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A Geopolitical Earthquake In The Middle East

Drone

This is now the ultimate game of leverage between Iran and the United States, with Saudi Arabia’s oil infrastructure being used by Tehran to win concessions from Washington.

There has been no call to war. The highest level this has reached (and keep in mind that the markets have already largely written off the incident) is for the US to announce a troop deployment to the Middle East, to defend Saudi Arabia and the UAE. That move in itself can be seen as a sign of weakness for these Gulf giants whose own alliance has been wrecked by Yemen and whose defense systems are now glaringly incapable of protecting strategic assets - even from the rogue Houthis (with, of course, Iranian aid).

Iran is now laying all of its cards on the table, offering to meet with Trump should the American president “do the right thing” and lift sanctions.

Back in Saudi Arabia, there is little time to consider the new geopolitical reality of a weakened Gulf Cooperation Council (GCC). They’re too busy wondering what this will all mean for OPEC leadership, future vulnerability of oil installations, and the Aramco IPO.

There is a certain amount of skepticism as to whether the Saudi oil leadership will be able to meet its promise of getting Abqaiq - the world’s largest oil processing facility - repaired and fully operational by the end of this month.

Recent announcements, such as a notice to Japan’s NXTG Nippon Oil & Energy (Japan’s biggest oil distributor) that exports to Tokyo would be downgraded from light grade to heavy and medium in October quite possibly suggests things are not on track to meet the completion date.

The Saudis have made a point to note that they realize they are largely alone now, with the UAE having abandoned them in Yemen, and Trump having failed to push the red button on Iran. This is a Saudi Arabia weakened to the point that it becomes clear that being the world’s oil giant is not enough.

Qatar, for one, is having a media parade in celebration of this sentiment. Having been the victim of a rather unsuccessful economic blockade by Saudi Arabia and its allies, as it turns out, natural gas giant Qatar is far better protected. Qatari-run media has also been quick to point out that Aramco employees have ostensibly been threatened with severe disciplinary actions for sharing any images or videos of Saudi oil facilities that are currently being repaired.

We are set for a dramatic geopolitical reshuffling: The Saudis are suddenly openly vulnerable, the Aramco IPO is looking far less attractive, and the US under Trump doesn’t fit the profile of a country willing to go to bat wholeheartedly for the losing side.

What does this mean for OPEC? More importantly, what does it mean for Saudi Arabia’s dominance of OPEC? That was already in question long before the attacks, when the Saudis had to bring on Russia in order to make an oil price output cut relevant. And in the event of a war with Iran, oil prices would soar through the roof and there would not be a thing OPEC could do about it (which is exactly what Iran is banking on).

For now, MBS’ attempt to save face is to make sure everyone knows that he is considering doubling the stake offering in the Aramco IPO, news of which was leaked on Tuesday via the Wall Street Journal. That would mean floating up to 10% of Aramco, rather than only 5%.

The Chinese oil coup in Iraq

With Iran having succeeded in taking low-cost advantage of a very convenient collection of events (days from the local listing of Aramco, days after the change of guard at the Saudi oil giant, days after the UAE withdrawal from Yemen, and days after the removal of Bolton), it’s also worth looking at a similarly strategic Chinese move on Iraqi oil.

Largely unnoticed by the media (outside of an Oilprice.com analyst with official sources from the region), the Chinese have landed a new drilling contract for the supergiant Majnoon field - which is shared with Iran, holding the Azadegan side. But this deal comes with a twist. On paper, and in public, it appears that an Iraqi company will play the key role in this drilling campaign. There are two contracts for this: One for 80 wells at $54 million with China’s Hilong Oil Service & Engineering Company, and a second for 43 wells at a cost of $255 million with Iraq Drilling Company. The numbers here are confusing, but that’s because this is a Chinese drill all the way, and the Iraqi inclusion is meant to appease Moqtada al-Sadr’s increasingly nationalist followers. China will do all of the work and finance all of the drilling.

What this means is that it sounds like a bad deal for China, unless you consider that China deals not in profit, but in political capital and influence. This is why the Chinese have managed to get a strong foothold in major natural resources sectors - they are willing to give the best deals to governments for contracts. In this case, Iraq won’t be paying Chinese Hilong anything. All of the financing will come from the Chinese government, including for Iraq Drilling. The payout for China is the foothold for its One Belt, One Road initiative which leads right through this region.

