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Global Intelligence Report - 30th November 2018


Global Intelligence Report - 30th November 2018


- Turkey’s National Security Council

- Turkish general, ex-NATO

- Top aide to Turkish deputy foreign minister

- Saudi figure close to Shura council member

- U.S. advisor in Saudi equities, who has relationships with senior people in KSA

Turkey: The Cyprus Calm Before the Storm

Turkey will conduct a two-pronged strategy to stop or at least slow down Greek Cypriot oil and gas exploration. According to a civilian member of Turkey’s National Security Council (MGK), the body confirmed in its meeting on Nov. 27 that it would pursue legal means, including diplomacy, first. In this regard, Ankara will step up efforts to persuade Italy and France that their companies’ bids in “one-sided” drilling of energy resources off Cyprus will have more negative consequences for their national interests than positive ones. “We are also looking into all options in international law,” the source said.

On the other hand, a four-star Turkish general who had roles at NATO—and whom our sources believe is pegged to become the new Deputy Defense Minister of Turkey--said the second level of Ankara’s strategy is military.

The MGK has decided to deploy more warships to prevent Greek Cypriot drilling without Turkey’s approval. Multiple sources in Ankara also stress that Turks are in back-channel talks with the Israelis to solve the issue.

A top aide of a Deputy Foreign Minister in charge of chancellery noted that a number of Turkish officials believe that the issue “should not be blown out of proportion” with “extreme reactions” but more moderate ways can be found. “Our primary goal is to solve the Cyprus problem once for all. Then, these side-problems will also be solved,” he said.

From this perspective, what appears to be the green light for a pipeline that would feed Israeli gas (and eventually, Cypriot gas) to Europe is another threat to Turkey, and a rival to a Turkish-Russian pipeline venture that plans to bring Russian gas to Europe.

Our sources on the ground in Turkey, though, are not overly concerned about the pipeline, with one official shrugging it off as a distant dream. There is some sense that Ankara is hedging its bets that Turkey and Israel will mend fences in the coming years—enough so that they won’t be shut out from the EU energy supply equation, particularly in the post-Syrian war era. So, for now, the Turks are downplaying the rival pipeline’s capacity and feasibility.

Turkey is shrugging off the EastMed Pipeline Project, which is planned to start about 100 miles off the southern coast of Cyprus and stretch for over 1300 miles to Italy, via Crete and the Greek mainland. Earlier this week, Greek, Italy and Cyprus reached a deal with Israel for the ~$7-$8B pipeline, which would bring Israeli gas (think: Tamara and Leviathan) to Europe, diversifying away from Russian gas. Israel expects the pipeline to be done by 2025.

The EastMed, with a capacity of 12 billion cubic meters annually--is designed to outdo the Russian TurkStream pipeline at half that. But TurkStream has a head start with part already completed.

The Russian-Ukraine Game

Over the weekend, Russian border guards from the FSB fired on two Ukrainian warships and seized the crew of 20, wounding several in the process. The warships were attempting to traverse the Kerch Strait between the Black Sea and the Sea of Azov on the coast of Russia-controlled Crimea. The vessels, according to Russia, violated national waters and failed to comply when told to stop.

Kiev says it informed the Russians in advance and, of course, was not violating national waters that technically belong to Ukraine. Moscow is spinning a different version of the story, claiming that Ukrainian President Poroshenko purposefully provoked the attack to gain political capital ahead of next year’s elections (the campaign starts on 31 December), and to give him the opportunity to declare martial law. Other motivating factors would include getting a response (finally) from Europe and NATO. From our perspective, Ukraine has much more to gain from this incident than Russia at this point. Moscow does not need to demonstrate its power in this region at the moment.

If it was a provocation, it’s not working for the most part.

Ever-pragmatic Germany is sticking to its plans for the NordStream2 pipeline to allow Russian gas to reach Europe by bypassing Ukraine. Ukraine was hoping the Russian attack would motivate Germany to reconsider—and NATO to act decisively, largely by starting a war. While NATO and the EU have paid lip service to Ukraine, siding with Kiev and admonishing Russia, there are no indications yet that any real action will be taken over this other than Trump cancelling his meeting with Putin in Argentina. In the EU, there have been calls for new sanctions, but given the divisions in the bloc, we do not expect any quick consensus on this—if any.

Russia will take full advantage of the opportunity, however, to punish Ukraine further. It’s first move may be to deploy new surface-to-air missiles in Crimea to be operational by the end of the year. But Ukraine continues to fuel the fires here, moving on Friday to bar Russian men of military age from entering the country to prevent an “infiltration”.

Saudi Arabia: The Internal Chaos and Paranoia

There should be no question that MBS is fully in command in Riyadh, but our sources inside note that paranoia is reaching extreme levels, with the biggest fear being an assassination attempt. He has been spending weeks at a time on his yacht. While in Riyadh, MBS is largely confining himself (whenever possible) to his compound, which is heavily guarded by three rings of security: external ring, Saudi; middle ring, Israeli; internal ring, American (Eric Prince). Any guests must pass bomb sniffer dogs and have daily checks of their room.

