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Is Argentina Set For Another Debt Default?

Politics, Geopolitics & Conflict

- Will it or won’t it default? That’s the hedge on Argentina right now, and it’s of more concern to investors than whether Macri will be able to claw his way back after his loss to presidential contender Alberto Fernandez and his controversial populist running mate, Christina Kirchner. We’ve seen this happen before in Argentina, so it should come as no surprise to anyone. Macri has now imposed capital controls with foreign currency restrictions, but so far he really hasn’t stepped up to the plate to boost confidence in his administration, which faces elections in October. Last week, the Macri government said it would postpone payments on short-term local notes in order to reprofile over $100B in debt. This concerns some $15B in provincial bonds. This isn’t a default, per say, but left-wing Fernandez is making sure the public knows he views this as a “virtual default”. The IMF is now assessing Macri’s measures.

- The now infamous Adrian Darya 1, Iran’s oil tanker that has made its way from Iran, around Africa, to Gibraltar where it was held for quite some time, has delivered oil to Syria, to the chagrin of the US who has tried and failed to buy off the vessel’s captain with a financial reward in exchange for steering it into a port where the US could seize it. The US is now offering a $15 million reward for anyone who can disrupt the finances of Iran’s RGC (Revolutionary Guards). On 4 September, the US Treasury imposed sanctions on an expansive global shipping network, that has ties to the RGC. The administration also hinted that it would not grant France waivers to set up a multi-billion-dollar line of credit to Iran.

- Just days after signing an agreement with the US and Ukraine to ramp up LNG deliveries, Poland’s government says it won’t be renewing its existing gas supply contract with Gazprom, set to expire in 2022. Poland is expected to replace Russian gas with Norwegian gas through a new Baltic pipeline across Denmark and ramp up LNG deliveries to once a week at its expanded landing terminal near the border with Germany. According to the deal signed earlier this week, the LNG imports provided by the US could quadruple the volume of Polish gas exports to Ukraine to six billion cubic meters. Lithuania had stopped importing Russian gas five years ago.

- Iranian Energy Minister Reza Ardakanian told reporters that Russia is considering some $10 billion in investment in Iran's oil sector. Ardakanian met with Russian counterpart Aleksandr Novak at an economic forum held in Russia. The minister would not elaborate on further details of the Russian plan.

Market Movers

- The US and Singapore are vying bigger shares of Algeria’s prized low sulfur straight run (LSSR) feedstock - a prime commodity due to its high quality, and even more so due to the run-up to the IMO 2020 rule change. The US has traditionally been the prime buyer of Algeria’s LSSR, but now Singapore wants in on the action - and it’s willing to pay for it. Singapore has already purchased some LSSR from Algeria, and is storing it in VLCCs to later use as a blendstock to make 0.5% bunker fuel, which will comply with the new sulfur rules. Algeria’s refinery complex in Skikda produces 335,000 bpd of the prized LSSR. This LSSR is now trading at a $4.40 per barrel premium to Brent, compared to a $4.09 discount last year. The premium will ultimately be passed on down to the final bunker fuel product.

- Kuwait’s state-run oil company (KOC) is planning to start production of heavy crude by next February, along with its plans to increase its overall oil production capacity to 3.2 million bpd by 2024 and 4.75 million bpd by 2040. KOC is responsible for 100% of Kuwait’s oil production, which as of July stood at 2.678 million bpd. This is down from 2.71 million bpd in May, almost all of which is light crude and super light crude at 31 API and 48 API, respectively. The new heavy oil will target between 10 and 18 API, with 5% sulfur content. Production volumes of this heavy crude will total 75,000 bpd.

- Rosneft has lashed out at pipeline operator Transneft for the tainted oil crisis, alleging that it had so far failed to come up with a workable solution. Rosneft is claiming that Transneft’s failure to ensure quality going forward has ruined Russia’s image as a quality oil supplier. Further concerns were raised by Rosneft, which has accused Transneft of mixing oil from various suppliers since the incident, pointing out that buyers are getting blended oil that may or may not comply with the quality they require. Claims by buyers who received the tainted oil have yet to be resolved. Some of the oil traveling through pipelines to the Baltic Sea port Primorsk have elevated organic chloride levels which many European refineries cannot process.

