Sources
- Yemeni geopolitical analyst
- Riyadh-based advisory to Saudi Public Investment Fund
- London-based consultant tracking Glencore’s activities in DRC for 5 years
- Investigative journalists on the ground at ‘Davos in the Desert’
The Yemen Quagmire Just Got More Complicated
The timing of a Saudi airstrike on Yemen that killed 21 at a crowded marketplace will put further pressure on U.S.-Saudi relations, with Washington facing increasing pressure in the wake of the Khashoggi murder to step back from and punish Riyadh—a move Washington is extremely hesitant to make. But Yemen is the proxy war venue for a Saudi-UAE-American war against Iran, and it is part and parcel of the unspoken U.S. containment policy.
But there’s more tied up on the ground in Yemen than is apparent on the surface. Yemen’s oil resources aren’t Iraq’s, or Libya’s. Production is at a bare minimum, and civil war has ensured that development has been sidelined, but the prospect remains alluring, and whoever ends up controlling the oil and its export points wins this civil war. As such, Yemen’s barrels are worth more than their volume in oil.
Right now, the Iranian-backed Houthis control Yemen’s port of Hodeida, a gateway to the Bab el Mandeb Strait. In other words, Iran largely controls this strait through which nearly 5 million barrels per day of oil flow—over half of it to Europe. The Saudi-UAE…
Sources
- Yemeni geopolitical analyst
- Riyadh-based advisory to Saudi Public Investment Fund
- London-based consultant tracking Glencore’s activities in DRC for 5 years
- Investigative journalists on the ground at ‘Davos in the Desert’
The Yemen Quagmire Just Got More Complicated
The timing of a Saudi airstrike on Yemen that killed 21 at a crowded marketplace will put further pressure on U.S.-Saudi relations, with Washington facing increasing pressure in the wake of the Khashoggi murder to step back from and punish Riyadh—a move Washington is extremely hesitant to make. But Yemen is the proxy war venue for a Saudi-UAE-American war against Iran, and it is part and parcel of the unspoken U.S. containment policy.
But there’s more tied up on the ground in Yemen than is apparent on the surface. Yemen’s oil resources aren’t Iraq’s, or Libya’s. Production is at a bare minimum, and civil war has ensured that development has been sidelined, but the prospect remains alluring, and whoever ends up controlling the oil and its export points wins this civil war. As such, Yemen’s barrels are worth more than their volume in oil.
Right now, the Iranian-backed Houthis control Yemen’s port of Hodeida, a gateway to the Bab el Mandeb Strait. In other words, Iran largely controls this strait through which nearly 5 million barrels per day of oil flow—over half of it to Europe. The Saudi-UAE coalition-backed forces control Yemen’s Bir Ali port in the Gulf of Aden (where Yemeni crude is exported to East Asia).
In the meantime, Austrian OMV has braved a return to Yemen’s oilfields, thanks to the Saudi and UAE success at seizing Hadhramaut and Marib from the Houthis on one hand and Islamic radical forces (AQAP) on the other. The Austrian company managed in late July to export its first crude cargo through Bir Ali. But the Houthis still control another oil terminal, Ras Issa, on Yemen’s west coast. They also control a pipeline that runs to Ras Issa from Marib province, the key oil-producing area.
Right now, the Saudi-led coalition is believed to be preparing for a new assault on the port of Hodeida. This would follow the airstrike that killed over 20 people earlier this week just south of Hodeida. A victory in Hodeida would be a key one for the Saudi-led coalition because it is through this port alone that the Houthis can get aid, and if aid is blocked the famine will be devastating. By the early morning hours of October 26, there were already indications on the ground that the assault was beginning.
The Crown Prince’s Litmus Test
Nothing is more important to the global oil story than the fallout from the murder of Saudi journalist Jamal Khashoggi. This is the prime litmus test for MbS. Necessarily, speculation abounds about his replacement, but at this point he is most likely too big to fail. The purge of Saudi business elite last year helped with that. If the Khashoggi murder had happened a year ago, MbS would not likely have survived this.
