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Global Energy Advisory April 29th 2016

Politics, Geopolitics & Conflict

Splitting the Libyan Spoils

Let’s get Libya out of the way first. It should not be necessary to mention this, and in general we find it inadvisable to comment on foreign policy issues brought up by the campaigning of Donald Trump; however, because the U.S. intelligence community has seen fit to respond, we will note only that the Islamic State (ISIS) is not known to be selling Libyan oil. It has not made it that far. There is also the question of what ISIS would actually do with a major oilfield. It can manage small ones, but does not have the capacity to run a big one. Right now, their tactic is to threaten the big fields in order to use that as leverage to throw a wrench in unity government negotiations.

Moving on to what’s really going on in Libya, control of the country’s oil reserves is indeed in question. ISIS is not the biggest threat in this respect. The eastern “government” in Tobruk is using its own branch of the Libyan National Oil Company (of Benghazi) to attempt to export oil unilaterally. It has in fact sent out its first cargo, bound for Malta; however, Malta is not allowing the cargo to dock and the UN has blacklisted the tanker carrying it. It’s since been ordered back to Libya, but it’s not going to offload its precious cargo without direct orders from the UN. The other Libyan government (the second of three) based in and controlling the capital, Tripoli, had vowed to block this export move. So far, it’s winning this phase of the battle. Whoever controls Libya’s oil, controls the government because its revenues are almost entirely dependent on oil.

Right now, Libya has three governments and two National Oil Companies and two Central Banks—one each in Tripoli and Tobruk. That leaves the third government—the UN-backed Government of National Accord (GNA)—in a tight spot because it needs the support of both in reality, for any stability to emerge.

On 30 March, the GNA’s UN-backed Prime Minister-designate, Serraj, showed up in Tripoli feeling a bit overconfident after the US and a handful of European countries recognized it as the legitimate government of Libya. They did this without any endorsement from the eastern government based in Tobruk, and without any support from the military factions of Libya. So basically, the GNA and the UN tried to move into Tripoli without any real backing, but they have made some headway (what price they paid for that, we’re not sure). On 25 April, the GNA took over the Foreign Ministry in Tripoli (and seven other ministries). In the meantime, the government in Tobruk has still not endorsed a GNA cabinet. So Tobruk’s move to export oil was immediately thwarted. The GNA, then, has largely won over the Central Bank and the NOC in Tripoli, and somehow managed to get past the Islamist-leaning government in Tripoli along the way, but the previously favored government in the east (the internationally recognized one) is playing
hard to get and its own NOC is trying to export oil alone.

Where the media-reading public probably gets confused is in the alliances here, which are anything but black and white and everything about divvying up the spoils. Readers tend to assume that the eastern NOC is the ‘’good guy” in this scenario because, after all, it was the eastern Tobruk-based government that was “internationally recognized”, while Tripoli was being controlled by an Islamist-leaning government, which everyone in the West immediately associates with the “enemy” in a knee-jerk reaction. However, it with the NOCs and the Central Banks that it gets trickier. The Tripoli-based NOC and Central Bank have remained recognized as the legitimate branches of these institutions despite Libya Dawn’s control over the capital city, which did not extend fully into the NOC or Central Bank. Tobruk overstepped by trying to make an independent go at oil exports through a parallel NOC.

Croatia Back in the Syrian Oil Spotlight

Croatian media recently reported that the Syrian government has withdrawn its decision to grant oil fields owned by Croatian state-run INA to Chinese and Russian oil companies, after the intervention of former Croatian President Stjepan Mesic.

Vecernji List cited sources saying that Mesic used his previously established private relations with Syrian President Bashar al-Assad to save INA’s Syrian assets, as the Syrian government was against the company’s return to oil fields. Assad, of course, had good reason to want the Croats out of the picture—they allowed their country to be used as a transport point for weapons shipments to Syrian rebels early on in the conflict. A large amount of weapons was sent to Syrian rebels from Croatia between 2010 and 2013. The Saudis are believed to have financed the bulk of these weapons shipments through Croatia.

While Mesic seems to have temporarily won INA a stay of execution with regard to its Syrian assets, their trouble isn’t over. In 2013, Croatia declared that it recognized the Syrian National Council as the only legitimate representatives of the Syrian people. The coalition’s main aim is to replace Assad.

But Mesic apparently has special relations with Assad, and while he was president from 2000 to 2010, he visited Syria several times, and Assad also visited Croatia. The two also held several one-on-one meetings since the Syrian uprising in 2011. Mesic served as the mediator between Assad and the U.S. and EU. He also offered to mediate contacts with Syria and to host peace talks in his country.

