- Middle East analyst based in Dubai, with access to Saudi royal advisors and business elite
- Libyan investigative journalist in Tripoli
- Turkish investigative journalist in Istanbul
- Top aid to Turkish deputy foreign minister
Libya’s Currency Crisis: Part of the Resource Problem
While it won’t resolve the broader war for control of Libya’s government (read: oil wealth), getting a handle on the country’s liquidity crisis could starve militia groups who are making money off this (not counting for their funding from external actors). Militias have been making money off the gap between official and black market exchange rates.
Libyan officials say the liquidity crisis should be resolved by February of next year by converging the rates and restoring supply of Libyan dinars and dollars. The next step will be to start fuel subsidy reductions, on which Libya is currently spending some $5 billion annually.
Not only the exchange gap, but also these fuel subsidies have been feeding militia coffers, via smuggling revenues. For oil and gas investors willing to brave what is essentially a civil war that is nowhere close to being resolved, resolving this liquidity crisis and getting fuel subsidies under control would—according to officials—put $1.8 billion into budget coffers next year, enabling them to start (or re-launch) major energy development projects. We note, however, that there are multiple variables that will determine whether this plan is successful. The most dangerous variable will be how militias respond, which will possibly not become clear until authorities start reducing fuel subsidies. This is where militias won’t sit idly by and simply let it happen, and we expect a major resurgence of violence—directed and oil facilities.
Turkey Isn’t Getting Gulen Back--Yet
It’s been increasingly interesting to watch Turkey’s passive-aggressive diplomatic maneuvers in the wake of souring relations with the U.S. and the Khashoggi murder. One of Ankara’s biggest gripes against Washington is its refusal to extradite Fethullah Gulen, linked by Erdogan to the 2016 coup attempt.
Recently, an article appeared in NBC saying that Washington was going to extradite Gulen to Turkey in order to ease Turkish pressure over its response to the Khashoggi murder. This, of course, is exactly the kind of leverage Turkey is hoping to gain from its pressure; however, our sources say there is no indication the Gulen will be extradited.
According to a top aide of the deputy foreign minister, Gulen’s extradition is a very routine subject in talks between Washington and Ankara, but Ankara has received no such assurances from Washington, while publicly Trump has denied any deal.
In fact, the source said, Ankara believes that the NBC report was a manipulation designed by the Gulenists to fish for their own assurances from Trump and prompt a response at a time when Gulen is clearly concerned about his fate as a result of any outcomes in U.S.-Turkey relations.
MBS Isn’t Going Anywhere
In the meantime, rumors are surfacing that senior royal family members are reconsidering MBS as the next king to take over from his father, King Salman. We suggest that investors not fall victim to these rumors, whose purpose is largely to sow uncertainty for a longer period of time. Such rumors benefit certain family members and external actors such as Qatar and Iran, but we view them as unreliable and having no real value beyond this. According to a Middle East analyst with access to royal court advisers and Gulf business elite, MBS is still firmly in position, and even King Salman would have great difficulty displacing him at this point.
What we’re seeing right now is the continuation of international pressure (Germany just halted arms sales to Saudi Arabia), and Saudi Arabia will respond to this here and there to try to defuse it, but there is no smoking gun, and Trump by Tuesday had made it clear that no real action was going to be taken. Even if the CIA uncovers a smoking gun, they won’t be able to do much with it without Trump’s approval.
Global Oil & Gas Playbook
It’s this time of the year again when OPEC begins to talk about production cuts, this time caught by surprise by the latest decline in oil prices. Just as the cartel was beginning to get comfortable with higher production rates on expectations of tighter supply after the Iranian sanctions went into effect, pessimistic economic growth forecasts dampened optimism and prompted the talks.
Like last time, Russia is playing—and will likely play until the very last moment—the role of the indecisive partner before it agrees to join the cuts. Of course, there is always the possibility, however small, that Moscow will this time decide to sit the cuts out but it will all become clear in early December when OPEC is scheduled to meet in Vienna.
Meanwhile, however, some producers are already bargaining for exemptions. Libya, notably, expects to be spared another round of cuts because of the troubles it has had in raising and maintaining its oil production, the head of its state oil company, Mustafa Sanalla said earlier this week. Chances are it won’t be the only one trying to avoid the cuts, suggesting some OPEC producers would rather expand production than seek higher prices even though they would all benefit from them.
Deals, Mergers & Acquisitions
- Ineos, one of the big independent players in the North Sea, is in exclusive negotiations with ConocoPhillips for the acquisition of the supermajor’s assets in the area. The assets could be worth as much as $3 billion. They exclude ConocoPhillips’ Teeside oil terminal and a trading unit based in London, but include a 6.5% interest in one of the most promising fields in the UK’s continental shelf: the Clair field holds an estimated 7 billion barrels of oil in place. If the deal goes through, Ineos will join in its development BP, which holds 45% in Clair.
