Global Intelligence Report - 9th January 2019

Sources

- A friend of family of jailed McKinsey partner in Saudi Arabia
- 2 former business associates of Hani Khoja in Saudi Arabia
- High-level Turkish military sources

In recent days, news has been emerging about the October 2017 arrest of a former partner in McKinsey in Saudi Arabia, including reports that he is now being interrogated and tortured. The McKinsey partner in question is Hani Khoja, and our network of high-level sources on the ground in Riyadh say that he is being pressured right now to give false information on former Saudi economics minister Adel Fakieh. McKinsey fired Khoja while he was in jail and stopped paying his family as well. A Wall Street Journal story from a few weeks ago suggested that McKinsey was still paying the family; however, family members have told our sources that this is not true.

In addition, the government of MBS took 70% of Khoja’s net worth soon after his arrest in 2017. They simply removed it from his bank accounts without any procedure whatsoever.

The Khoja affair is a major black eye for McKinsey, and comes amid more scrutiny of the firm’s global dealings with totalitarian and undemocratic regimes. It is also a continuing highlight of MBS’ corrupt manner of dealing with businessmen in KSA.

Fakieh is an engineer and the former mayor of Jeddah, as well as former labor minister and former health minister. Most recently, he was minister of economy, until King Salman removed him in November 2017 by royal decree. Fakieh was a threat to MBS’ total power over KSA and was involved in the ‘transformation’ projects even before MBS came to power. He even had his own measure of influence, including with others in the Saudi royal family. For this reason, he was targeting during the initial crackdown. However, MBS’ problem right now is that they have not been able to associate Fakieh with any crime, and thus are using the McKinsey partner in an attempt to fabricate evidence against him and remove his power and influence fully. This is yet another indication that MBS views his position as vulnerable.

Syria and A Dangerous Near-Miss Between Russia and Turkey

At any moment, the conflict in Syria could spiral out of control, and no moment suggests that more clearly than a planned Turkish hit on a convoy carrying Russian military personnel, which was stopped at the last minute—before it could do major damage. It also led to a shakeup in the top ranks of Turkey’s military.

General Metin Temel, commander of Turkey's 2nd Army who is in charge of Syria operations, has been benched by President Tayyip Erdogan in an unexpected move. It was surprising because Temel was the government's favorite, as he was once harshly criticized by the main opposition for applauding Erdogan while the incumbent president bashed the opposition CHP's presidential candidate last year. Moreover, Temel was seen highly successful for his quick-win command in Turkey's Jarablus and Afrin operations. There are dueling rumors in Turkish media, with some saying he clashed with the Defense Minister and others saying he criticized Erdogan’s plans to invade northeastern Syria. Neither of these rumors are correct, according to our high level sources in the Turkish military. According to our sources, both of these issues had "created some rifts" but neither of them were substantial enough to justify Temel's "almost-demotion" (He now has a passive job at Chief of Staff's Review Directorate). In reality, the sources said, Temel was effectively suspended because he had recently created a crisis when he ordered Turkish units to strike a Syrian regime convoy which also included Russian military personnel. The Defense Minister was forced to personally intervene and stop the attack near Manbij, averting a serious crisis with Russia. "Temel's words on US-supported YPG and his action against Russia-supported regime forces undermined confidence entrusted in him," one source added.

And the leverage game continues between Turkey and US in the meantime. On Tuesday, Erdogan lashed out at Washington’s demand that Turkey guarantee the safety of Kurdish fighters in northeaster Syria before the US withdrawal from the conflict zone—a demand Erdogan has called “a very serious mistake”. This comes after a visit last week to Ankara by a US prosecutor and FBI officials who were given permission to attend the interrogation of a key suspect and two witnesses in Turkey’s landmark legal case against allies-turned-rival, the Gulenists. According to our sources, not only were the prosecutor and FBI allowed to attend the interrogation, but they were also given copies of the witnesses’ phones in a diplomatic first. But the sentiment on the ground in Ankara is that the US took what it was granted and proceeded to pay half-hearted lip service to Turkey’s fight with the Gulenists.

A source in the Turkish Defense Ministry told us that Turkish officials "did everything" to satisfy the needs of the US delegation but "some of their responses created disappointment" in Ankara. "We stretched out judiciary and diplomatic precedents to give whatever the Americans wanted. We asked all their questions to Kemal Batmaz [the key suspect] and the two prosecutorial witnesses. We let them attend the interrogation. We provided them the virtual copies of the key suspects' phones. Still, I sometimes got the impression that the Americans were here to find gaps in our legal processes—even hinting of innocence in the suspects' cases. Legal moves in the US against the Gulenists are one form of potential leverage for Washington in Syria, and the timing of this visit as well as the request to guarantee the safety of the Kurds in northeastern Syria are not coincidental.

Global Oil & Gas Playbook

Venezuela is taking steps to increase its oil production through contracts with little-known energy companies. Two such deals emerged this week—one with a US independent and the other with a French company, both seeking to boost production from a number of fields.