Trump’s responses to this affair have been non-committal and contradictory because MbS has been a key partner in the fight against Iran, and indeed, his deep coffers have been a key inspiration behind the U.S. withdrawal from the Iran nuclear deal. The ideal outcome for Trump would be MbS surviving this, but Washington being perceived as having been tough. It cannot simply be shoved under the rug due to the level of international attention. And Turkey’s Erdogan is determined to keep the issue very much alive.
Our sources in Riyadh, across the board, noted an atmosphere of panic last week, and a desperate effort to maintain the status quo, hence the changing narratives of the Saudi story. What it all means most definitively is that MbS will have to spend a significant amount of money cleaning up his reputation. But it will linger for some time. What Trump must clearly understand is that any move against Saudi Arabia that would include ripping up contracts, sanctions or the like would result in extreme retaliation. The psychological profile of MbS is such that there can be no other response but an extreme one, and it would be taken as a personal insult.
It’s time to start watching the money more closely, and more deeply because Saudi finances will continue to play a big role in the crown prince’s longevity.
Russian and Chinese moves into Saudi Arabia were already coming into clearer view before the Khashoggi scandal, and any negative move made by Washington at this point will strengthen the positions of both Beijing and Moscow in the Kingdom. The Chinese are a perfect fit for MbS’ wildly unfeasible projects because their MO is not financial return on investment, but soft power political influence.
Most significantly, MbS’ Vision 2030 is failing, with its first sign of doom being the delaying of the Aramco IPO. The fact is that the Saudis are getting by on high oil prices.
Do key investors with tentacles in Riyadh think MbS could be replaced? Not really, but watch them maintain a balance just in case. While some big names ducked out of “Davos in the Desert”, they made sure that someone was on the ground in a show of loyalty. So all the withdrawals weren’t necessarily genuine.
The media has made a big deal about SoftBank’s Masayoshi Son cancelling his speech at the affair. Saudi Arabia’s Public Investment Fund (PIF) is the biggest investor in SoftBank’s $100-billion Vision Fund, to which it committed $45 billion in the first phase, and promised the same for Fund II. So, it is a big deal, but SoftBank still had execs on the ground at the conference. MbS was certainly paying very close attention to who was there and who wasn’t. This is a huge risk for the beneficiaries of Saudi money, either way, and they’re hoping to play both sides of this. (Of course, it didn’t go unnoticed that oil majors had no intention of shunning the conference).
Glencore Tries to Downplay DOJ Investigation
Hedge funds will be wondering where to place their bets on Glencore as the U.S. Department of Justice requests documents from intermediary companies the commodities giant used in the DRC, Venezuela and Nigeria. Glencore execs are telling media that the DOJ investigation is targeting the intermediaries, not Glencore’s own activities, but this is a misleading statement at best. Hedge funds are now playing a guessing game, but there should be no confusion here: This investigation is all about Glencore, and the only way to get to the bottom of Glencore’s questionable activities in terms of corruption and bribery is through the intermediaries (such as Israel Dan Gertler, most importantly) it used to secure deals. Glencore’s stock lost 13 percent on the initial DoJ subpoena in July, and now it’s desperate to claw back amid this investigation. Its play on words this week led to an over 2% boost today.

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Turkey Intensifies Threats to Greece over Offshore Exploration
Last week, we noted that the Turks were claiming a Greek frigate had been harassing a Turkish seismic research vessel in the Mediterranean in an area claim by Cyprus for future oil and gas exploration. On Wednesday this week, Ankara stepped up the rhetoric on this threat, and added four warships and an oil tanker to the mix—the former to ‘protect’ its seismic vessel from Greek attempts to obstruct Turkey from conducting exploratory activities.
