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Has Bolton’s Firing Burst The Oil Price Bubble?

Drone

Bolton Out, Iran In? Oil Prices Think So

There’s a good reason oil prices tanked on Tuesday (temporarily) and then continued to do so on Wednesday. Bolton has always been a warmonger, while Trump is a leveraged negotiator who may bring things to the brink of war but is not gunning for a conflict; rather for leverage in a high-stakes game. With Bolton out, speculators flirted with the assumption that this means a potential deal in the works with Iran or at least some sort of detente.

Israeli media is all over this, referring to Bolton as “marginalized” and suggesting this signals and end to US sanctions on Iran - an outcome that does not suit Netanyahu who, on the tailwinds created by Bolton, has become emboldened to do things like annex part of the occupied West Bank and destroy any chance of a peace deal with the Palestinians.

Trump’s announcement that Bolton is out comes after the National Security Advisory on Sunday said sanctions on European firms over Iran were “possible”. It also brings into clearer view Trump’s statement to the effect that he would be open to meeting Iranian President Hassan Rouhani. Iran has played coy on this, saying the president would not meet with Trump until sanctions were lifted, but with regime-change Bolton out of the picture, Trump might just get his way. Bolton did what he was meant to do - raise tensions for leverage, but he has no further use.

Syrian Oil & Gas: Russia’s Gain, America’s Loss

Russia needs to strengthen its position in the Eastern Mediterranean - and it will use Syria to do it.

Syria’s oil and gas supplies, and pipeline access, were at the heart of a conflict that most think was simply about political differences with the Assad regime.

The primary interest here is in Syria’s offshore potential because it shares the Levant basin with Israel (and Lebanon), and this is where Israel struck two major gas discoveries that have put it on the energy power map: The Tamar and Leviathan gas fields. Those Israeli finds change the geopolitical game quite dramatically.

Now, Israel has much more negotiating leverage. It’s signed a $2B gas export contract with Egypt as of Q1 this year, which brings Egypt into the Israeli fold on global issues. It’s also planning a pipeline with Greece and Cyprus to move gas to Greece and onward to Europe. Right now, that pipeline project hasn’t proven itself to be economically feasible, but we’re keeping a close eye on it.

Where does that leave Russia? In great need of a better position in the Mediterranean, and its key inroad here is Syria.

The US has stepped up its military presence in the region using Cyprus, which Moscow views as highly confrontational.

Russia’s biggest move is to ensure that no one else is capable of supplying all the EU’s gas needs because Moscow cannot afford to lose its grip on this market share. This is what is behind Russia’s vehement support for Syria’s Assad regime - Syria is the key to maintaining its control of the Mediterranean and getting out in front of any new gas projects that threaten its EU market share. Eventually, Europe’s gas is going to come from the Mediterranean: The question now is who will control that gas.

That brings us squarely back to control of Syria, which most importantly includes the US, Russia, Iran and Turkey. The US nominally controls the Syrian Kurdish forces who in turn control the key onshore oilfields in the country’s northeast. This area accounts for nearly all of Syria’s onshore production and production potential. The US does not control this oil, though. The Syrian Kurds are pragmatic: They’ll sell it to anyone, including Assad, regardless of what the US wants.

But in January this year, Russia won all the rights (exclusively) to produce oil and gas in Syria in return for taking on the tens of billions of dollars in costs to get the industry up and running again. In order to make good on this deal, Russia is going to have to ‘handle’ the Syrian Kurds. And the US will leave Syria sanctions in place to make sure that the Russians can’t get too far with their rehabilitation efforts.

That technically leaves the Russians with offshore potential only. But offshore could be massively bigger than onshore, though it is likely to be a gas bonanza more than anything. Still, that’s precisely the kingmaker for Europe.

That is the background for a series of deals Russia signed with the Syrian Oil Ministry a week ago. Those deals concern exploration, drilling and production in Syria’s central and eastern region—not on Syrian Kurdish territory.

In the meantime, Russia is helping Iran skirt sanctions by transporting crude through ports in Crimea, bypassing the Suez Canal.

Global Oil & Gas Playbook

- Algerian Prime Minister Noureddine Bedoui is planning to step down to allow for elections later this year, which the military hopes will end months of high-level protests. Bedoui’s stepping down is a key demand of protesters. Oil will play heavily into this equation because crude has been propping up this state, led for long by a military-faction and a presidential faction, the latter which has recently lost power. Algeria’s oil and gas resources are depleting, and this chips away at the military clan’s ability to maintain order, with mass protest movements now calling many of the shots. Oil industry expansion isn’t moving forward, and budgeting assumes a price of oil that is not exactly today’s.

- Libya’s Government of National Accord’s (GNA) latest move against General Haftar is to try to squeeze his kerosene supplies in areas he controls. Where this gets tricky is with the National Oil Company, which is charged with restricting these supplies. The NOC must remain a neutral force in the conflict amid General Haftar’s offensive to take Tripoli. The NOC is in a very difficult position here, cooperating with the GNA in Tripoli, but also required to cooperate with Haftar because he’s the LNA strongman who controls the oilfields.

- Chevron appears to be making preliminary preparations for a potential exit from Venezuela as the country sinks further into chaos and as the US administration seeks to more vigorously levy sanctions on the socialist regime and anyone doing business with it. Chevron has updated some of its contracts with partners in Venezuela in such a way that would allow it to leave the country without penalty for early termination. The company’s waiver to operate in sanctioned Venezuela expires on October 25. Chevron has officially denied that it is planning on leaving the country but has reiterated that it will comply with the law in this regard.