Global Oil & Gas Playbook

- China’s state-owned CNOOC has said that its Lingshui 17-2 nat gas project in the South China Sea - which is 100% CNOOC operated - is expected to produce first gas at end 2021, which will go a long way toward reducing China’s reliance on natural gas imports as its consumption of the gas continues to grow. This will be new territory for CNOOC as sole operator, unlike its other natural gas ventures with Big Oil as partners.

- South Sudan is preparing to host an international oil conference in October to attract investors following its first oil discovery since declaring its independence eight years ago. The question now is whether any major investors are willing to take on the most violent and corrupt new oil venue in the world for a discovery that amounted to 5.3 million barrels of recoverable oil. The government of South Sudan has high hopes of doubling production by late 2020. But the shadows of war are following this newly independent country around, rather too closely. Foreign oil companies are now being accused of taking advantage of the civil war to cut deals with government officials and even engineer massacres and mass displacements to free up terrain for oil exploration.

- Last week, the existence of parallel national oil companies in Libya reached a climax when General Haftar appointed a parallel board to the local, eastern unit of the National Oil Company (Brega Petroleum Marketing Co, BPMC) in a power move clearly designed to break way from the Tripoli-seated NOC. The US, UK, Germany, France, Italy, the UAE and Turkey have all come out in support of the Tripoli-based NOC. In other words, Haftar may have pushed his luck too far with this move, forcing a response from the US and France, particularly. The UAE, Turkish and Italian responses were expected, as all three have come out on the side of the Government of National Accord (GNA) against Haftar’s offensive on Tripoli. The head of the Libyan Presidential Council (on the GNA side) was in New York this week, lobbying for support from Washington and American oil companies for investment in Libya’s oil future.

- It’s worth keeping a close eye on events in Egypt right now, especially for investors in the country’s booming oil and gas sector. Protests going on right now in Cairo, Alexandria and elsewhere are not huge, but they are thousands-strong, and they are unprecedented under the El-Sisi regime. Protesters are calling for El-Sisi to step down. They’ve grown tired of austerity and weary of corruption. It could end up being a disruptive force for mega projects centered around the 43 crude oil discoveries and 18 natural gas discoveries made in 2018 alone.

- The US Treasury Department targeted four groups and four vessels on Tuesday for moving Venezuelan oil to Cuba in violation of sanctions. The department said Cuban entities including state-run Cubametales, have continued to receive oil shipments from Venezuela, in violation of sanctions. The sanctioned entities are Cyprus-based Caroil Transport Marine and three Panama-based groups: Trocana World, Tovase Development and Bluelane Overseas. The sanctions are rough for Cuba, which relies heavily on swapping services crude oil and other petroleum products sourced from PDVSA. Cuba has a limited ability to pay for crude oil and fuel at the going rate from alternate suppliers.

- French Total SA has signed a deal with the Congo to operate the Marine XX offshore permit, even though that same block had been promised by Congolese officials to American Noble Energy. French lobbying, however, appears to reigned victorious. The deal will be solidified once approved by the Congolese cabinet, which is expected in the coming weeks.

- South Korea’s KOGAS has signed a long-term energy contract with BP for the purchase of ~$9.6 billion worth of US LNG from 2025 to 2039. According to the deal, Korea will be importing an additional 1.58 million tons of LNG annually from BP between 2025 and 2039.

- Norwegian Equinor, Austrian OMV and Petoro have announced an oil discovery in the Sputnik exploration well in the Barents Sea, with recoverable resources estimated at 20-65 million barrels of oil (preliminary). Fluid samples contained light oil and water, and the task ahead is to determine commercial viability. The Sputnik well has proven oil in a large channel system.

- Also keep an eye right now on Apache, whose drillship has arrived in Suriname, right across the border from Exxon’s Hariga discovery in Guyana, for the anticipated start of first well drilling on Block 58 before the end of this month.

- While we will refrain from discussing the pending impeachment move by the Democrats against Trump, it is important to note the precarious position of Ukraine here, which is stuck uncomfortably between Russia and the United States - both of which are using it as a puppet. Putin lost Ukraine in 2014 when he lost the country’s Kremlin-backed president. To make up for that loss, he annexed Crimea to weaken Kiev. Trump is also holding Ukraine hostage to some extent, for election campaign purposes. Ukraine relies on the US for defense support against Russia. A delay in military aid to Ukraine over a desired investigation into Biden could risk US-Ukraine relations at a time when Russia controls Crimea and could threaten further incursions. This is clear to Ukraine, which may have no choice but to do Trump’s bidding.




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