Global Intelligence Report - 17th April 2019

Geopolitical Notebook

Oilprice Assets on the Ground in Tripoli…

Haftar's Problem With Libya's Oil Revenues

This week, Oilprice.com was on the ground in Tripoli, reporting from the Ain Zara District, in the heart of the clashes between Haftar's LNA forces and militias supporting the Government of National Accord (GNA).

The view of the clashes from Ain Zara:

Copyright: Oilprice.com

Copyright: Oilprice.com

Militias from Tripoli and neighboring towns such as Misrata and Zawya have united their forces into the 'Tripoli Protection Force' to thwart General Haftar's advance in the capital city. This is the only way the GNA has any chance of not losing Tripoli to Haftar without a fight. Essentially, the UN is backing these militias indirectly because it's backing the GNA, which is backing the 'Tripoli Protection Force'. In fact, the GNA has funded this force to the tune of $2 billion. At the same time, Haftar's LNA is also recognized formally by the Libyan House of Representatives (HoR), based in the east of the country, in Tobruk and then Benghazi. Technically, it is also recognized as a legitimate body by the UN.

For now, the main clashes have been in the outskirts in every direction, in the districts of Wadi Rabih, Ain Zara (from where we are reporting), Qasr Ben Ghashir, Swani and Krimia. Anyone living in these areas is at high risk from shelling, heavy artillery and even air strikes. Hundreds on both sides have been killed, and tens of hundreds of civilians have been displaced already.

Public opinion in Tripoli is split with regard to Haftar. Many accuse him of attempting to rule Libya by force; but many others view him as a strong leader who can finally bring stability to the country.

Haftar's attack have surprised everyone on the ground. After all, it happened amid ongoing negotiations between UN envoy to Libya Ghassan Salame, General Haftar and President Council head Faeiz Serraj. The thought was that a political compromise was within grasp.

There had also been arrangements already made for a UN peace conference in Libya on 16 April, which of course was cancelled at the last minute.

Now, with Haftar having failed to take Tripoli quickly, and having been halted in his advance, the fear is that radical groups/terrorists will take advantage of the chaos to turn this into a full-blown civil war and to hijack oil and gas fields and facilities.

Our team on the ground notes that many members or associates of the Islamic State have already joined this conflict. If Haftar fails, the Islamic State will pounce definitively.

Oil production has not yet been affected. Only one facility has incurred some damage in the fighting, and that is the headquarters of the North Africa Company for Geophysics Explorations, owned by the National Oil Company (NOC). An airstrike targeted this facility on 9 April in the Qasr Ben Ghashir district, in southwest Tripoli.

So what happens to the oil next? That remains unclear. What we do know is that Haftar now controls most of the oil fields in the country, whose takeover he finalized in recent months with the seizure of key oilfields including El Sharara.

But now, the chairman of the Tripoli NOC, Mustafa Sanallah, is criticizing Haftar's advance on the capital city, warning that it will negatively affect the oil industry and its facilities. This is an important development because the NOC had largely been supporting Haftar, since he was responsible for freeing the oil from its hijackers who had kept it from flowing for over two years. He was meant to liberate these facilities and hand them over to the NOC. But the first indication that things were not well was Haftar's seizure of the El Sharara field in February from an armed group working alongside protesters. He did not immediately hand this over to the NOC, and the NOC was hesitant to recognize his takeover and to lift force majeure. He waited for weeks, only making the move to lift force majeure in early March. Not long after, Haftar would make his move on Tripoli...

On 27 March, the Tripoli NOC revealed February's oil revenues, showing them at $1.26 billion - down $330 million from January. According to the NOC, this loss was due to events at the El Sidra oil terminal and the closure of El Sharara, which produces (when fully functional) 300,000 bpd.

Regardless of Haftar's sovereignty over the oil fields, what few understand is that all the oil revenues are going straight into the accounts of the Arab Foreign Bank, which is under the authority of the GNA in Tripoli. Haftar needs these revenues to have real control, and he needs Tripoli to get it.

Elsewhere on the coup front …

As the political instability continues its momentum in Algeria following the resignation of President Bouteflika on April 2, unrelenting protesters have now forced the resignation of the head of the Constitutional Council, Tayib Belaiz - a Bouteflika ally that protesting Algerians view as an extension of the old regime.

And, amid the handful of crumbling oil deals related to state-run Sonatrach, there was a ray of hope for the Algerian oil giant, whose CEO claims to be holding talks next week with Chevron. The talks will reportedly center on Algeria's shale patch, which Exxon stalled when the political crisis emerged. Chevron, apparently, is feeling emboldened in the wake of its blockbuster announcement last week that it would by Anadarko (another shale producer in the US patch) for $33-billion. Now it's one of the Big Four and looks set to maintain that momentum. Chevron clearly has patience, so these talks aren't going to progress too far until everyone sees how the dust settles on political matters, and how much investigative grief Sonatrach is going to get with a transitional government under immense pressure to root out corruption among the elite (much of which has to do with the state-run oil company).