- JPMorgan (NYSE: JPM) shares are up as media label it as the frontrunner for investment banks to take the lead in Aramco’s upcoming IPO, which appears to be moving along at a healthy pace now with the reshuffling of Saudi Arabia’s energy ministry and Aramco’s board. From Friday at $112.63, JPM’s stock rose to $116.23 by mid-day on Tuesday. Aramco is now said to be finalizing the entire list of banks that will manage the deal. Morgan Stanley, HSBC, and Goldman Sachs are all thought to be still in the running. More updates are expected in the coming days regarding which banks will have what roles in what is expected to be the world’s largest IPO.

- Guyana is booming, and the finds just keep coming. The latest find is expected to be announced as early as by Friday this week, but the details, for now, have not been revealed. Guyana is the number-one oil hotspot, with Exxon leading the charge. Its relatively fledgling oil industry has seen the country’s GDP double in less than a year and a half. The only thing left for Guyana to do now is to ensure its oil and gas policies are sufficient to manage the wealth of oil that will soon be coming out of the ground--as well as managing the foreign oil firms that have been rushing in.

- Equinor is currently assessing the hurricane-related damage to its Grand Bahama South Riding Point oil storage terminal, which has resulted in an oil leak of unspecified quantity. Equinor’s storage tanks there--some of which have no tops thanks to the storm--have the capacity to hold 6.75 million barrels of oil, although it only had 1.8 million barrels at the time of the hurricane. Equinor has said that the spill is not ongoing and that it will clean up the spill this week.

- Russia’s federal agency for subsoil use, Rosnedra, has determined that the Pobeda offshore oil field in the costly Arctic is only practical with oil prices at or above $130 to $140 per barrel. Rosneft scrapped its Arctic project in the Kara Sea after Exxon pulled out of the project in order to not run afoul with the US sanctions. That agreement was inked in 2011 when oil prices were above $100 per barrel, and was found to hold 125 million tons of oil. With oil prices trading at not even half that amount, this Arctic prospect is likely to remain undeveloped for a considerable amount of time.

- China’s CNPC is skipping oil loadings from Venezuela for a second month in a row, nervous due to the increased sanctions on Venezuela. China’s oil imports from Venezuela are still ongoing thanks to other intermediaries such as Rosneft--who apparently isn’t so concerned about the sanctions, but those loadings have fallen sharply to their lowest level in five years in July. China has been the largest importer of crude since the sanctions took effect.

- Putin greenlighted a new gas pipeline project that will deliver gas to China and has ordered construction to begin. The Power of Siberia pipeline--a separate project--will also start pumping later this year. Now, Gazprom will be working to deliver gas by way of Mongolia to Chinese buyers. The project, formerly known as the Altai pipeline, is now referred to as the western supply route. An agreement has already been reached with Mongolia. China’s appetite for gas has increased as it pushes to switch more consumers over from coal.

- Moldovan authorities announced that as of January next year, Moldovan-Russian joint-stock company Moldovagaz will get a discount of $10-15 for Russian gas. Moldovagaz’s existing gas supply and transit deal with Gazprom expires at the year’s end. Last year, Gazprom supplied 2.94 Bcm of Russian gas to Moldova.

- Spanish Repsol SA is in advanced talks to purchase $1 billion in Exxon’s deepwater assets in the Gulf of Mexico. The sale, if successful, would go a long way toward helping Exxon meet its $15 billion divestment goal as it focuses on US shale and Guyana assets, not to mention seeks cash to repurchase additional shares that had to be sold when times were tough. Repsol already has a presence in the Marcellus shale.

- GE is planning to sell millions of shares in Baker Hughes oil services company, relinquishing its majority stake. GE and affiliates will sell $250 million in stock back to Baker Hughes, and will also divest 105 million shares in an underwritten secondary offering. GE will go from 5 board members on Baker Hughes, to one. GE stock has lost 24% in the past year.

- Saudi Arabia has announced its plans to enrich uranium for use in generating nuclear power for the country--a country that is trying to back off domestic oil consumption in order to free more oil for exports, and longer-term, to diversify away from such a reliance on oil. Its nuclear plans, which it insists would be strictly for power generation and not for nuclear weapons manufacturing, will likely unnerve its regional rival Iran, who also has insisted it is well on its way toward developing nuclear technologies. Saudi Arabia has so far refused to sign a treaty that says it will not use the uranium for weapons, causing further concern.

- Billionaire investor John Paulson’s hedge fund has opposed Callon Petroleum Co’s proposed $3.2 billion acquisition of Carrizo Oil & Gas Inc. The fund said Callon's stock has lost 36% since the acquisition deal was announced and urged Callon to pursue selling itself.

- Qatar has shortlisted international oil firms for a stake in its expanded North Field LNG megaproject. The results of the invitation process are due to be announced early next year. It is, however, possible that Qatar Petroleum will, in the end, choose to go it alone unless some of the foreign majors offer up something of significant value. Those majors include French Total, Exxon, Shell, and Italian Eni.

- Australia’s Woodside is seeking to reduce its stakes in the Scarborough gas field at home and in Canada’s Kitimat LNG project. The company holds a 75% stake in the Scarborough gas field and a 50% stake in the Kitimat project. It is speculated that Saudi Aramco could be interested in Scarborough.

- Italy’s Snam is working on a bid for a stake in a $6 billion Rover natural gas pipeline across northern Ohio. If the deal goes through, it would be Snam’s first project in the US. The company is planning to buy a 33% stake owned by Dallas-based Energy Transfer LP. The rest is owned by two private equity groups: Energy & Minerals Group and the Blackstone Group.




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