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Drilling Giant Posts $11 Billion Loss

Global Intelligence Report - 5th October 2018

Global Intelligence Report - 5th October 2018

Filling in for Iran, Keeping a leash on MbS, Musk as a persona non-grata in Riyadh, Libya’s impossible elections … and more

The billion-dollar question for the month is definitely who will fill in the gap for the Iranian oil that is about to be removed from the market due to another phase of U.S. sanctions. The consensus among hedge funds is that the Saudis won’t be able to, despite the fact that Riyadh keeps telling Washington that it can fill the lion’s share of the gap.

Last week, there have been rumors in the region that Saudi Arabia and the UAE—both facing a bit of a cash crunch—are actually seeking to push oil prices higher and may be coordinating efforts to miss production targets to that end. While the wider oil community in the region has expressed the opinion that the Saudi’s may not be able to increase production to the extent that they have claimed, typically, the Kingdom has 1.5-2 million barrels per day of spare capacity meant to manage the market. However, that spare capacity—which is the subject of debate—cannot be kept up indefinitely.

Reports that emerged this week citing unnamed sources claim that the Saudis and Russians had already agreed (without the rest of OPEC) at the end of September to “quietly” raise output through December to keep oil prices under control.

This is a very delicate balancing act for the Saudis. They would like the extra cash that high oil prices bring; however, their moves and public statements are not meant to appease Trump so much as to avoid the media barrage of ‘cartel’ headlines. At the same time, they are concerned about letting prices drop low enough to threaten investment in an industry that needs to be pumping more to make up for the Iranian supply loss.

One thing is sure, global spare capacity will drop significantly as producers ramp up to fill in the gap.

Color from the Kingdom: Keeping MbS From Draining Saudi Coffers

While hedge funds are busy betting that the Saudis cannot make up for a loss of Iranian oil on the market once the next round of US sanctions hits on November 4th, inside Saudi Arabia, there is a fair amount of panic about the Crown Prince’s (MbS) propensity for over-spending and putting the Kingdom’s coffers in a position from which they would have a hard time recovering.

According to Oilprice.com sources with access to royal advisors, dealing with MbS requires a manipulation of the documents that are allowed to cross his desk, with any investment idea that is too tempting and risky removed before viewing in order to protect the Crown Prince from himself.

Under MbS, many of the conservatives in Saudi inner circles have been sidelined; and along with them the spending caution. Instead, MbS has surrounded himself with bankers who are more in line with the Crown Prince’s tendency to go for big, flashy deals that aren’t necessarily realistic or in the interest of the Kingdom. MbS has committed billions of dollars to Vision 2030 ideas that won’t see any financial returns any time soon.

These conservative forces who are working behind the scenes to keep things from spiraling out of control operate—for all intents and purposes—as a Saudi “deep state”. This same “deep state” was successful in ensuring that the much-hyped Saudi Aramco IPO was derailed. Part of the reason for this was that many of those that MbS sidelined were from Aramco; but Aramco’s own economists were busy trying to convince a line-up of advisors to MbS that the IPO would flounder (it wouldn’t be the cash cow that the Crown Prince thought it would be).

This is not to say that the Saudi “deep state” is an overt one. On the contrary, this is best described as passive-aggressive manipulation. There is no outright opposition to MbS’ plans—however crazy they may be. All efforts to derail new investment ideas are accomplished with the maximum amount of subtlety.

So, is the Kingdom in financial trouble? Not yet. Certain classes may be far less excited about the prospects of Vision 2030 delivering any fantastic returns (or jobs) anytime soon; however, there is still enough optimism to keep it afloat. And when it comes to finances, it will take much more than some wild investment schemes by the Crown Prince to make the Saudis desperate. The Saudis have deep coffers—even when that means simply moving money around—and they have the ability to borrow heavily. Vision 2030 has some major fault lines, which could widen, but for now it’s not enough to talk about financial instability.

For hedge funds earlier eyeing the potential of a Saudi de-peg from the dollar, things are not drastic enough to make this likely to happen, and the machinations of more cautious and conservative aides is keeping a lid on this talk.