- Mexico’s oil hedge is going to happen despite earlier suspicions that it may not go through. The billion-dollar hedge is now soliciting quotes from banks, although the size of the hedge and the price for which it will sell those barrels, remain unknown, as is usual. The delays to the hedge were due to volatility in the market as well as pricing reshuffling for its Maya crude grade, which had to be adjusted due to the changing lower sulfur rules.

- Norwegian state oil giant Equinor launched a $5bn share buyback with immediately repurchasing $1.5bn in shares. That first tranche will be completed before the end of February. The company’s main shareholder, the state of Norway, will keep its 67% stake undiluted. The company also announced it would start pulling oil from the Johan Sverdrup in the North Sea in October, a month ahead of schedule.

- Libya’s Al-Bayda oilfield has been shuttered due to pipeline maintenance work, further reducing the country’s oil output (though negligently), according to Libyan media and not confirmed by the NOC. Al-Bayda produced 7,000 bpd prior to closure. Libya’s largest oilfield, El Sharara, has restarted, but has been operating at a reduced rate after a series of valve closures by unknown persons. The country’s oil output fell in July to 1.078 million bpd, from 1.120 million bpd in June, and while Haftar’s military might has sought to increase security around the oil fields, further disruptions to Libya’s oil production are likely.

Discovery & Development

- The Liza Destiny floating production, storage and offloading unit (FPSO) has arrived offshore Guyana, where Exxon and Hess will start phase one development of Liza, which will include four undersea drill centers with 17 wells.

- Black Rock Mining (ASX: BKT) is now construction-ready for its brand new graphite mine in Tanzania--the fourth-largest graphite mine in the world. The mine should produce up to 350,000 tonnes per annum of 98.5% graphite concentrate, according to its feasibility study. The new mine should come online as demand for energy storage continues to increase, with Black Rock’s estimate that it will double within the next decade.

- Shell wants more time (another 5 years) to build its Louisiana-based LNG export project, which will push project completion into 2025. The pushback, if approved by US regulators, would knock the LNG export project out of the running to take advantage of the anticipated supply shortfall in 2023/2024. There are already more than 10 projects, most of which are in the Gulf of Mexico, that are on track to gain FID in 2019 and 2020 to take advantage of the expected supply and demand imbalance. There will be room for only so many projects that can capitalize on this, and latecomers may find no room left at the table.

Deals, Mergers & Acquisitions

- Switzerland-based Klesch Group has been in talks with Refineria di Korsou (RdK), Curacao’s state-run refining company, to operate the 335,000 Isla refinery. The Isla refinery currently has a contract with PDVSA, but this is set to expire at the end of the year. Isla has remained essentially idle, starved for crude oil at the hands of PDVSA. Saudi’s US-based Motiva had been in talks with RdK earlier in the year, and despite the rumor that it had won the bid to operate the facility in the short term, no action has been taken on that front. In late January, Curacao’s hunt for a new operator was put on hold after corruption allegations into the bidding process at RdK were raised. The current talks with Klesch Group are exclusive, and the final agreement is expected to be reached in November. The Isla refinery was thought to be on the edge of financial ruin in June, as it tried to strongarm PDVSA to get either crude oil for the refinery or $60 million in cash to honor the existing contract. The refinery has processed essentially zero oil for over a year. PDVSA has lost complete interest in its obligations to the Curacao refinery, because it cannot sell products from Curacao due to US sanctions.

- Aramco is supposed to select underwriters for its IPO as early as this week as banks are wrapping up what are sure to be emphatic pitches to offer their services. Progress on the biggest IPO in the world seems to be moving along now at a fevered pitch, starting with an organizational reshuffle that saw Saudi Energy Minister Khalid Al-Falih step down as chairman of the board of Aramco and get replaced by the head of the country’s sovereign wealth fund, the Public Investment Fund (PIF). The power shift indicates that MbS is ready to move ahead with Aramco’s public listing after a series of lengthy delays due to the listing venue and overall valuation of the oil giant, which MbS optimistically insists is $2 trillion.

- Exxon is bowing out of its oil and gas resources in Norway, looking to sell them for $4 billion, following another announcement in mid-August that it was looking to sell off its UK assets in the North Sea in a deal that could raise $2 billion. This will leave Exxon to focus on its assets in the Permian and Guyana. Exxon is in exclusive negotiations with local Var Eneri regarding the sale, but nothing has been signed yet.

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