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Energy Industry On Edge As Geopolitical Tensions Rise

Libyan oil is still flowing - for now - but a stoppage is becoming increasingly likely as General Haftar’s advance on Tripoli hits a few snags thanks to militia paid for by the UN-backed Government of National Accord (GNA). What happens next in Libya has the potential to take more oil off the market, exciting speculators and driving oil prices higher. But the real war here is playing out between OPEC and American shale; and the latter is having a banner week, solidified by the biggest merger deal in years ...

Oil Story of the Week: The Mega-Merger

There’s nothing more exciting to oil watchers than a sudden surge in big deal-making transforming the shape of the market. Chevron’s plan to acquire Anadarko for $33 billion isn’t a big deal - it’s a huge deal. It is a deal that is far more significant than the $33 billion figure that has dominated the headlines. This has the potential to snowball far and wide as Chevron becomes one of the top four dogs and puts the other supermajors under pressure to respond.

And the timing is interesting, too: It comes amid a tough drive towards “environmentally responsible” investments that are threatening to drive massive flows of money out of the industry. But the massive Aramco bond sale and the Chevron deal are evidence that there is still plenty of money in the space and this won’t be the only big oil deal this year ...

The Permian is the hottest spot in the US shale patch right now, and expectations of more mergers and acquisitions are clearly not unreasonable. It’s becoming a relatively crowded space now, with everyone eager to snap up a piece of the low-cost underdeveloped basin that spans Texas and New Mexico.

Yet as the lowest-cost plots dry up, drillers are forced to settle for higher-cost deposits at a time in which there is little to no certainty where international prices will go next as OPEC and Russia fight to preserve their market shares in the face of growing U.S. production.

The significance of higher production costs in the context of an increasingly active M&A space becomes more pronounced when the debt factor is added. Most U.S. shale players have notoriously high levels of debt; so high in fact, many of them are burning through cash despite the higher WTI prices, still incapable of turning a profit. With that in mind, further consolidation seems a logical progression - as it always is in times when lower costs are essential.

Renewables Story of the Week: Energy Metals Set To Soar

New research shows incredibly tight supply for energy metals looming as early as 2022, based on demand for EVs, solar arrays, wind turbines and infrastructure. While the Paris Climate Agreement may have dampened fossil fuels opportunities, it has made up for that in new metals opportunities. Demand for energy metals is expected to outstrip current production by 2022, according to the UTS Institute for Sustainable Futures.

That means it’s time for investors to start seriously looking into metals, including cobalt, nickel, lithium, copper, aluminum, silver and rare earths, with supplies of cobalt and lithium being the biggest openings in terms of demand, and with EV batteries still driving the biggest demand.

One development that will rain on the cobalt supply parade is Glencore’s resumption of cobalt exports from its mine in the Democratic Republic of Congo (DRC), where it was ordered to halt operations in January when traces of uranium were discovered in its metal production.

Politics, Geopolitics & Conflict

- The situation on the ground in Libya is now showing signs of a much wider conflict with rival external powers, as anticipated. Haftar’s foreign supporters have had to show their cards in rejecting a UN call for a ceasefire in Tripoli. Libya’s interior minister (of the UN-backed GNA government) has ended security cooperation with France over this. Both the US and Russia have refused to support the UN’s call for a ceasefire. We will be closely monitoring the situation with regard to Italian Eni and French Total in Libya. They may have signed agreements with the NOC, but at the end of the day, Haftar controls the oil and has the support of both countries.

- Mass protests again renewed in the streets of Algeria, and there are signs that the military may be losing its patience with demonstrators calling for much more sweeping changes at the top.

- The United Conservative party won the vote in Alberta, promising greater pressure on British Columbia and Ottawa for the Trans Mountain pipeline expansion.

- Climate change protests are rocking London, with people deliberately getting themselves arrested for entering restricted areas and gluing themselves to doors in an attempt to force more decision action from politicians.

- Russia has declared its continued support for Venezuela and Cuba, with its Deputy Foreign Minister saying the U.S. sanctions against the two are illegal. This could spark off another round of trade war games as the EU threatens to sue the U.S. at the World Trade Organization (WTO).

- Not only has Russia declared its continued support for the Maduro regime, but reports also emerged Friday that Maduro is getting cash from oil sales out of the country with help from Russian state oil giant Rosneft, avoiding sanctions that prevent clients from buying oil from state-run PDVSA with dollars. The scheme was exposed by Reuters, and will ratchet up the conflict between Moscow and Washington significantly.

- Keep an eye on Saudi Arabia’s potential to make an unprecedented positive move towards Israel, which would be a major game-changer for the region and further isolate Iran, while also currying massive favor with Washington as the Crown Prince gradually succeeds in burying the Khashoggi affair.