Global Oil & Gas Playbook

Deals, Tenders to keep an eye on

- Ukraine: The Ukrainian government just launched the tender process for the Dolphin offshore block on the Black Sea's continental shelf. The area covers nearly 9,500 square kilometers, and the tender will be under a production-sharing agreement that gives the government a minimum of 11% for petroleum. Applications are due in 60 days and winning bidders will be announced by July. It's a tricky venue to navigate in the middle of presidential elections …

- Qatari state-owned Qatar Petroleum has opened bidding for engineering, procurement and construction for the expansion of its North Field project. These are tied to three tender packages for the building of four new LNG mega-trains. Those trains will also be able to produce LPG and will host a helium plant. Shrugging off an economic blockade orchestrated by the Saudis, Qatar is driving ahead with plants to boost its LNG output to 110 million mt/year by 2024. Currently, Qatar produces 77 million mt/year.

- Thirteen international companies bid on 18 out of 38 oil exploration blocks in Argentina's first-ever offshore auction. Newcomers on the bid list in Argentina include Mitsui, BP, ENI and Tullow. Other bidders are not new to the venue, including Qatar Petroleum, Equinor, Exxonmobil, Total, YPF, Shell, Pluspetrol, Tecpetrol and Wintershall. Exxon and Qatar Petroleum say they have won three blocks. Total investment offers for the blocks were just under $1 billion, coming from 13 companies. The sweet spot here is the Western Malvinas basin, which brought in offers for nine areas totalling $776 million (also where Exxon says it's won blocks). Results of bidding are set to be announced in mid-May. After that, we're looking at a roughly four-year exploratory first phase.

- Saudi Aramco is reportedly in talks to acquire up to 25% in the refining and petrochemicals business of Reliance Industries Ltd. This is India's largest company, while the country has been a key target (along with China) for the Saudis recently. Indian media estimate this minority stake in Reliance at a value of $10-$15 billion. This comes amid recent Saudi statements to the effect that they may invest up to $100 billion in India over the next two years. In the meantime, we are wondering what the Saudi sovereign wealth fund (Public Investment Fund, PIF) will do with the money coming in from Aramco after the recent bond sale. This money will come into government coffers in staggered tranches, but our sources on the ground believe it is most likely to be invested in NEOM--the unadvised futuristic desert city project of the Crown Prince.

Regulatory hooks to monitor...

The Trump administration is making a huge push to make things easier for LNG producers and exporters, clearly demonstrated over the past week.

Trump is proposing to get LNG to new markets by moving it by rail. Trump has ordered the Department of Transportation to draft a new rule that would allow LNG to be shipped in tank cars by rail, despite what is expected to be a high level of opposition due to the risks. Those risks have been made clear by several accidents, including the disastrous outcome in Quebec in 2013 when 40 people were killed when an oil train derailed.

At the same time, a group of Republican senators have introduced a bill designed to make exporting US LNG easier by removing barriers to market access. The point is to get American LNG to market faster in order to get natural gas to allies in an effort to steal market share from, say, Iran and Russia. The "License and Natural Gas (LNG) Now Act" is being introduced at the perfect time, when the Trump administration is actively seeking to remove a lot of red tape bogging down the LNG sector.

- Egypt is moving to slash fuel subsidies by 40.5%, and electricity subsidies by a massive 75% for fiscal year 2019-202, following initial cuts for 2018-2019. The new cuts have not yet gained parliamentary approval, but when they do, we expect severe protests, which could spiral out of control given the revival of the "Arab Spring" atmosphere following the overthrow of the Algerian president and continued protests pressuring the military there, as well as a coup in Sudan.

- The governor of Colorado has officially signed into law the major overhaul of state oil and gas rules, which we have detailed in recent briefings. While the governor views this as an end to the "oil and gas wars", the industry of course will find much more arbitrary (by community) decisions hindering its development as the priority shifts to public safety and environment. It's a major overhaul for a state that is the fifth in terms of US crude oil production and sixth in terms of natural gas production.

On the geopolitical front...

- Turkish officials are expecting the US to extend the country's sanctions waiver to allow it to continue to buy oil from Iran. Turkey has reduced imports of Iranian crude in a bid to play by the rules and earn another sanctions waiver. Its current exemption will expire on May 2. With Turkey, there are a number of leverage points on both sides. Also at stake is Turkey's planned purchase of a Russian missile defense system, for which it faces sanctions by US Congress - again, Erdogan is banking on Trump coming to his aid over this.

- Also related to sanctions, the Syrian government is now restricting gasoline and petroleum product consumption due to interruption in supply as a result of sanctions against Iran, which was supplying Syria with roughly 2 million barrels per month. Syrian officials also say that oil tankers bringing fuel to Syria have not been able to navigate the Suez Canal for six months (Egypt is said to be preventing tankers from reaching Syria through the Suez Canal). This is a dangerous shortage for the regime. It has prompted the government to restrict motorists to only five gallons of fuel per every 10 days, leading to harsh criticism of the Assad regime.

- In Venezuela, opposition "president-in-charge" Juan Guaidó has vowed to appeal an $8.7-billion arbitration award to ConocoPhillips in a bid to protect the collapsing country's assets. An annulment would be a boost to Guaido, whose interim presidency of the country is backed by the U.S. and several other countries. ConocoPhillips holds a similar $2 billion arbitration claim that led it to seize Venezuelan storage and refining assets in Caribbean export terminals last year before reaching a settlement with PDVSA for regular payments.