Identifying Libya’s Oil Saboteurs

Libyan Oil Sabotage: The Next Phase

Nearly one-third of Libya's oil output was taken offline for three days this week after a pipeline was sabotaged from the giant Al-Sharara field, which produces 315,000 bpd. On Monday, production resumed, but not before Libya lost 290,000 bpd for 48 hours. That's about $19 million a day in losses, confirmed by our sources at the Tripoli-based National Oil Company (NOC). The NOC is not keen to discuss publicly what the cause of the shutdown was, or who was behind the sabotage. Instead, they refer to it publicly only as a "criminal act". The unwillingness to discuss the nature of the sabotage suggests that it may have been perpetrated by Islamic radical forces. What this means is this: It's always been General Haftar (presently trying to seize Tripoli from the GNA) who fought off ISIS-related forces from the country's oil facilities. The GNA isn't keen to highlight this at a time when they are bringing on external parties to help fight back Haftar's offensive on the capital city. The Sharara oilfield is only functioning effectively because of Haftar, who has rescued it from armed groups several times already.

In the last week of June, the NOC released its oil revenue reports, showing $1.7 billion for June. That's up from $580 million in May, which was plagued by electricity cuts to oil facilities that had caused a loss of production of approximately 70,000 bpd.

In the meantime, Haftar is stepping up his lobbying efforts in Washington, DC, taking on a new lobbyist in the form of Linden Government Solutions' Erica Kasraie. At the same time, the GNA is targeting Russian citizens (two that we know of have been arrested for attempting to meddle in future elections) because of Moscow's support for Haftar.

Haftar is waiting for the UN to get the ball rolling for an audit of Libya's two parallel branches of the Central Bank. Earlier we noted that Haftar got the UN's attention by claiming that the Tripoli branch of the CB, which handles all oil revenues, was using those revenues to pay off militia fighting against his forces. The UN is dragging its feet on this, having failed to sign on one of the Big Four auditing firms in closed bidding and now issuing an open tender for the process.

Keep Your Eye on Novatek, It's Putin's Favorite

Putin has just granted Russian citizenship to Novatek's finance chief, Mark Gyetvay. This is a brilliant and not-intended-to-be-subtle move on Putin's part. It will help Novatek sneak by US sanctions in some ways. US nationals, like Gyetvay, cannot help organize long-term funding for Novatek because of sanctions. So it doesn't help if your finance chief is a US national.

It's time for investors to better understand what Novatek is while all the attention goes to Gazprom, which is by all accounts a rival in a carefully balanced game of favor with Putin. Novatek is backed to Gennady Timchenko.

What's worth watching is the Arctic LNG 2 project in northern Siberia. This is a JV between Novatek and TechnipFMC (a French-American company that also worked on Novatek's Yamal LNG facility). The LNG2 project is a massive one with a nearly 20-million-ton liquefaction capacity. Work is slated to begin in Q3 this year and be completed in four years. Until this week, Novatek owned 70% of the project (Total SA, 10%; China's CNPC 10%). On July 22nd, they closed a deal to sell 30%. 20% went to two Chinese companies, CNOOC and CNODC (10% each) and another 10% went to a consortium of Japanese Mitsui and JOGMEC (Aramco was originally in the running, but is no longer).

Timchenko is under sanctions - as is anyone who owns a combined 51% of Novatek, which includes Timchenko and Leonid Michelson. The company itself isn't under sanctions.

Now, it's Novatek - not Gazprom - that's Putin's biggest energy weapon. Putin is launching no less than an LNG offensive through Novatek. It's part of a national security doctrine. Novatek is the largest supplier of LNG to the European Union as of Q1 this year. That has led to a reduction in Gazprom's market share. The trick is that the Novatek CFO was the last sanctions hurdle. Sanctioning Timchenko and Michelson does not keep Novatek from expanding its business at all. There are no sanctions on Russian natural gas projects.

By 2023, Russia will be the definitive king of LNG. That's when Novatek's LNG2 project will come online and the company's capacity will hit 37 million metric tons a year. It helps, too, that the Russian government this week allocated $800 million for the construction of LNG carriers for the Arctic LNG2 project.

