Lebanon Clashes With Israel Over Gas Exploration

Geopolitics & Conflict

Lebanon, in full crisis mode, has rejected Israeli gas exploration in a disputed area in the Levant Basin. Israel has already signed a contract for exploration with Halliburton. This isn't an end to negotiations over the disputed area. Rather, Lebanon objects to the fact that while UN-sponsored negotiations are still ongoing, Israel has jumped the gun by signing a contract with Halliburton. Lebanese Prime Minister Michel Aoun said this week that all exploration would be frozen until there is a resolution on the disputed area. Negotiations began in the fourth quarter of 2020. The area in question is an 860sq km swath of the Mediterranean Sea (Zone #9). Negotiations are faltering at a time when Hezbollah is increasing its strength and maintains control of the area on the Lebanese-Israeli border.

The horse-jockeying for the top spot at Libya's National Oil Company (NOC) has taken another twist, this time with the interim prime minister's withdrawal of the suspension order for long-time NOC head Sanallah. As we noted last week, we do not believe it was ever the intention of the prime minister to remove Sanallah; rather, he was attempting to buy time by temporarily appeasing the new oil minister who is seeking Sanallah's removal as various parties attempt to configure a new leadership for greater control over the country's oil resources. The rift between oil minister Mohamed Oun and Sanalla is not likely over, however. That complicates Libya's grand plan to increase its oil production from 1.4 million bpd to 1.8 million bpd in the relatively short term. The additional 400,000 bpd would go a long way to shoring up the perceived gap between tight global oil supply and growing oil demand that the market has been focused on for weeks now.

Former Venezuelan oil chief - the longtime head of state-run PDVSA - will not be extradited to his home country, according to a ruling by the Roma court this week. Former PDVSA head Rafael Ramirez is accused of managing the state-run oil company in a non-Chavez fashion and "bankrupting" it. He fled to Italy after a falling out with Venezuelan President Nicolas Maduro that led to a warrant for his arrest. The Rome court ruled that Ramirez should have international protection and refused the extradition request.

Markets

U.S. crude oil inventories are falling, and global oil markets are getting jittery, not just because of increased oil demand and tightening supplies, but because of the nat gas crunch in Europe also, which is expected will further increase the demand for oil. OPEC's August production disappointed some analyst expectations, but OPEC members such as Nigeria are now lobbying OPEC to raise its baseline as it is confident it can increase production.

Part of oil's jitters has had to do with Evergrande, a Chinese conglomerate that is facing default and saw its shares crash 70% earlier this week. Whether or not China bails Evergrande out, fears that this could be another spectacularly devastating Lehman Brothers event are possibly overblown. Beijing isn't likely to flat out bail Evergrande; nor is it likely to let it fail completely and enter into Lehman Bros territory. The Chinese authorities have far too much penchant for control of their markets - especially lately.

China said it would stop building new coal-fired power plants abroad. And while the knee-jerk response would be to point out this does nothing to limit the number of coal-fired power plants it could build domestically, more than 70% of all new coal plants that are built around the world rely on Chinese funding.

We might be in the midst of a gas crunch, and a wind energy crunch in Europe. But another weather-dictated energy source is also feeling the pinch: hydropower. Calm winds are sapping Europe's renewable energy supply. In the United States, drought is set to curtail hydropower generation by 14% this year, compared to last. As a result, at least one hydropower plant has been forced offline, plunging California's hydropower output to a near 10-year low. This will further put the squeeze on natural gas imports for California, which will domino into higher oil prices as nat gas supplies run short and power generators look to alternate sources.

Deals & Discoveries

BP Trinidad and Tobago's Matapal gas development has achieved first gas - and 7 months ahead of schedule. Matapal will deliver 250-350 million standard cu ft/day for Trinidad's domestic use in power generation and as a feedstock for ammonia, methanol, and LNG plants. Matapal is tied back to the existing Juniper platform.

Royal Dutch Shell is bailing on the Permian. It has reached a $9.5B deal with US-based ConocoPhillips to sell those assets. It's possible that the sale is in response to a Dutch court that ordered Shell to reduce its carbon footprint - asset sales are the quickest way to decrease its Co2 output by 45% from 2019 levels per the court order - it only has until the end of 2030 to do so. But Shell has stated simply that it is focusing on value over volume and disciplined capital stewardship. Shell produces 175,000 bpd-200,000 bpd from its Permian assets. For Conoco, it means adding even more Permian acreage, after spending $9.7B on Concho earlier this year. Of course, Shell's Permian exit does little to affect Co2 output - it merely transfers it to Conoco. The message here isn't the Co2 impact, which is nonexistent. It's this: if the market was wondering whether Permian assets are still a hot commodity, the answer appears to be a resounding yes - just not for the European oil majors. Shell owns 260,000 acres in the Permian - so this sale means the acreage is selling for nearly $40,000 per - rather steep indeed. Shortly after the deal was announced, Shell said it would return $7 billion of that to shareholders in a somewhat surprising move.

Also after the Shell/Conoco deal was announced, Conoco said it would sell $500 million in lower-value conventional oil and gas properties in the Permian. Conoco has plans to divest $5 billion in assets by 2023 - mainly focused on some of its less productive Permian assets, but some Alaskan assets as well.

Iran is looking to attract $145B in foreign and domestic investments in its upstream and midstream oil industry over the next four to eight years, Iran's oil minister said this week. This was announced at a meeting between Iran's oil minister and the head of Sinopec. China is Iran's top oil customer, and one of the few countries willing to purchase Iranian crude oil in defiance of sanctions.

Policy & Regulation

The European Commission has ordered Poland to shut down its open-pit coal mine, KWB Turow. But Poland has refused, citing energy security problems. The Commission has therefore levied a fine of $586,000 per day for every day it continues to extract coal. Poland says it has no intention of closing up shop. Turow supplies power to 2.3 million homes. The mine is located near the Czech and German borders, and those two countries are fighting vigorously to have the mine shut. 80% of Poland's domestic energy came from coal in 2019. The EU hopes to have coal completely phased out by 2030, but Poland has said it will be unable to comply with that goal.

Britain is mulling over the option of handing out loans to energy companies that take on customers from the smaller ones that go under as the natural gas crisis intensifies. State-backed loans are just one solution Britain is considering to ease the strain on the power sector.

Mexico has canceled five import licenses held by Trafigura is just the latest move by Mexico to push out private fuel importers from its energy sector in favor of state-run Pemex. Over the summer, Mexico suspended 82 companies from its fuel import and export registry, including Repsol and Kansas City Southern.

New Energy Money

Lightsource BP has secured nearly $2B in funding to develop 25 GW of solar capacity by 2025, in what would be a significant expansion in its solar energy capacity, only developing 2.8 GW of solar capacity so far since 2017.

Shell is starting up its Shell Energy brand in Brazil, committing to invest $570 million in renewables there by 2025, focusing on solar and wind power, thermal-based gas, and Renewable Energy Certificates and carbon offsets.