- Cimarex Energy will buy smaller sector player Resolute Energy for $1.6 billion that also includes Resolute’s debt. The target company has acreage in the Delaware basin that neighbors Cimarex property. The deal is the latest sign of the ongoing consolidation in the oil and gas sector following the 2014 oil price collapse and the subsequent recovery that intensified competition among those left still standing after the flurry of bankruptcies.
- Israeli Delek Group has plans to exit the giant offshore Tamar gas field by spinning off its remaining 22% interest in it, after last year it spun off 9.25% of its Tamar stake and put it up for sale expecting proceeds of $980 million. Meanwhile, the spinoff has taken a larger share in the Tamar field, in which Delek partners with Noble Energy and three smaller energy companies.
- The oil equipment and services industry recorded mergers and acquisitions worth a combined $9.9 billion over the third quarter of the year, a more than double increase on the previous quarter when the total value of M&A deals stood at $4.1 billion. At the same time, the deals in the third quarter declined in number, further pointing to an industry recovery as sellers got higher prices for their assets and operations.
Tenders, Auctions & Contracts
- Russia and Turkey marked the completion of a section of the Turkish Stream gas pipeline that will increase the flow of Russian natural gas to Europe to the chagrin of many in the European Union. Turkish Stream will have an annual capacity of 31.5 billion cu m, half of which would stay in Turkey to satisfy its domestic demand. The second half would supply gas to eastern and southern Europe, according to Russian President Putin, although the route—via Bulgaria or via Greece—has yet to be determined.
- Carlyle Group-owned Black Sea Oil & Gas has signed a gas distribution contract with French Engie. Under the terms of the contract, Engie’s Romanian subsidiary will buy natural gas produced at two offshore fields in Romanian waters, beginning at a rate of 500 million cu m annually, over a period of 10 years. The Midia Gas Project spans five offshore production wells at two fields, Doina and Ana, and Black Sea Oil & Gas expected to start commercial production in 2019. However, the project is still pending a final investment decision.
Discovery & Development
- Alberta’s government is considering imposing obligatory cuts on crude oil production as local producers continue to struggle with huge discounts of their crude compared with West Texas Intermediate and other international benchmarks. The idea of cuts was first proposed by Cenovus’ chief executive, who argued oil producers in Alberta are losing too much money because of pipeline bottlenecks to continue pumping at ever-increasing rates. An analyst from Tudor Pickering went further this week, saying the price of bitumen mined in Canada has slipped into negative territory—something which is not reflected in the benchmark Western Canadian Select price as it also includes light blends.
- Japan and South Korea will resume Iranian crude oil imports beginning in January or later, sources from the refining industry in the two countries have said. The window for imports, however, will be pretty tight as the waivers South Korea and Japan scored with the U.S. Department of Treasury earlier this month are temporary, to last six months.
- Russia’s Novatek has announced a new gas field discovery in the Yamal-Nenets region in northwestern Siberia, where the company’s operations are focused. The largest private gas company in the country said the Nyakhartinskoye field yielded a flow rate of over 300,000 cu m of natural gas daily. The field neighbors another field operated by Novatek, Yurkharovskoye, which the company is developing by utilizing hydraulic fracturing technology.
- Japan’s Inpex officially launched its Ichthys LNG project in Australia worth $34 billion, which will add a substantial chunk of supply to global LNG markets. Production and shipment of gas from the project actually began earlier, with the first shipment of LNG from Ichthys leaving last month. Some 70% of the gas pumped from Ichthys will go to Japan, with peak production planned at 8.9 million tons of LNG annually.
- Brazil’s new president-elect, Jair Bolsonaro has named a pro-privatization executive the next CEO of oil major Petrobras. The move was not a surprise since Bolsonaro had already spoken about selling parts of Petrobras. Castello Branco used to be member of Petrobras’ board and while his specific position on how much of the company should be privatized has yet to be made public, he would have to contend with Bolsonaro’s preference for limited privatization and the incoming economy minister’s view of a full privatization.
- Warburg Pincus is raising $2.5 billion for an energy-focused investment fund that would its second one oriented exclusively towards energy investments. Interestingly, however, the size of this fund is smaller than the size of its first one, for which the firm raised $4 billion. The smaller target suggests Warburg Pincus is proceeding with caution amid heightened price volatility. Still, it is proceeding, seeking to take advantage of the overall recovery in oil since 2016.