- High-level US official
- Former Aramco executive
- American businessman in Saudi Arabia
- 3 prominent Indian businessmen in UAE
NOPEC Isn’t Going to Happen
A bipartisan measure called the “No Oil Producing and Exporting Cartels Act” was approved by a congressional committee last week. It sounds ominous, but it does not have teeth. It basically removes the sovereign immunity protection of OPEC countries, leaving it open to civil suits alleging antitrust violations. While there is some momentum behind the law, it still has the potential to die before it reaches a full vote in Congress. Basically, the law would allow the US government to sue OPEC nations for improperly controlling prices through oligopolistic practices.
While NOPEC has been a threat tossed around by Trump and meant to lend the appearance of power against the Saudis, our high-level sources say that officials in the Trump administration are leaning toward fighting any attempt to put this law into place.
While Trump has been critical of OPEC, advisers from the State Department and elsewhere in his government are cautioning that allowing such a law to go through could upend Middle East peace talks led by Jared Kushner, as well as relations with Persian Gulf allies like Saudi Arabia. Diplomats on the ground in the Gulf have told us this is a done deal already, and is not going to happen.
Trump hasn't weighed in with a final decision, but our sources say it will be ‘no to NOPEC’, and the likelihood is that he will keep using the lack of a final decision as leverage to have over the heads of Gulf countries to keep prices low.
Aramco Pushes Ahead in Nonsense Deal for IPO Cash
Aramco’s board is meeting this week to approve an international bond to fund the acquisition of a 70% stake in petrochemicals major Sabic. The acquisition is part of efforts to make Aramco more attractive for foreign investors when the time comes to list. The latest update from Energy Minister Khalid Al-Falih is that the IPO will take place in 2021. The bond, Aramco’s first on the international market, also raised questions: such a bond will require the notoriously opaque company to disclose a lot of financial details to whet investors’ appetite to participate.
Behind the scenes, it’s important for investors to understand that Aramco is rather toxic right now. And it was the Saudi ‘deep state’ (yes, there is something deeper than MBS, which is why he is currently and increasingly paranoid about his life) that managed to run this IPO off track. This is part of the power struggle, definitively. So this is where Sabic comes into play—and having Aramco buy Sabic shares from PIF, using debt. It’s a last ditch effort to raise the money from somewhere even when it doesn’t make sense: Aramco has its own conflicting strategy for chemicals.
This can all circle back to the idea of NOPEC and why it is such good leverage even if Trump has no intention of going through with it. While the Saudis can always keep borrowing, the real question is whether the Kingdom is actually solvent. The sovereign wealth fund’s (PIF’s) billions are largely publicly traded stocks—much of which they can’t sell without wreaking havoc on the local market. Is that solvency? It’s a gray area, but it’s important for investors to understand that PIF is, for all intents and purposes, a warehouse of shares that can’t be sold.
Indian Businessmen Have No Qualms About Busting Sanctions
US Secretary of State Mike Pompeo has urged India to stop buying crude oil from Venezuela. This message is likely to fall on deaf ears. With that in mind, Trump has asked Congress to remove India from the list of preferential trade partners, which could start another trade conflict.
The biggest risk for hedge funds right now is betting on sanctions busters. India is one of the riskiest of those emerging markets that are considered otherwise a good bet. Nor is it just the state of India that the US sanctions regime needs to worry about. Prominent Indian businessmen in Dubai have told us that the global Indian business community does not view US sanctions against foreign countries as justifiable, and they will bust sanctions if they can see an avenue for doing so that does not result in getting caught. This makes things tricky for investors/hedge funds. What hedge funds should be looking out for right now is the potential for individuals and their associated companies to be placed on the BIS Entities List, which results in denials of licensing for imports/exports, and which can destroy a business empire.
Global Oil & Gas Playbook
Norway’s sovereign wealth fund will divest from its interests in upstream oil and gas after the government recommended the move first proposed in 2017. This means stakes worth billions of dollars will be sold—news that sent the stocks of energy majors diving. But there is a favorable catch for the integrated majors.
The government of Norway advised only a partial divestment from the oil and gas industry: the sovereign wealth fund will sell its holdings in pure-play production companies but keep its stakes in integrated companies such as BP, Shell, and Chevron.
It’s a pragmatic decision and has nothing to do with environmentalism. The bottom line is that Norway has become too reliant on the returns from its oil and gas interests, as evidenced during the 2014 price crisis.
To reduce the likelihood of a repeat of the situation, the world’s largest sovereign wealth fund, worth about $1 trillion, needed to reduce its exposure to an industry where volatility had always been considerable but was only becoming more intense post-2014.
Some have tried riding the environmental wave, arguing the decision to divest was motivated by environmental concern as well as financial reasons but the official line remains strictly focused on financial security rather than any sustainability concerns as evidenced by the fact the fund will keep its holdings in the supermajors.
In other words, this is Norway moving with the times, and getting out in front of the big fight to come that has oil majors who aren’t jumping on the renewables bandwagon scrambling for another foothold.
Deals, Mergers & Acquisitions
- French Total has bought a 10% direct stake in Novatek’s Arctic LNG-2 project, which will bring its total stake in it, including its 19.4% holding in Novatek, to 21.6%. The French supermajor also has an option to buy an additional portion in the $21-billion project if the Russian operator decides to reduce its 60% interest in it.
