior figures connected to Saudi Arabia’s oil sector. One of the most obvious examples of this is the chief executive officer of Saudi Arabia’s flagship hydrocarbons company, Saudi Aramco (Aramco), Amin Nasser, who said last week – bewilderingly for those who know even a modicum about the global oil markets – that Aramco is to go ahead with plans to increase its maximum sustained capacity (MSC) to 13 million barrels per day (bpd) from 12.1 million bpd.

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Is The OPEC+ Alliance Coming To An End?

Is The OPEC+ Alliance Coming To An End?

It’s been a wild and bumpy ride for OPEC+ this year. The consortium, consisting of the traditional members of the Organization of the Petroleum Exporting Countries plus oil and gas superpower Russia, was largely responsible for the huge collapse in oil prices toward the end of April.  After a huge drop in oil demand corresponding with the devastating spread of the novel coronavirus around the world, an OPEC+ strategy meeting turned into a spat between Russia and Saudi Arabia which then turned into an all-out oil price war and massive global oil glut. The oil storage shortage created by this glut would go on to push the West Texas Intermediate crude benchmark into previously-unthinkable negative territory, closing out the day on April 30th at nearly $40 below zero per barrel.

OPEC+ has since reconciled and once again banded together to address the oil market crisis, making myriad pledges and severe production cuts to bolster crude oil prices. But many of the countries that made those pledges have fallen far short of their promises. “OPEC reached a historic deal to cut output by 9.7 million barrels per day in April, but a number of countries fell significantly short in meeting their production targets,” reports Markets Insider. 

But, just this week Iraq, OPEC’s second-biggest member just made a huge commitment to cut its oil production in the coming months. After a Thursday night conversation between Iraqi and Saudi leadership, Baghdad “made a commitment to cut oil production by 400,000 barrels per day in August and September,” a massive uptick from the nation’s relatively paltry July production cut of 11,000 barrels per day. 

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The Forgotten Conflict That Is Threatening Energy Markets

The Forgotten Conflict That Is Threatening Energy Markets

One of the world’s forgotten conflicts is now making headlines again. In the last week, the military conflict between Azerbaijan and Armenia has reignited, with the two nations having already been engaged in a military confrontation for decades. Nagorno Karabach, an Armenian enclave inside of Azerbaijan, is one of the main underlying factors for the conflict, but the growing rivalry between Russia and Turkey is also playing a part. More than 16 soldiers have been killed in the most recent round of fighting. Both sides are accusing each other of aggression and military action. The use of full scale armed forces and drones have been involved, killing several soldiers on both sides and reportedly an Azerbaijani general. The current outbreak of fighting has been the deadliest since the “April War” of 2016. While most clashes normally occur in and around the Armenian controlled Nagorno-Karabakh region, the current clashes are on the international border between Armenia and Azerbaijan. The international community is urging both sides to end the clashes.  The United States, European Union, and the OSCE Minsk Group are trying to defuse the situation. While it remains unclear what reignited the conflict, it seems that Armenia played a large role in increasing tensions. Armenia recently constructed a new military outpost, which could have given Armenian armed forces a tactical advantage and tempted Azerbaijan to strike. At the same time, Azerbaijan is being buoyed by strong support from Ankara and may have wanted to test Russia’s support for Armenia. Remarkably, Armenia has called upon the Russia-led Collective Security Treaty Organization (CSTO), of which Armenia is a member, to intervene. The CSTO’s response, from Yerevan’s point of view, however, is lacking. As of July 14, the CSTO has only called for a normalization of the situation on the border, not implying that it would provide military support for Armenia.

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Oil Price Crash Sparks A Wave Of Banking Mergers In The Middle East

Oil Price Crash Sparks A Wave Of Banking Mergers In The Middle East

The historic oil price crash and Covid-19 pandemic have left major producers of the commodity in a deep economic crisis. Dramatic production cuts by OPEC+ has exacerbated the situation by further lowering export inflows for economies that depend heavily on oil dollars. Some, such as the UAE, have tried to put on a brave face by touting the strength of their banking systems and claiming they can withstand shocks of any scale.

Unfortunately, a growing body of evidence suggests pretty much the opposite: A wave of banking mergers is sweeping through the Middle East as the sector scrambles to stay afloat amid slowing economic growth.

About $440 billion worth of deals are already on the table. That’s a remarkable feat for a region that has the lowest banking penetration anywhere on the globe. 