INA’s Syrian oilfield investments are worth an estimated $1 billion. The assets include six oil, natural gas and condensate fields: Jihar, Palmyra, al Mahr, Jazal, Mustadira and Mazrur. INA began exploration activities in 1998 and concluded them in 2007, but it abandoned operations in 2012. It’s an issue now because Assad’s force recently took over these fields from the Islamic State (ISIS). Now, INA is hoping to get back into the game, but Assad isn’t all that pleased with Croatia’s conflict-time alliances and its role in arming Syrian rebels.

Back in 2011, INA was under the pressure of its majority shareholder to divest its concessions in Syria. The company is a subsidiary of Hungarian MOL Group, which owns 47.16 percent of INA, while the Croatian government owns 44.84 percent. The rest of the shares are owned by private investors.

At the time, Croatian media speculated that MOL wanted to sell INA's Syrian oilfields to Russian partner Rosneft in order to weaken the Croatian company.

The truth is that the two countries had a series of disputes since MOL secured management control of INA in 2009 and the Croatian government filed several lawsuits over misuse of INA’s management rights. In 2012, Croatia found its former prime minister, Ivo Sanader, guilty of accepting a bribe in 2008 from MOL to grant it a dominant position in INA, without having to buy a majority stake. For its part, Hungary didn’t investigate the bribery case, while the Croatian government sued MOL’s CEO for bribery but a Hungarian court rejected the case.

Yemen Government Retakes Export Terminal

Yemeni government forces say they have retaken the country's largest oil export terminal, Ash Shihr, from al-Qaeda on the Arabian Peninsula (AQAP). The terminal, which used to export 80 percent of Yemen's oil reserves, is one of a number of southern Yemen locations seized by AQAP since last year. The group tried to export some two million barrels of oil stored there but was unsuccessful.

Discovery & Development

• By far the biggest discovery news of this week brings us to Iran, which has announced a new shale find that could eventually add significant tension to the geopolitical playing field, and the Saudis will certainly find it unsettling. Iran says it has discovered new shale oil reserves in Lorestan Province, and it’s nearly half through with studying the reserves, but is already calling the find ‘’significant’’. It’s not Iran’s first shale find, and Tehran has clearly been sitting on it for a while, keeping it fairly quiet and reviving the news for maximum effect. It’s also made a fair amount of progress in studying the extent of the find, which is another reason for the news. This particularly discovery is in the Garoo formation in Lorestan Province, and the authorities suggest it is the largest shale find yet in Iran, with other discoveries made earlier in to other provinces: Kerman and Semnan. The overriding sentiment is that this is something Iran will hold onto for the future because it can’t produce this shale at current market prices. Still, it’s a future threat to hold over the Saudis. For now, it’s got plenty of conventional resources to ramp up production of.

Deals, Mergers & Acquisitions

• Husky Energy has agreed to sell a partial interest in Canadian midstream energy assets to two Hong Kong-based firms for $1.35 billion in cash. Power Asset Holding and Cheung Kong Infrastructure will acquire a 65 percent stake in assets located in Alberta and Saskatchewan. Husky Energy will retain the remainder. The assets consist of around 1,900 kilometers of pipeline and 4.1 million barrels of oil storage capacity.

• Wood Group has signed a $500-million contract with BP to service its offshore Azerbaijan project. The deal covers eight offshore platforms for BP and includes the option of two, two-year extensions. Last October, BP awarded Wood Group project to provide subsea engineering services to these eight platforms, as well as to BP’s existing subsea infrastructure in the Gulf of Mexico and on the UK and Norwegian continental shelves.

• Suncor will acquire a 5% stake in Syncrude Canada joint venture from Murphy Oil for approximately US$743 million. This brings Suncor’s stake in the Alberta joint venture to 53.74%. Earlier, Suncor made a $4.5-billion acquisition of Canadian Oil Sands, which owns a 36.74% interest in the Syncrude project. The deal should boost Suncor’s production capacity by 17,500 bpd. This is light sweet synthetic crude.

Regulatory Updates

• Rio de Janeiro state in Brazil is raising oil and gas taxes to close a budget gap that has led to closures of schools and hospitals and delayed pensions and public salaries. Last year, the state legislature passed an environmental levy that would allow the government to collect 77 cents per barrel. The method of collection was published on 28 April. This will make it more expensive for the oil industry to develop its offshore resources, and adds insult to injury from the industry’s perspective, as it is already reeling from the depressed oil prices. Rio de Janeiro produces two-thirds of Brazil’s entire oil output and around 40% of its natural gas.

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