While, as we mentioned last week, there are rumors about MBS’ longevity (rumors that we find no bases in), what is really happening is damage control that looks like this: After publicly seeking the death penalty for the Khashoggi murder suspects, there are now moves in the works to create what one might call a “coalition” of Al Sauds (royal family members). This gives cover to MBS in the eyes of the rest of the world because it could mean putting together what amounts to a council of advisors that would include family members that have not been in MBS’ good graces. It’s a peace agreement of sorts and makes him look good. Among those would be Sheikh Ahmed, the uncle of MBS, who has been in self-imposed exile in London, and even Prince Mutaib bin Abdullah, whom he locked up in the Ritz during the purge of the elite. Any talk of Ahmed replacing MBS would be nullified by such a move; as such, we believe there is a good chance this coalition will emerge. There will be more necessity for this as international attention continues to be drawn to the incident, with Turkish authorities searching for the body and divisions over Saudi Arabia growing in Washington, including in the Republican-controlled Senate.

Global Oil & Gas Playbook

Deals, Mergers & Acquisitions

- Rosneft and Beijing Gas have set up a joint venture that will build and operate a network of 170 compressed natural gas stations in Russia as part of Rosneft’s strategy to increase the sales of compressed natural gas. The joint venture will be 55% owned by the Russian company and 45% by the Chinese partner.

- Shell has inked a deal to sell its 26.56% interest in the Greater Sunrise offshore LNG in Australia. This makes it the second supermajor to quit the project, after ConocoPhillips sold its 30% stake in it last month for $350 million. The buyer was the government of Timor-Leste, which, together with the government of Australia, is the reason supermajors are quitting the LNG projects. The two states differ in their opinion on how the project should be developed.

- Norwegian DNO launched a hostile takeover bid for British Faroe Petroleum, which the latter rejected, saying it undervalued the company. The Norwegian company had offered almost $800 million for Faroe Petroleum. DNO is already a shareholder in the company with a 20% interest and is on a growth path ion the North Sea after years of focusing on Kurdistan.

Tenders, Auctions & Contracts

- Exxon is in talks with the Angolan government to secure licenses for the development of at least six deepwater offshore blocks. The state oil company Sonangol is also in talks with Eni, Equinor, and BP for the development of untapped resources. Exxon currently has rights to develop three deepwater blocks in Angola with recoverable resources estimated at up to 10 billion barrels of oil equivalent.

- Adnoc has awarded German Wintershall a 10% stake in the Ghasha sour gas project offshore the UAE. The project is expected to produce 1.5 billion cu ft of natural gas daily. This is the first time a German company has been approved to participate in an Adnoc oil and gas development. It will be joining Italy’s Eni, whom Adnoc awarded a 25% stake in the Ghasha project earlier this year.

- Dutch Boskalis signed a long-term contract with Aramco that will put the company on Aramco’s short list of preferred bidders in contracts that make up the Kingdom’s oil production maintenance and expansion program. Investments under the agreement with Boskalis could reach $3 billion annually over an initial period of six years, with the option for the agreement to be extended for another three plus three years.

- Brazil’s Petrobras has quit several oil fields, transferring the development rights to other companies. All the fields are in northwestern Brazil. Petrobras sold its participation in the Polo Nordeste group of fields to Perenco for $370 million and its rights for the development of 34 fields in the Bacia Potigar basin for $453 million to 3R Petroleum.

Discovery & Development

- Chevron has started pumping oil and natural gas from the Big Foot field in the Gulf of Mexico. Discovered in 2006, Big Foot contains recoverable reserves estimated at over 200 million barrels of oil equivalent. Its productive life is seen at 35 years, with a design production capacity of 75,000 bpd of crude and 25 million cu ft of gas. Chevron has partnered with Equinor and Marubeni on the development of the field.

- Buzzard, the largest North Sea oil field in the UK has been closed for repairs after operator Nexen discovered corrosion in the pipes. The shutdown briefly pushed Brent crude prices higher as the field produces 150,000 bpd of crude, which are fed into the Forties stream, one of the blends that is included in the Brent benchmark. Nexen has given no deadline for the field’s return to operation.

- Mexico’s incoming government says that—among other big new policy proposals—one for a new oil refinery in the Gulf of Mexico had been approved in public consultations. This is a massive refinery that would reduce the need for US refiners. The project would cost an estimated $8 billion and the incoming government says construction should be completed in three years.

Company News

- BP and Trafigura will lend Indian, Russian-owned refiner Nayara Energy $1.5 billion, which is the biggest fuel-backed loan for the receiving company. Previously a unit of Essar Group, Nayara was bought by a consortium led by Rosneft last year. Trafigura is Rosneft’s partner in the acquisition. The new loan, which besides BP and Trafigura also includes several banks, will take Nayara’s debt load to $3 billion. Repayment will be in the form of gasoline and gasoil deliveries over a period of four years.

- Tullow Oil, the UK-based, Africa-focused oil explorer, said it will restart dividend payments from 2019 after it suspended them amid the crisis in 2015. Starting 2019, the company plans to distribute at least $100 million to its shareholders and this year it may distribute a special dividend on improving earnings. Tullow said its net debt will be reduced to $2.8 billion by the end of 2018 with free cash flow at $700 million.

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