Interestingly, Saudi Arabia–guilty of initiating the oil price war with Russia that triggered the oil price crash–is well represented in the growing trend.

Source: World Bank

Giant mergers

Source: Bloomberg

#1 Saudi Arabia The National Commercial Bank, Saudi Arabia’s largest lender by assets, has lined up a $15.6 billion takeover bid for rival Samba Financial Group. The $15.6B tab represents a nearly 30% premium to Samba’s valuation before the deal was announced, while the potential deal will create a $210 billion (assets) behemoth.

The Saudi Arabian Monetary Authority, the Kingdom’s central bank, has unveiled nearly $27 billion in stimulus packages to support its flagging banking system suffering from years of weak private sector loan growth. The Kingdom’s oil and gas sector accounts for 50% of GDP and 70% of export earnings. The IMF has estimated Saudi Arabia’s fiscal breakeven sits at $76.1 per barrel, a far cry from the current ~$40/bbl.

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Huge Debt Payments Come At Worst Time Possible For Canadian Drillers

Huge Debt Payments Come At Worst Time Possible For Canadian Drillers

The collapse in oil prices has significantly deteriorated Canada’s oil companies’ finances and has made repaying their debt more challenging. Over the past decade, Canadian firms have borrowed money to survive the previous oil crisis of 2015-2016 and boost production post-crisis. But now the second price collapse in less than five years is leaving Canada’s oil patch, especially the smaller players, extremely vulnerable as debt maturities approach.   

This year, the oil crash coincides with the highest-ever annual debt maturities in the Canadian energy sector, according to Refinitiv data cited by Reuters. In 2020, oil and gas firms have to repay US$3.7 billion (C$5 billion) in debt maturities, up by 40 percent compared to last year.  

The debt pressure adds to the Canadian energy sector’s new predicament with low oil prices, low cash flows, and low overall demand for crude oil due to the coronavirus pandemic.

Some companies are set to default on debts, while others are looking at restructuring options and refinancing. Banks are not generally too keen to own energy assets. But the banks may be the ultimate judge of who can refinance, who can stay afloat, or who can go belly up in this crisis, legal and industry professionals told Reuters.

Some of Canada’s oil and gas firms had not overcome the previous crisis when this one hit.

According to Bank of Canada’s recent Financial System Review—2020, the COVID-19 crisis led to widespread financial distress in all sectors, but “Canada is also grappling with the plunge in global oil prices, which hit while many businesses in the energy sector were still recovering from the 2014–16 oil price shock.”

The energy sector has the most refinancing needs over the next six months, at US$4.43 billion (C$6 billion), and faces the most potential downgrades, according to Bank of Canada.

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The World’s Most Important Oil Consumers And Producers

The World’s Most Important Oil Consumers And Producers

Following last week’s release of the BP Statistical Review of World Energy 2020, I began to review and analyze the data. Today I take a deeper dive into the numbers on petroleum. Oil accounts for a third of the world’s energy consumption. That is the greatest share for any category of energy. In 2019, the world consumed a record 98.3 million barrels per day (BPD) of oil. This was nearly 1 million BPD higher than consumption in 2018, and marked the 10th consecutive record for global oil consumption.

Over the past 35 years, global oil consumption has risen by 39 million BPD, an average increase of 1.1 million BPD each year. Last year’s rise fell just short of that average.

In recent years, BP has begun to provide more granularity in the Review. In previous years, the oil consumption category included biofuels. Now, they have split biofuels into a separate category, so the consumption numbers above are for just oil and derivatives of natural gas and coal (e.g., synthetic oil).

The U.S. continues to lead all countries in the consumption of oil, but China has had the fastest consumption growth for several years. Below are the Top 10 global consumers of oil for 2019.

Related: Saudi Arabia Eyes Total Dominance In Oil And GasOil consumption fell in most developed countries and rose in most developing countries. A notable exception was Germany. Although consumption in OECD countries fell by 0.6% and consumption across Europe was down 0.3%, Germany bucked the trend and saw its consumption grow by 0.9%.

The biggest percentage increase in oil consumption was in Iran, which was the world’s 11th largest consumer. Demand there jumped by 10.0%. Iran was the only country in the world with a double-digit percentage increase in demand.

In contrast, double-digit decreases in oil demand were seen in Iceland (-12.7%), Venezuela (-11.6%), and Pakistan (-10.5%).

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Olduvai IV: Courage
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Olduvai II: Exodus
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