The first deal was closed with private U.S. company Erepla Services, which will work with state-run PDVSA to increase the oil production of the Tia Juana and Rosa Mediano fields. The terms of the agreement are different from the usual: PDVSA will sell all the oil it pumps from these two fields to Erepla, which will then have the right to resell it and return to PDVSA 50.1% of the proceeds. The size of the deal was not disclosed but it will be in force for 25 years with an extension option of another 15 years. (While there are U.S. sanctions on Venezuela, to date, those sanctions have not extended to oil).

The other deal involves a French company, Maurel & Prom, which will help PDVSA boost production at a large field in the Zulia state in western Venezuela. This deal will be worth $400 million and will help Caracas progress with a plan to boost overall crude oil production to $2.5 million bpd by the end of 2019.

This is not the first time the Maduro government has announced ambitious production plans for its oil that seem to fall through pretty quickly for lack of financial means and workforce to see them through. As of November, Venezuela produced around 1.52 million barrels of oil daily, down from an average of 2.07 million bpd in 2017. To date, its production rate is the lowest in almost 70 years.

Deals, Mergers & Acquisitions

- Elliott Management has approached US energy independent EQP Resources with a takeover offer valuing the company at $8.75 per share. The price, to be paid in cash, represents a 44% premium to QEP’s closing price on January 4 and values the company at about $2 billion. The activist investor group already owns 5% in the energy company, which owns more than 50,000 acres in the Permian.

- Italy’s Eni will buy a 70% stake in the Oooguruk oil field in the Beaufort Sea, offshore Alaska, which the company says will complement its operations at another field in the vicinity, Nikaitchuq. The Oooguruk field, currently operated by the seller of the stake, private company Caelus Natural Resources, produces around 10,000 bpd of crude.

Tenders, Auctions & Contracts

- The Indian government on Monday launched a long-delayed tender for 14 oil and gas blocks as part of its open acreage licensing policy that aims to reduce India’s overwhelming reliance on imported crude. The 14 blocks on offer include one deepwater area in the Krishna Godavari Basin, five shallow-water blocks, and eight onshore blocks. The combined in-place resources of the blocks are estimated at 12.6 million tons of oil and gas.

- Saudi Aramco sealed a deal with the Pakistani government to build an oil refinery in the port city of Gwadar. The exact size of the deal was not disclosed although Pakistan’s information minister referred to it as a “multibillion dollar” refinery. For the Saudis, this is part of efforts to secure future markets for Aramco’s crude and for Pakistan it is part of a drive to attract more foreign investments.

- Separately, Aramco sealed a six-year deal with UK TechnipFMC for work on the Saudi company’s offshore projects. The British oilfield services provider will work on these projects in a consortium with Malaysia Marine and heavy Engineering.

Discovery & Development

- 88 Energy expects to begin drilling its first exploration well in a promising part of the North Slope in Alaska within weeks. The Winx-1 well could tap resources estimated at about 400 million barrels of crude. The company estimates the chance of success for the well at between 25% and 30%.

- Bolivia’s state oil and gas company, YPFB, and its partners have struck oil and gas in the Gran Chaco province with resources estimated at 200 billion cu ft of natural gas and 11 million barrels of petroleum liquids. Plans are to drill a total 11 wells in the deposit during the first quarter. Maximum production is estimated at 35 million cu ft of gas and 5,000 barrels of crude oil daily.

- Despite a string of field and pipeline outages, and oil terminal closures last year, Libya’s National Oil Corporation plans to boost production to 2.1 million barrels daily by 2021. At the moment, the country produces less than a million barrels daily as its largest field, Sharara, remains shut down following a blockade by local tribesmen and members of the Petroleum Facilities Guard.

- Exxon said it has started the drilling of its Haimara-1 exploration well in the Stabroek block offshore Guyana. The block has become one of the most promising assets Exxon operates after it made ten discoveries since the first one in 2015. The block’s reserves to date are estimated at over 4 billion barrels of crude oil and natural gas.

Company News

- Sinopec, China’s largest refiner, expects profits for 2018 to be 50% higher than a year previously thanks to restructuring efforts and operational streamlining that enhanced efficiencies. The company said it estimated its refined oil product sales to have hit 40 million tons for the first time in its history.

- Ophir Energy will book a non-cash writedown of $300 million in its annual report after the government of Equatorial Guinea refused to extend a development license for a gas block that contains the Fortuna discovery. The government warned Ophir it would oust it from the block if the company failed to present it with loan deals by the end of last year.

- Occidental Petroleum, the latest to report capex plans for 2019, said it may spend $4.4 billion to $5.3 billion this year depending on benchmark prices. The company, one of the largest players in the Permian, noted it would maintain its dividend even at a price of $40 a barrel for Qwest Texas Intermediate.

- Exxon has become the first energy company to join IBM’s Q Network that involves Fortune 500 companies as well as startups and academic institutions united in tier ambition to find some practical applications for quantum computing.

Politics, Geopolitics & Conflict

- Gabon’s army has reportedly attempted to seize power and oust President Ali Bongo, whose family has ruled the West African country for five decades.

- Mexico’s military has taken control of at least two Pemex refineries as the government cracks down on fuel theft that’s cost the state $7.5 billion over just the last three years.

- Police have had to interfere with protests by a First Nation against a natural gas pipeline project in British Columbia. The pipeline will ship gas to the LNG Canada facility in Kitimat. So far, the Royal Canadian Mounted Police have arrested 14 people.