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A New War In Yemen


The New War in Yemen Isn’t About Iran

Separatists backed by the UAE have taken control of Yemen’s port of Aden, all government military camps and the presidential palace. The port of Aden, and parts of the port town have been taken over by the Southern Transitional Council (STC), a militia force that is supported by the UAE and which is seeking the secession of the south.

Why is Aden important? This port town is the temporary seat of the international recognized Hadi government. Hadi was ousted from the Yemeni capital, Sana’a, in 2014 by the Iranian-backed Houthis. But Hadi’s control over the town is far from complete, with clashes between his government’s forces and UAE-backed separatists earlier this week. This weekend’s decisive battle had nothing to do with the Houthis, instead, it was yet another front in the Yemen conflict. And this element of the Yemen conflict is far from over. Hadi himself is hiding out in Saudi Arabia, and both he and Riyadh played out the battle for Aden in total silence. This development also comes shortly after the UAE announced it would begin withdrawing troops from Yemen.

This all gets tricky when Saudi Arabia and the UAE are allies in the fight against the Iranian-backed Houthis. The problem is that Aden is really UAE territory, not Saudi territory. The UAE is the strongest force in the south, which is where the separatists are strong. All share a common enemy in the form of the Houthi rebels, but the UAE does not necessarily stand with the Yemeni government, based now primarily in Saudi Arabia. And the Saudis will remain silent on this because the UAE has some 90,000 militiamen backing it up in the south of Yemen. Basically, the Saudis let this happen and had little choice in the matter. While the media has suggested this second front could lead to a civil war within a civil war, that is not likely to happen, but there is some diplomatic triage going on now.

The Saudis are concerned with fighting a proxy war against Iran in Yemen, and with securing their southern border with Yemen. The UAE is less concerned about fighting a proxy war with Iran, which is exactly why it announced a withdrawal. What the UAE is concerned with is securing the south (even if its separatist) for access to major trade routes because this is where Africa links to Asia, and Aden is the key. The Yemen conflict is extraneous and expensive if it’s all about a proxy war with Iran. The UAE is far more pragmatic than the Saudis in this respect.

It’s important to understand that the UAE Crown Prince Mohammed bin Zayed Al Nahyan (MBZ) is the mentor of Saudi Crown Prince MBS. MBS was essentially created, or fine-tuned, by MBZ. Nonetheless, even MBZ at times fears the loose-cannon nature of MBS. Yesterday, the UAE Crown Prince traveled to Riyadh to discuss events at Aden, and what comes out of that will, in part, determine what happens next in the Middle East, starting in Yemen. The UAE is withdrawing, yet Trump recently vetoed a congressional resolution to end US involvement in this conflict. The UAE is shifting strategy. Washington will now have to choose between the Saudi strategy and the UAE strategy.

The (Weakened) Aramco IPO

As the world is well aware by now, the Saudi Aramco IPO is back on, as the Saudi Crown Prince (MBS) is determined to see it through. It’s one of a number of vanity projects, and specifically one that is meant to help fund MBS’ Vision 2030 dreams. From an investment perspective, we still don’t like it: Aramco has been weakened considerably, partly due to the growing power of US production and partly due to financial moves by the Crown Prince that have weakened the state-run oil company.

MBS is still hoping for a $2-trillion valuation, but his advisors and others seem to think that $1.5 trillion is more realistic. They would be too afraid to strike lower than that. There have already been media reports citing anonymous sources and rumors related to the Aramco board meeting that took place on Friday. We will be bringing more on this from sources on the ground next week, but in the meantime, consider the import/export numbers here:

The U.S. is importing less crude from Aramco this year. To wit: Aramco exported almost one-third less so far this year than it did for the same period of time in 2018. If you break it down by consecutive month, the picture emerges of a continual decrease in Aramco crude exports to the U.S., which also coincides with consistent increases in U.S. production. The Saudis have been trying to keep Aramco’s crude out of the US market, but what’s happened is that Russia has just taken its place and scooped up that market share. What’s the message? US crude inventories are controlled by US refiners. Aramco isn’t as powerful as Saudi Arabia hoped it might be.

An Aramco IPO is for a state-run oil company that may have been separated from the “state” to an extent that is getting closer to what investors want to see, but it is, nonetheless, a much less powerful apparatus today. This all ties back to its valuation in the end.

Global Oil & Gas Playbook

- Argentinian president Macri suffered a surprise defeat in the primaries on Sunday - largely thought of as a poll - painting a bleak picture of his chances at securing the election in October. While polling showed market-friendly Macri as up, the reality was different, with Alberto Fernandez, shadowed by Kirchner as his VP running mate, securing almost half of the votes. This was Kirchner’s Trojan Horse, and it worked. The result will cause rifts in Argentina’s energy industry which relies on large, foreign companies to tap Argentina’s Vaca Muerta shale play. Energy giants will likely hold off major investments until the political future becomes more clear, which may not be until December. The fear is that Fernandez (a Kircher puppet) would reinstate the noose of currency, price, trade, and capital controls that Macri had lifted during his term that had allowed the industry to prosper. The Argentinian flagship index, the S&P Merval, fell a massive 48% on Monday in what was one of the largest price slides ever, on any of the world’s stock exchanges.

- The Southern Iraq Integrated Project is suddenly the stuff of big oil rumors, prompting Baghdad to deny reports that it’s reached a deal with BP and Italian Eni, pushing Exxon out of the project. The massive $53-billion project involves the rehabilitation of a number of oil fields, expansion of export, transportation and storage capabilities. Late last week, Reuters had cited Iraqi oil sources as saying that BP and Eni would build two seabed oil pipelines for exports from southern Iraq through the Gulf. Unnamed sources said that Exxon had tried to play hardball and left Baghdad with no choice but to look for alternative partners. But officially, Baghdad insists that talks with Exxon are still on track.