What To Watch in Libya
With BP declaring that it expects to start exploration in Libya in the first quarter of next year, right after elections that may or may not happen in early December, the key thing to watch in this game right now is which external actors back General Haftar. Another figure to watch will be oil tycoon Tatanaki Hussein, a close ally of Haftar’s who facilitates the general’s connections to the UAE, one of the key external powers deciding Libya’s fate. Moscow, now, will also throw its weight possibly behind Haftar.
Global Oil & Gas Playbook
- The International Energy Agency is warning of a global shortage of LNG due to insufficient spending on LNG carriers and distribution infrastructure. Demand has been healthy, led most notably by China, which experienced significant gas shortages last winter due to lack of LNG storage capacity. LNG carrier capacity is growing, with the IEA noting that between January and April this year, some 22 new LNG carriers were delivered and another 43 are scheduled for delivery through the rest of 2018. China’s demand for the fuel is set to continue growing ahead of the winter season. We also note that earlier this month, the first LNG cargo from the Ichthys project off the coast of Western Australia shipped by partners French total and Inpex. Only the first liquefaction train is operational; however, plans are to have the second one kick in in a few weeks. Once both trains begin operation, Ichthys will be able to produce 8.9 million tons of LNG annually and 1.65 million tons of LPG, plus 100,000 bpd of condensate. The Ichthys field is estimated to contain more than 3 billion barrels of oil equivalent.
- Lukoil has inked a two-year exploration agreement with the Uzbek government to study the oil and gas potential of a 45,000-square-kilometer area in the northern part of the Central Asian country, which Lukoil believes is rich in hydrocarbons.
- Chevron may buy a Petrobras refinery in Texas, according to unconfirmed reports. If confirmed, the deal would be the latest indication of a drive to expand in refining amid rising production from the shale patch that needs to be processed somewhere but refining capacity is stretched. If the deal takes place, Chevron will boost its light crude refining capacity by 110,000 bpd.
- Exxon has hired Technip to construct the subsea part of the second phase of development of the Liza prospect off the shore of Guyana. Liza is among the biggest recent oil and gas discoveries, part of the Stabroek Block, which earlier this year Exxon said could contain up to 4 billion barrels of oil and gas. Potentially, the block could yield 750,000 bpd.
- Egypt will launch its first international oil and gas tender for offshore blocks in the Red Sea by the end of this year. The tender will be announced after the completion of a large-scale seismic study of the area. Egypt is currently actively developing its offshore resources in the Mediterranean, where production stands at 6.5 billion cu ft of natural gas daily, thanks to international investments of over $427 billion.
- Production growth in the Permian is likely to slow through the rest of the year, according to Schlumberger’s chief executive Paal Kibsgaard, who said reservoir and well performance would be the top problems for drillers, rather than pipeline constraints that are forcing local producers to sell their crude at a discount to WTI.
Earnings Roundup
- Schlumberger booked a profit of $466 million for the third quarter of the year, which translated into earnings per share of $0.46--an 18% improvement from Q3 2017.
- Equinor reported a net profit of $1.67 billion for Q3, up from a loss of $480 million, but still fell short of analyst expectations despite the price improvement in oil and further cost cuts the Norwegian company had achieved.
- Oil Search, Exxon’s partner in the Papua New Guinea LNG project, reported an 81% jump in Q3 revenue to $474.9 million, from $262.8 million in the previous quarter. The PNG LNG project produced an annualized 25-26 million barrels of oil equivalent when production was resumed after a major earthquake earlier this year.
- ConocoPhillips reported adjusted profit of $1.6 billion for the third quarter of the year, or $1.36 per share, which is a substantial improvement on the Q3 2017 result of $200 million and $0.16 per share.
- Husky Energy booked a net profit of $416 million for the third quarter of the year, a substantial increase on an annual basis thanks to higher prices for the crude it makes despite the deep discount between the Western Canadian Select benchmark and WTI.