Deals, Mergers & Acquisitions

- ConocoPhillips has agreed to sell its UK subsidiaries for nearly $2.7 billion to North Sea oil and gas producer Chrysaor E&P. Why is this significant? Because it’s the biggest deal of this nature outside of the U.S. for the year. Conoco will hang on to its London-based commercial trading business and its 40% interest in the Teesside oil terminal, which is also operations with gas from the North Sea.

- Saudi Aramco is negotiating the acquisition of a 25% stake in the refining and petrochemicals production businesses of India’s Reliance Industries. The deal could be worth between $10 and $15 billion as the Saudi company seeks to ensure markets for its future oil production. The acquisition is also part of a spending plan by Saudi Arabia for India that could be worth $100 billion over the next two years, as per a statement by Crown Prince Mohammed.

- Separately, the Saudi company acquired a 17% interest in South Korea’s Hyundai Oilbank, one of the country’s top refiners, for $1.2 billion. The deal between Aramco and the parent company of Oilbank, Hyundai Heavy Industries, also includes an option for the further acquisition of 2.9% in the refiner. Aramco will likely use the option as earlier this year it announced plans to invest $1.6 billion in the company.

- Toshiba is looking for buyers for its U.S. LNG business once again after Chinese ENN, which had agreed to buy the business dropped it due to failure to secure the necessary shareholder agreement and approval from U.S. authorities controlling foreign investments. The Japanese conglomerate hopes to finalize a sale by March next year.

- Sono, the German startup, is partnering with National Electric Vehicle Sweden to build the first series production solar-powered electric vehicle at Saab's former plant in Sweden. Production will launch next year, with an output of approximately 43,000 cars a year and a total of 260,000 vehicles over an eight-year period.

Tenders, Auctions & Contracts

- Equinor won exploration licenses for seven offshore blocks in Argentina as well as production licenses for five of these. Exxon, in partnership with Qatar Petroleum, got licenses for three of the blocks during the offshore tender. In total, Argentina received bids from 13 companies with the licenses awarded amounting to investments of $995 million. This is the first offshore licensing round for the South American country.

- Qatar Petroleum has invited three consortia to bid for the construction of new liquefaction trains at its offshore North Field, the largest gas deposit in the world. Qatar shares the North Field with Iran. The sultanate last year lifted a moratorium on new drilling at the North Field and announced a production boost plan as Australia began breathing down its neck and even overtook it in November as the world’s top LNG exporter.

- Brazil is holding an offshore auction in October for four blocks that make up part of the now notorious transfer-of-rights area in Brazil’s Santos basin, in the presalt zone. The blocks hold an estimated 10 billion barrels of oil. Participants in the auction will need to pay a total signing bonus of almost $27 billion.

- BP has closed a three-year framework agreement with an independent Chinese refiner for the supply of crude oil. Under the deal, Shandong Tianhong Chemicals will receive 8 million barrels of crude produced by the supermajor beginning this year.

Discovery & Development

- As Exxon cleans house in Guyana, it just announced its 13th oil discovery offshore in the Stabroek Block, which it is exploring with partner, Hess. That’s three discoveries in the same are for Exxon this year alone.

- Norway’s Equinor launched production at an offshore wind farm in the Baltic Sea that will supply power to Germany. The farm, Equinor’s fourth for the last seven years, is large enough to produce power for 400,000 households, with a capacity of 385 MW. The Norwegian oil and gas major operates the facility in partnership with German utility E.on.

- Mexico’s Petrobras plans to drill 20 wells this year as part of its push to reverse falling oil production. Most of the new wells will be drilled offshore, in shallow waters. The new government of Mexico earlier this year said it would inject $5 billion into the troubled company that had amassed a substantial debt in the last few years and struggled with falling production despite a string of auctions organized by the previous government. Now, auctions have been suspended while the current government reviews contracts with foreign oil and gas companies.

- Vermillion Energy, a Canadian company, plans to drill its first two exploration wells in a country not known for its natural resources but for its tourist locations: Croatia. Vermillion won four exploration licenses in Croatia in 2015. The company has some data confirming the presence of gas in the block that it will drill now but drilling will show whether or not it is enough for commercial production.

- BP will increase its capital expenditure on onshore operations in the United States to $2-2.5 billion this year, which is more than double on the U.S. onshore capex of the supermajor for 2018. BP recently finalized the acquisition of BHP’s U.S. shale operations, joining the hordes of shale devotees.

- More big numbers for the European wind sector have just come out: The industry invested $30.05 billion in new wind farms last year. That is similar to the previous year; however, due to cost reductions in offshore wind, this equates to the financing of a record 16.7GW of new wind capacity. The UK was the biggest investor, followed by Sweden. In total, the Europe invested $73 billion in the wind industry last year.

Company News

- Saipem reported this week a 28% increase in core profits, to $309 million despite acknowledging that the situation in the industry remained uncertain.

- Kinder Morgan reported a net profit of $556 million for the4 first quarter of the year, which was a 15% improvement on the year, resulting from higher natural gas transportation volumes.

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