Tenders, Auctions & Contracts
- Pembina Pipeline Corp. the company that plans to build the Jordan Cove LNG plant in Oregon said it has secured non-binding commitments exceeding the planned facility’s annual capacity by about 3.5 million tons of the liquefied fuel. However, the state authorities’ decision on whether to grant Pembina a construction license for Jordan Cove has been delayed by six months after the Department of State Lands was drowned in comments. These, according to the regulator, were between 49,000 and 57,000 but it did not say which ones were more, those in favor or those in opposition to the project.
- Sinopec, China’s largest refiner, could sign a 20-yer LNG delivery contract with U.S. Cheniere Energy but only if Washington and Beijing finalize their trade deal. For now, expectations are optimistic but last-minute surprises are always an option. Cheniere is the largest exporter of LNG from the United States and China is a key market for all producers of the fuel.
- Shell has signed two contracts in Colombia for the development of two offshore blocks in the Caribbean. Initial investments in the two projects would be to the tune of $100 million and the total spend could reach $650 million if exploration yields promising results.
- Baker Hughes and McDermott scored offshore field development contracts from BP for a natural gas project in Mauritania. The Greater Tortue Ahmeyim LNG project is a priority one for BP, which will feature a floating production and storage facility with an annual capacity of 2.5 million tons of liquefied gas. The resources of the field are estimated at 15 trillion cu ft. First production is slated for 2022.
- Ecuador’s auction of “intracampos” oil blocs this week has received bids from six oil companies and may fall short of the hoped-for $1 billion in investment—possibly because the deals come with a provision that gives Ecuador 60% of production. The blocs are estimated to contain around 850 million barrels of oil. Bidders included Russian Zarubezhneft, Uruguayan Petrobell, Colombian Gran Tierra, Colombian-Peruvian Frontera Geopark and American Flamingo Operating, and a domestic company, Petrolamerec.
Discovery & Development
- Saudi Arabia’s Aramco announced a potentially substantial natural gas discovery in the Red Sea, without, however, divulging any details as to how much gas it contains. The company said it will now step up its exploration efforts in the area after it completes a feasibility study on the discovery. Gas has gained more prominence on the Saudi energy agenda lately with Aramco looking into gas and LNG acquisition opportunities abroad as well as new investment projects at home as it seeks to boost the portion of natural gas in its energy mix.
- Malaysia’s Petronas plans to increase its exploration budget this year focusing particularly on natural gas and LNG to reduce its exposure to super volatile oil prices. Petronas’ total budget this year could be around $12.22 billion and a solid portion of it will go into the LNG Canada project where Petronas has partnered with Shell, PetroChina, Kogas, and Mitsubishi. The project will cost $30 billion.
- Colombia’s Ecopetrol, the state oil company, plans to spend $500 million on fracking over the next three years despite vocal opposition from environmentalists and local communities. Plans are to drill 20 wells and frack them to tap its unconventional oil resources. The sum is part of the company’s $12-15-billion budget for the period.
- Argentinian plans to boost natural gas output and supply have been furthered with $1.8 billion in new pipeline construction contracts that could be signed by September and are aimed at getting gas from the shale heartland—Vaca Muerta—to Buenos Aires.
- Iran is gearing up to launch four new phases at its giant South Pars gas field (the biggest in the world). This should, in part, be viewed as PR because there are no details on launch phase dates or expected production capacity increases. Currently, Iranian authorities claim that South Pars production is up to 610 million cubic meters per day.
- Shell and HES International will partially restart a Germany oil refinery that has been shuttered since 2011. Investors should be looking closely at new rules by the International Maritime Organization (IMO) that mandate a reduction in sulfur content in shipping fuel from 3.5% to 0.5% beginning next year. This will prove to be a major change in oil markets for traders. And the Shell-HES deal represents a foothold on this lower-sulfur-content fuel. This refinery had a capacity of 260,000 bpd when it was shuttered in 2011. Our understanding is that Shell will be the client for the fuel.
Politics, Geopolitics & Conflict
- Israel’s Prime Minister Benjamin Netanyahu last week suggested the Israeli navy could be used to stop Iran from “smuggling” crude oil abroad despite US sanctions.
- While France and Italy have been the key European players vying for control of oil-rich Libya, Germany is now signaling that it may like to get back into the game, though we are unaware of any direct expressions of interest by specific oil and gas companies yet. But this also comes as General Haftar (Libyan National Army) closes in on Sirte with his forces. Sirte is controlled by the Tripoli-based Government of National Accord (GNA), which is the (for now) internationally recognized government—but it is not likely to last much long. The GNA has declared a state of emergency in Sirte as Haftar approaches. They are calling this is declaration of war. (This will be the focus of our HUMINT next week).
- The effect that isolating Iran with sanctions and trying to create further rifts around Iran in the Middle East is having the effect of bolstering the hardline elements in leadership. One particular figure is now clearly on the rise, cleric Ebrahim Raisi, who is now visibly in the running to take over from Supreme Leader Ayatollah Ali Khamenei. He has now been elected to the Assembly of Experts, a hugely powerful body that chooses the Supreme Leader. And his place in this body is as deputy chief. He has also just been appointed chief of the judiciary.
- The UN Panel of Experts on North Korea released a 400-page document this week, detailing what it calls a “massive” increase in oil imports by North Korea, despite sanctions, along with an increase in coal exports. Additionally, the report notes that North Korea is making attempts to sell weapons in the Middle East, and has likewise been stepping up efforts to hack into global banks.