Tesla: The Saudi Perspective

It’s not likely that Elon Musk will be able to make any near-future attempts to tap into Saudi investment funds following his run-in with the SEC that cost him his board chairman position at Tesla. Musk has overstepped wildly, angering the head of the Saudi Pension Investment Fund (PIF) and the Crown Prince, as well. Musk sought Saudi help in taking Tesla private, but he jumped the gun by tweeting to his 22 million followers that this was a done deal when it wasn’t. And when that became clear, Musk offended the Crown Prince by making it appear that the Saudi deal wasn’t good enough. The Saudi revenge on this slight came in the form of a well-timed leak about their investment in a potential Tesla rival—Lucid Motors. According to our sources in the Kingdom, the news of this investment was purposefully leaked when it was to annoy Musk.

Libyan Oil Conference on Hold

Libya’s National Oil Corp. (NOC) has moved to postpone a planned oil conference in Benghazi for two weeks, citing the recent attack on the NOC headquarters in Tripoli. The purpose of the conference was to bring local and foreign oil and gas companies together to discuss prospects. Libya tends to jump the gun on political stability, which has everything to do with the country’s oil. Production and export levels swing wildly as control over key oil facilities changes hands from various militia forces and back to General Haftar, the man responsible for ‘liberating’ Libya’s oil for export after it had been held hostage for over two years. Every time Haftar regains control of one or another of the country’s ports and returns it to the NOC, the market views it as ‘game over’, until the next attack.

There is a French and UN-backed plan now to hold elections in Libya in December. Haftar, who has publicly supported the idea, isn’t convinced that elections will take place at all in the current atmosphere. The September deadline for the creation of a constitutional framework to make elections possible has come and gone with no progress. Our assessment is that it is in no way feasible to hold elections in Libya in December, particularly given the intense surge of violence in Tripoli over the past month. By the end of this year, Libya’s oil patch could see its worst attacks yet and Haftar may not be able to come to the ports’ rescue in the face of escalating violence and bigger and more frenzied militia groups who are increasingly joining forces.

Global Brief Book

• Former Iraqi Oil Minister Adil Abdul-Mahdi has been tapped as Iraq’s new prime minister. Importantly with regard to the ongoing oil dispute between the Iraqi central government and the Kurdistan Regional Government (KRG), Salih is the former prime minister of Iraqi Kurdistan and is backed by one of the two main Kurdish parties, the Patriotic Union of Kurdistan (PUK).

• As unrest intensifies in Iraq’s oil-rich Basra region, the U.S. State Department has ordered the closure of its consulate there and the evacuation of its diplomats, citing security risks from Iran. Officials in Basra reject Washington’s notion that Iran has controlling influence in Basra; however, Iranian influence is significant enough to help fuel the ongoing demonstrations over water pollution, electricity shortages, corruption, unemployment and general lack of public services in the region despite the oil wealth.

• The UAE is now requiring that oil tankers docking at its Fujairah terminal provide certified documentation about the origin of cargoes in preparation for U.S. sanctions on Iranian oil that go into effect on November 4th. Fujairah is the biggest oil-trading hub in the Middle East. This news appears to have been leaked purposefully, citing unnamed sources, in an attempt to demonstrate compliance to Washington.

• For anyone following the trajectory of Noble Energy after Israel’s game-changing gas discoveries in the Levant Basin, the key news will be that Noble has sold its 43.5% stake in Israel’s Tamar Petroleum Ltd in order to focus on a gas export deal with Egypt. The Egypt deal sealed last week will see Noble, Israel’s Delek Drilling and the Egyptian East Gas Co. buy a 39% stake in the EMG pipeline. This is one piece of the puzzle for a massive $15-billion natural gas export deal that will see Israel export to Egypt beginning in 2019. The gas will come from Israel’s Tamar and Leviathan fields in the Levant Basin.

• Next month will see presidential elections in Brazil. So the timing of the awarding of four blocks in the highly sought-after pre-salt layer (billions of barrels trapped in this layer) brings with it some uncertainty. Shell, Chevron, Exxon and Petrobras all won key blocks in two pre-salt basins: Santos and Campos. Brazil’s former president Luiz Ignacio Lula da Silva—in prison on a 12-year conviction—has named Fernando Haddad to replace him as the Workers' Party (PT) candidate in the elections. Haddad is an unknown and clearly an extension of Lula himself and despite all, he is polling second in this race.

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