If you're betting on US LNG, this is exactly what you need to look out for.

The US-Iran Conflict Is A Tit-for-Tat Game of High Tech

The UK is out of its league with Iran, and British Foreign Secretary Jeremy Hunt's proposal for a European-led maritime security force in the Gulf, followed by Iran's dramatic seizure of a UK tanker isn't only being rejected by Iran - it's being rejected by incoming PM Boris Johnson. Nor do the country's shipping industry figures find any comfort in the idea. The US is also launching its own Gulf protection force, Operation Sentinel, to escort ships through the Persian Gulf, Strait of Hormuz and Gulf of Oman. Iran is trying to force the UK into a solid stance here - to continue to support the nuclear deal. And it's winning so far because Boris Johnson's allies appear prepared to do just that. In the meantime, this is a standoff, and Iran is playing it expertly, most recently hinting that it could offer a swap deal - the British tanker for the one the UK seized off Gibraltar carrying Iranian crude.

But the next phase in this conflict will be a high-tech one, and most won't even know anything is going down. The downing last week of either one or two Iranian drones was done by new US Naval technology. This was a tit-for-tat because the Iranians took down a $130-million Global Hawk drone from the US Navy in June. The Iranian drones taken down this month were done so with a next-gen piece of tech that is a directed-energy weapon. It was the first time it had been successfully deployed. It's the Light Marine Air Defense Integrated System (LMADIS) and it uses radio frequencies to jam drones, which then destroys them. There are also indications that the Russians are jamming GPS signals in the shipping lanes, lending Iran a helping hand. The Russians are believed to be using a GPS spoofing technology - and that same tech was likely responsible for sending the Iranian-seized British tanker off course.

This is the nature of this conflict. We expect a high-tech-aided tit-for-tat to continue until parties are forced back to the negotiating table, avoiding an all-out war that would benefit no one.

US Sanctions for Chinese Importers of Iranian Crude

Over the past couple of weeks, Washington has gone back and forth over whether to issue China a waiver for Iranian crude imports, or whether to start slapping on more sanctions. The wait is over. Is it a big deal or just for show? It's a fairly big deal: The Chinese company sanctioned is Zhuhai Zhenrong Corp. Unless you're a trader, you probably haven't heard of this company, but it - along with Sinopec - is the biggest importer of Iranian crude in China.

Zhuhai is a subsidiary of Macau-based Nam Kwong Group - and both the parent and the subsidiary are state-run Chinese companies. The sanctions put Zhuhai on the US blacklist, and bar executive Youmin Lin from entering the US.

It's not, however, a novel move. Obama sanctioned this same company in 2012, for the same reason.

Global Oil & Gas Playbook

- Saudi Aramco will be holding its first earnings call in August in yet another sign that the IPO is still hoping to happen. But we remind subscribers that while the purpose of the IPO was to raise cash to be deployed in the strategic development of the Kingdom's economy to avoid potential crises related to growing youth unemployment and the inability to offer subsidies and lucrative positions to this dangerous demographic category, Aramco could not possibly be the only engine of this. We remind you that this was a directive from the Saudi Crown Prince that no one else believed in: The only way to make Aramco a $2-trillion company is to destroy it. The first step toward that was forcing Aramco to buy SABIC shares from the country's sovereign wealth fund (PIF). That will harm Aramco in the long term and only served to get PIF much-needed cash, which is now going to be pumped into a ridiculous project called NEOM.

- Blackstone Group is considering selling its stake in Cheniere Energy Partners LP after investing some $1.5 billion into the partnership in 2012. Cheniere owns the first major LNG-export terminal in the US. Blackstones has a 58% stake worth about $8.8 billion.

- Angola will auction off nine offshore oil blocks of the Namibe basin, scheduled to start in October. It will be the country's first block auction since 2011. The government's plan is to offer as many as 55 blocks-31 through public bidding in 2019, 2020, and 2023 and the rest through direct negotiation-by 2025.

