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Global Intelligence Report - 14th December 2018

OPEC

Sources

- Kazakhstan energy industry executives
- Western hedge fund manager
- A source in the Kazakh political elite inner circle
- A prominent UAE banker
- Libyan investigative journalist in Tripoli

The Oil Cartel Game & Deeper Concerns for MBS

As we noted last week, Qatar’s move to quit OPEC was intended to weaken the cartel. The timing is perfect for Washigton—just as the US is pumping over 11 million bdp, and counting.

Beyond this, Qatar is keen to be out from under any threats posed to its US LNG ambitions because of NOPEC, which could have potentially led to antitrust lawsuits that would risk Qatar’s planned billions of investment in the US.

In the meantime, there is real concern—for the first time—that not only the Khashoggi murder, but also the Mueller probes in DC could significantly undermine Saudi Arabia’s (and the GCC masters’) position in the United States. There are indications now of illegal Gulf involvement in the Trump campaign, and if the Saudis or UAE are found (with evidence, such as large amounts of cash given by figures in Abu Dhabi to Nader) to have subverted the US or interfered with the presidency this could all be pushed over the edge. A key concern will be MBS’ response to this decided cooling of relations, the unpredictable nature of which is the most dangerous aspect.

Investors, Look to Kazakhstan

In mid-November, Kazaatomprom (KAP)—Kazakhstan’s state-owned uranium producer (the Saudi Arabia of uranium)—became the first big Kazakh IPO in over a decade, listing on the new Astana International Financial Center’s (AIFC) stock exchange. Then, in late October, KazMunaiGas (KMG) finalized its own plans for a $6.5-billion IPO. That would value the gas giant at up to $26 billion. The plan is to sell 20-25% of shares.

KazMunaiGas is Kazakhstan’s state-run company for exploration, production, refining and transportation of oil and gas, and it’s owned by the country’s sovereign wealth fund, Samruk-Kazyna. The company is vertically integration and the grouping of companies has some 200 entities.

What investors need to know is this: Right now, KMG is a state-run commercial entity that is trying to step up its ability to compete with international rivals and it’s taken great strides to improve transparency to that end (enough so, that’s it feels ready for an IPO). The country’s long time President Nazarbayev, has been working toward this end for several years, largely because his time is running out and he wishes to leave behind a very specific legacy. KMG, though, is subject to the direct influence of Nazarbayev in terms of strategic decision-making (not day-to-day decision-making). More than half of the energy elite in Kazakhstan are patrons of Nazarbayev, and the oil and gas industry is what has been funding the network of patronage, with major rewards for loyalty. Now, however, the game is all about attracting foreign investors, and that means increased transparency. KMG itself has been dogged by everything from tax discrepancies to embezzlement—each time in recent years anything like this has come up, senior managers involved have been removed and prosecuted and the company has been fined.

The biggest concern for investors with the new KMG 2.0 is the potential for entanglement with sanctions violations, both concerning Russia and Iran. KMG has strategic relations with Gazprom, and we see these ties intensifying in the coming months. That includes a JV between Gazprom and KMG, KazRosGas, which was negotiated directly between Putin and Nazarbayev. This JV controls gas flows from Central Asia through Russia to Germany and Switzerland. While there is less concern regarding Iran, investors should be aware that KMG has in the past been interested in pursuing oil swap deals with Iran, and relations strengthened in 2016 when sanctions were lifted, with the current strategy being an attempt to figure out how to circumvent the sanctions regime.

Despite the fact that KMG and its 200 companies are controlled by the government, though strides have been taken to increase transparency, and despite concerns about sanctions violations tie-ups, we have strong indications that Western investors are interested in KMG.

Libyan Oil Hijacked Again

Libya’s Sharara oilfield has been under siege since 8 December, forcing the National Oil Company (NOC) to declare force majeure on exports. This is a joint venture between Spain’s Repsol, French Total SA, Austrian OMV, Norway’s Statoil and the Libyan NOC. That takes 315,000 bpd offline, and drops Libyan output to around 685,000 bpd. While Western media portrays this as an armed militia seizure of the oilfield, in truth it has been a bit more complicated than that. The oilfield was nominally taken over by protesters in the south trying to force their demands on an inactive, dysfunctional and split government. But those protesters, in the form of the Fezzan Rage Movement, invited the local Petroleum Facilities Guard (PFG) militia in on this, and now the occupation is a dangerous cocktail of PFG militia, armed tribesmen and civilian workers. They all have different agendas, and the PFG is holding out for a cash ransom, and there is disagreement among the various parties involved. In an apparent attempt to end that internal disagreement, the PFG has also added a demand for more workers at the facility to appease one camp of occupiers. The NOC has said in no uncertain terms that it’s not going to be paying a cash ransom.

On Thursday, Germany pledged another 2.5 million euros to the Stabilization Facility for Libya (SFL). But that pledge came right before it was confirmed that the Islamic State had killed six of 10 hostages taken during an October attack on the town of Al-Foqua.

In the meantime, there appears to be another interesting rival to General Khalifa. The powerful head of the Tripoli Revolutionaries Brigade (TRB), Haithem Tajouri, is back in town after having exiled himself apparently to the UAE for a spell. He’s flashing some serious cash around Tripoli, and is dressed in a way that spells UAE support, which is also supporting Haftar. It is unclear how this potential rivalry (or alliance) might play out.

Moscow Muscle in Venezuela

From a geopolitical standpoint, there should be significant cause for concern at the opening Putin has seen in a Venezuela sanctioned by the US. In the American backyard, Putin is openly supporting Venezuelan President Maduro and has taken things a step further by deploying nuclear-capable bombers to the Latin American country for military exercises. The lines are being drawn in the sand here.