- At the same time, it looks like Exxon may be ready to get out of the UK’s North Sea after being there for half a century to focus more on its US shale plays. Exxon is just one of many oil companies that have exited the North Sea. Exxon’s departure from the North Sea, if it materializes, follows a retreat from its Norwegian assets as well.

- A bomb has damaged a section of Colombia’s Cano Limon pipeline, operated by Ecopetrol. The pipeline carries crude from the Cano Limon field, which is operated by Occidental Petroleum. More than 80 bombings kept this same pipeline offline for almost all of last year. So far this year, there have been 26 attacks on this pipeline, blamed on the National Liberation Army (ELN) rebel group. Ecopetrol’s Q2 net profit fell 0.9%from Q2 2018, to $1.03 billion on lower product prices. Net profit for H1 2019, however, was up 1.6% from H1 2018.

- Zimbabwe authorities have increased gas prices again, for the second time in seven days. Petrol prices will now be $9.09 per liter, up from $9.01, while one liter of diesel will now be $9.27, up from $9.06. Zimbabwe had hiked its gasoline prices by 26% on August 4th after raising the fuel import tax. Roiling from an economic crisis, Zimbabwe is experiencing fuel and bread shortages, with companies shuttering for lack of imported raw materials.

- Armenia has invited Iranian President Hassan Rouhani to the high-profile summit of the Eurasian Economic Union (EAEU) to be held in early October. The EAEU will be somewhat of a lifeline for Iran. Last month, Iran ratified a parliamentary bill to launch a free trade zone with EAEU members, which include Russia, Belarus, Kazakhstan, Armenia and Kyrgyzstan. The purpose of the bill is to help Iran increase non-oil export revenues amid sanctions imposed by the US.

- The $30 billion Canada LNG project, whose shareholders include Shell, Petronas, Mitsubishi Corp, PetroChina, and Kogas, is set to ship its first LNG from British Columbia to Asia as soon as 2024. The project is important to Canada, who has relied largely on selling its LNG to the US. The United States has ramped up its LNG production and is set to soon become a net energy exporter. It now looks to the Asian markets to displace LNG demand from the United States, which began declining last year. Asia, too, will enjoy the new relationship with Canada, as security issues in the Middle East threaten energy supplies that must traverse through the area on the way to Asia.

- Using ship-to-ship transfers, Venezuela is offloading Russian oil off the coast of Malta, and then re-loading it onto other ships to continue towards Venezuela in an effort to circumvent US sanctions. The area, known as Hurd’s Bank, is offshore Malta, and as such is not subject to the laws of Malta. Malta itself has been embroiled in corruption and controversy since Maltese journalist Daphne Caruana Galizia was murdered with a car bomb in 2017. The stopping point of Hurd’s Bank has long been used for smugglers, including Libyan fuel smuggling. With Venezuela’s oil refineries now almost completely shuttered, it is thirsty for imported fuel, which it cannot get under the sanctions.

- Iraq offered public assurances that the Arab states could successfully secure the Persian Gulf and the Strait of Hormuz amid downed drones, oil tanker explosions, and tanker seizures witnessed in recent months. Iraq seemed particularly loathe to have Israel join the US/UK coalition that has promised to secure tanker traffic in the area, but shunned help from any outsiders on the grounds that Western assistance would increase tensions further. Iraq’s pushback is not surprising given the close ties between Iraq and Iran, including Iraq’s purchases gas from Iran for its power grid that it is allowed to buy thanks to the sanction waiver Iraq obtained to do so. The UK sent its HMS Kent warship to the Gulf on Monday as the US and UK unite to increase maritime security in the Gulf.

- Ship tracking service Tankertrackers.com has determined that two Lebanese companies are illegally shipping Iranian oil to Syria, using ship to ship transfers to conceal their true intent, as well as ensuring that its transponders were turned off to shroud their location.

- Perth-based Theia Energy may have found as much as 57 billion barrels of unconventional oil (possibly 6 billion which is estimated to be recoverable) that will need to be fracked, according to documents seen on Theia’s website. Some of the documentation has been removed. The find is huge and could end up being Australia’s biggest oil project ever. The project could require $77 billion in capital investments and could generate $55 billion in royalties to the government.

- Israel’s Delek Group is looking to raise up to $300 million ahead of its planned listing of Ithaca Energy. In May, Ithaca agreed to buy Chevron North Sea Limited from US energy giant Chevron for $2 billion. Delek Group's share price has fallen by about 25% in the past three months.

- Iran has spoken out against the Trans-Caspian gas pipeline that would go through the Caspian Sea, citing ecological concerns. Iran has offered to let its neighbors use its own infrastructure to move gas to their customers. Iran, however, may have an ulterior motive for opposing its project - it would like the pipeline to go through Iran. Russia, the other holdout in signing the agreement on the Trans-Caspian, opposes the pipeline as well, because Turkmen gas would then go to Europe, which would cut into Russia’s market share.

- India's Reliance Industries is set to sell a 20% stake in its oil to chemicals business to Saudi Aramco for $15 billion--an agreement that would see 500,000 barrels of Saudi crude sold to Reliance every day. For India, this means whittling down its massive debt load. For the Kingdom, this means capturing a forever market for its crude oil in the huge Indian market as it expands into the downstream segment.

- Portugal is struggling under the threat of a major gas shortage as thousands of fuel tanker drivers began a strike on Monday. The government has ordered the truckers back to work, and is rationing gas for drivers, imposing a strict 6.6-gallon limit to all drivers. The gas shortage couldn’t be more poorly timed as Portugal’s tourism season is in full swing, and a fuel shortage could ground planes. The strike also takes place less than two months before a general election scheduled for early October.

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