- Qatar Petroleum has signed an agreement to enter three offshore exploration blocks in Kenya's Lamu Basin. Italian Eni and French Total SA currently hold 55% and 45% interest share in the blocks, respectively. Eni is the operator. QP would acquire 25% interest share in each of the blocks.

- Talks are believed to have stalled between India's Reliance Industries and Saudi Aramco for the sale of a minority stake in the Indian refinery business. Sources have cited differences over deal structure as the reason for the stalled talks. Reliance is looking to sell as much as 25 percent of its refinery and petrochemicals business in a potential $10-billion deal. The sticking point right now is that the Saudis don't like Reliance's proposal to shift some of its $41.8 billion in debt to the refinery business prior to the transaction with Aramco.

- Ebola fears have now hit the oil industry itself, with China's CNOOC suspending operations in Uganda in the Kingfisher oilfield after a suspected Ebola-related death over the weekend. Last August, the Ebola virus took solid hold in DRC, and now there are fears of its potential spread into Uganda and elsewhere.

- Italian Eni has launched production with its South West Meleiha Development in Egypt. Starting production is 5,000 bpd, which will hit 7,000 bpd by September. Eni owns a 50% interest in the project. Egyptian General Petroleum Corp. holds the remaining 50%.

- Norway's Aker has made a significant oil discovery of the Alvheim field, located in the Norwegian section of the North Sea near the UK border. The company said recoverable oil discovered is estimated to be between 82-200 million barrels of oil equivalent.

- Nigeria's state-owned NNPC oil company has secured $3.15 billion from Sterling Oil Exploration & Energy to develop License 13--a block that is wholly owned by NNPC's upstream subsidiary, NPDC. Some 10% of NNPC's crude oil exports will go to India. NNPC posted a trading surplus of $18 million for May--up 13% from the previous month.

- Japan's JXTG Nippon Oil & Energy will terminate refining operations at the 115,000 b/d Osaka refinery, which is jointly owned with PetroChina, partly due to lower domestic oil demand in Japan. JXTG has a 51% stake in the refinery, with PetroChina holding the rest. The refinery will be shut in October next year, a month after the expiry of JXTG's venture with PetroChina. The facility will be turned into an asphalt-fueled power plant.

- Trading giant Vitol has launched construction of a 30,000 b/d refinery in southern Malaysia's Johor state. The new refinery will supply low-sulfur fuel oil once new sulfur regulations come into force. This is Vitol's preparation for the global shipping industry to switch to marine fuel containing 0.5% sulphur (down from 3.5% now) beginning in 2020.

- The Azeris built an oil refinery in Turkey, and now they can't supply it because of sanctions against Iran. That means Russia is a huge beneficiary. This is a $6.3-billion refinery that needs a crude supply. Russia is happy to step in to fill this gap. The Azeri, 200,000-bpd Star Refinery on Turkey's Aegean coast went online in October and is now gearing up to by 1 million tons of Urals crude from Russia's Rosneft giant.

- In Yemen, all eyes are on an oil tanker that has been abandoned off the coast with 1.1 million barrels of oil ($60 million) near the port of Ras Isa. It's been languishing there for years and off the radar. No one is maintaining the vessel, and the UN is now concerned that it is an environmental disaster-waiting-to-happen. The oil tanker has been stranded since 2015 and is now the center of a geopolitical battle in the conflict between the Iranian-backed Houthis and the Saudi-backed regime forces. According to the UN, with the tanker engines shuttered, inert gases being pumped into storage tanks to halt the build-up of explosive gases from the oil have not been topped-up.

- Juan Carlos Marquez, a former executive at Venezuela's state-run oil company PDVSA, was found dead in his apartment in Madrid, Spain, on Sunday. Two days prior to that he had appeared in court for his alleged involvement in a money-laundering scheme. Spanish police are investigating, and foul play is a potential here given reports that Marquez had allegedly agreed to collaborate with the investigation into PDVSA and would have served as a key witness.

- Brazil's state-controlled Petrobras says Trident Energy presented the highest bid (nearly $1 billion) to acquire the Pampo and Enchova oil fields - two clusters of shallow water fields in the Campos Basin. Trident Energy is backed by US-based private equity firm Warburg Pincus.