• Sources close the royal court in Saudi Arabia
• High-level Egyptian energy industry sources
• Former Egyptian intelligence source
• Diplomatic sources in UAE
SANCTIONS & SAUDI
OPEC and Russia are set to discuss oil production cuts again, less than a month after both Alexander Novak and Khalid al-Falih assured markets they will ramp up production to offset any supply losses after U.S. sanctions against Iran came into effect.
Conflicting signals demonstrate a new level of uncertainty in global oil. After dozens of media reports claimed that Iranian oil exports had been falling sharply and steadily, data now suggests the fall has been less steep—a fact immediately weighing on oil prices.
In this context, just months after some fund managers and analysts warned Brent could hit $100 or higher by the end of the year, it now seems a decline back to $70 a barrel is far more likely.
The imposition of sanctions against Iran and those who do business with Iran has had a very limited impact on oil prices, due in large part to strong output from the U.S. and Russia. Sources close to the Saudi royal court say Mohammed bin Salman is also ramping up capacity, although geopolitical tensions over the death of Khashoggi may end up impacting Saudi Arabia’s cooperation with the U.S. on that front. So far, the tensions between the US and Saudi Arabia over the incident haven't had any ramifications in the oil market, but it's on the minds of many market participants as the OPEC+ group meets this week in Abu Dhabi.
EGYPT OIL DEBTS
Oil exploration in Egypt has been hampered for a decade by the country's sluggishness in repaying debts to foreign firms (with total debt rising as high as $6bn). The situation was especially stark in the post-revolutionary period from 2011 to 2013, but a major push in the last two years has seen the oil ministry pay more than $2 billion of those debts. Now, it still owes about $1.2 billion but has an aggressive plan to pay it off next year.
The plan was driven in large part by oil executives with the ear of Gen. Al Sisi, including Hisham Mekkawi, who heads BP Egypt, and Khaled Abu Bakr, chairman of Taqa Arabia, according to two sources in the oil industry in Egypt.
The hope on a macroeconomic level is that Egypt can cut back its expensive imports of petroleum products to generate power by encouraging more natural gas exploration -- and eventually for Egypt to become a net exporter rather than a net importer.
In addition to paying off oil debs, the Egyptian government is also hoping to encourage more exploration in the Red Sea, with a planned tender by the end of the year. A Western oil executive said they are much more amenable to pursuing opportunities like this in Egypt now thanks to their commitment to pay off debts to oil majors.
EAST MEDITERRANEAN GAS
That leads us on to one of the most fascinating and intrigue-ridden stories of Middle East oil and gas, the East Mediterranean Gas Co. …
Under Mubarak, Egyptian tycoon and spy Hussein Salem built a gas pipeline from Egypt to Israel. To make the project more tenable, he brought in big international investors including Sam Zell and a Thai conglomerate. But after Mubarak fell, it quickly became a blot on the country and a symbol of Mubarak's weakening stance towards Israel (and corruption because of Salem's involvement).
That led to some pretty scary arbitration proceedings that are still ongoing, including a verdict in the International Chamber of Commerce in Geneva in 2015 for Egypt to pay about $2 billion to Israel's electricity company for failing to uphold its contractual obligation to send over gas. Thanks to some complicated behind-the-scenes negotiations and espionage intrigue, those problems were erased -- or at least delayed. Now, Israel is supplying gas to Egypt (thanks to some major discoveries, including off the Gaza Strip, they no longer needed the imports).
The government has gone to great lengths to make the deal seem like a private-sector arrangement. In fact, it's entirely overseen by Egyptian and Israeli intelligence parties. One key person behind the arrangement is Abdel Hamid Ahmed Hamdy, managing director of East Mediterranean Gas and a long-time Salem acolyte. What's not well known is Hamdy is married to a daughter of the late Egyptian spy chief Omar Suleiman and is heavily connected to the Egyptian General Intelligence Services.
The Abraaj Capital debacle (the private equity firm that was misusing client money and is now disintegrating) has seen some further developments relating to the Jafar family of Sharjah.
The family loaned Abraaj $300 million via Crescent Group at the eleventh hour last year, based on a personal relationship between the family and Abraaj's Hussein Naqvi. But the relationship soured amid the revelations about Abraaj's questionable dealings, and the Jafars went so far as to file a criminal case in Sharjah against Naqvi (this is serious because it would mean his arrest if he were to set foot in the country).
Sources say the two sides have quietly reached an agreement and the Jafars are planning to withdraw civil and criminal charges; the exact details are unclear, but Crescent will take a considerable haircut on the loan, UAE sources say.
THE DEPTH OF THE INDIAN SANCTIONS WAIVER
As we noted last week, New Delhi has a lot at stake in a major transport corridor that it’s invested $500 million in already. The International North-South Transit Corridor features the Chabahar port as the key link, and as we noted, it is a bulwark against China in the region. With that in mind, Washington has not only granted India a waiver on Iranian oil imports, but has also granted it an exception to U.S. sanctions that would have hindered India’s development of the port in Iran along with a railway line from the port to Afghanistan.
TURKEY’S SANCTIONS WAIVER
At the same time, while Turkey was included in the list of countries given a temporary waiver from complying with Iran sanctions, Erdogan remains belligerent, publicly attacking the sanctions, which he calls a purposeful attempt to unbalance world markets. Erdogan is likely to continue to ramp up pressure on Washington despite the waiver as he sees a political opportunity. Not only does it buy him political capital at home, but it also lays the groundwork for what happens when the waiver expires or is reviewed in six months or so. Erdogan is still looking for concessions on the U.S. trial over a figure from state-run Halkbank, accused of sanctions busting on Iran.
In relation to the Halkbank trial, Turkey moved earlier this week to issue an arrest warrant for Reza Zarrab, a Turkish banker and gold trader (with dual Iranian citizenship) who is a witness for the prosecution in the trial against Halkbank’s former deputy general manager, Mehmet Hakan Atilla. The Americans detailed Zarrab in 2016 and he pleaded guilty in 2017 of sanctions busting for Iran and is now testifying for the prosecution against Halkbank.
NEW SANCTIONS FOR RUSSIA
This week, Washington also slapped sanctions on Russians and Russian-backed entities over Moscow’s annexation of Crimea. The sanctions come ahead of the Paris meeting, and follow a push by Moscow to force Western oil buyers to start using euros instead of dollars. The push has extended to the introduction of penalty clauses in contracts. In question are the terms of 2019 oil sales contracts between Gazprom Neft and Surgutneftegaz on one hand, and Western majors on the other. Right now is annual renegotiation time, and Moscow needs protection against sanctions. Another dispute is ongoing between Western majors and Rosneft, which would see buyers pay penalties for supplies beginning in 2019 in sanctions halt sales. (Next week, we will delve deeper into the Russian negotiations with Western oil majors and what this means for cargo payments with sources in Moscow).