Global Oil & Gas Playbook

Australia has become the biggest global exporter of LNG overtaking Qatar by shipping 6.5 million tons of the superchilled fuel abroad in November. To compare, Qatar’s export shipments came in at about 6.2 million tons during the month.

This is yet another seismic shift in global energy after the United States emerged as the biggest crude oil producer globally this year, overtaking Saudi Arabia and Russia. Australia staked its claim as leader of the global LNG industry earlier this decade, with total investments in this strategy coming in at about $200 billion so far.

The country now boasts several of the largest LNG projects in the world, including Chevron’s Gorgon and Wheatstone, Inpex’s Ichthys, which started producing earlier this year, and Shell’s Prelude, due to come online before this year’s end. The total LNG production capacity of all existing projects is about 88 million tons annually.

However, the sharp increase in LNG exports has squeezed domestic supply in some parts of the country. Last year, gas prices on the eastern coast of the country spiked because most of the gas produced locally was shipped abroad, so the government had to step in and impose restrictions. Now, Western Australia is threatened by a gas shortage in the medium term, again because of rising exports.

Qatar is also eyeing an increase in production capacity from 77 million tons annually to 110 million tons annually by 2024, which might help it regain the top spot. However, LNG demand projections for the next decade or so are so robust, there will likely be enough buyers for all the LNG coming out of Australia and Qatar, whoever comes on top as the world’s biggest supplier.

Deals, Mergers & Acquisitions

- Italy’s Eni sold a 25% stake in the Nour North Sinai Offshore concession in Egypt to supermajor BP and another 20% to Mubadala Petroleum. Following the deal, which got the approval of the Egyptian government, Eni will remain the biggest shareholder in the concession with 40%. The deals are part of an expansion of Eni’s international partnership with BP on various projects. The Italian company is currently drilling its first exploration well in the Nour North Sinai Offshore block.

- A Chinese state energy firm has bought a 4% stake in an onshore oil and gas concession in Abu Dhabi, as part of the latter’s strategy of expanding the participation of foreign companies in its fields to boost production. The buyer is China ZhenHua Oil, a company wholly owned by a Chinese government agency. The stake was previously owned by another Chinese company—CEFC China—which ran into financial problems earlier this year after a breakneck international expansion that eventually worried Beijing and prompted an investigation into the company’s finances.

Tenders, Auctions & Contracts

- French Total expanded its presence in Mauritania after it won the rights to develop two more blocks off the coast of the western African country. The French company will lead the exploration of the deepwater blocks with a 90% stake in them, with the Mauritanian state energy company holding the rest. Total has been present in Mauritania for 20 years and considers the tiny coastal state one of its most promising locations in Africa.

- Brazil’s government and Petrobras struck an agreement for the transfer of exploration and production rights to a number of offshore blocks the state energy company was awarded back in 2010 with the obligation to develop. The blocks, however, turned out to contain a lot more oil and gas than Petrobras had the financial capacity to develop, so the company sought ways to bring in foreign field operators to tap these reserves. Now, the blocks will probably be open to international bidding.

- Mexico’s new government has postponed a tender for the selection of companies to partner with state energy major Pemex on the development of a number of oil and gas blocks. The tender had been scheduled for next February but will now take place six month later while the government reviews the tender process.

Discovery & Development

- Norway has given its approval to the Troll Phase 3 project led by Equinor, in partnership with local sector player Petoro, along with Total, Shell, and ConocoPhillips. The Phase 3 development will extend the life of the Troll field beyond 2050, with additional production seen to begin in three years. The phase will cost $920 million and will allow the operator to tap another 2.2 billion barrels of oil equivalent from the Troll field.

- The UK Oil and Gas Authority has approved Chevron’s plan for enhanced oil recovery at the Captain field in the central part of the UK section of the North Sea. Chevron said it will use polymer injection technology to tap several million recoverable barrels of oil at Captain, which has been producing since 1997. As of 2017, Captain yielded 28,600 bpd of crude oil and 5.6 million cu ft of natural gas.

- Cheniere Energy has shipped the first cargo of LNG from its new plant in Corpus Christi, Texas. Already the biggest US LNG exporter from its Sabine Pass LNG plant in Louisiana, Cheniere has allocated $13 billion for the Corpus Christi facility, where it has one liquefaction train in operation and plans to add another three. The second train is due to start producing by the end of June next year.

- The Tanzania-Uganda oil pipeline is facing delays as investors have been postponing final investment decisions, according to Ugandan officials. The companies involved in the project include Total Oil, China National Offshore Oil Corporation and Tullow Oil—all of whom were expected to make their FDIs last year and to have started construction on the pipeline by now. The pipeline was originally scheduled to be up and running by 2020. Ugandan officials allege that the investors are holding out for a higher tariff, beyond the $12.20 per barrel tariff originally agreed upon. Uganda’s crude oil reserves are 6.5-billion-barrels-strong. The renegotiations will likely delay FDI for the $3.5-billion pipeline project until June 2019.

Litigation & Regulations

- The Nigerian government has filed a lawsuit against Shell and Eni in a London Commercial court, requesting the return of $1.1 billion as part of a case of alleged corruption dating back to 2011. Nigerian authorities allege that the money was used by the companies to buy an oil exploration license in the Gulf of Guinea but was diverted to bribes and kickbacks. Two oil companies have previously denied any wrongdoing in the criminal case over the block, called OPL 245. The block is also at the heart of an ongoing corruption trial in Milan, Italy, in which former and current Shell and Eni officials are defendants.




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