The Geopolitical Impact Of A Natural Gas Revolution

Politics, Geopolitics & Conflict

- Now, Turkey is sending its Syrian mercenaries to another reigniting conflict zone: The battle over Nagorno Karabakh between Azerbaijan and Armenia. Renewed fighting erupted on September 27th when Azerbaijani forces (Turkish allies) attacked Armenian forces controlling the majority of Nagorno Karabakh territory. The forces of both sides have now been fully mobilized. This is another war of external party involvement. Armenians declared this territory their own in 1991, leading to a war between the two countries when the Soviet Union collapsed. Turkey's involvement pits it against Armenian ally Russia, once again. Moscow has a military base in Armenia.

- On the natural gas scene, a geopolitical shakeup is brewing as natural gas is positioned to overshadow crude oil as the most important fuel in the world and as the key bridge fuel for a renewable energy transition. That means more power for Qatar over Saudi Arabia, for one. It also means a lot of power for Israel, which until very recently had zero energy leverage. Despite the fact that Libya is a crude oil giant, Turkey's meddling here isn't about Libya's oil--it's about Mediterranean gas and all the power that comes with getting a share of this. With that in mind, keep an eye on the emerging "Eastern Mediterranean Gas Forum" which brings together previously unlikely bedfellows, including Israel, the Palestinian Authority, Egypt, Cyprus, and Jordan (among others). The highlight of that grouping is the fact that Israel is going to sell Egypt and Jordan $30 billion in natural gas. It's a tough pill for Turkey to swallow.

- The NordStream2 pipeline, with only 160 kilometers left to lay, has been dealt another blow as insurers informed the consortium of companies behind the Russian pipeline project that they would no longer cover any activity related to this pipeline or the Turkstream pipeline. Project shareholders--Gazprom (51%), German E.ON, Wintershall Dea, French Engie, Dutch Gasunie--are indeed finding this last, and smallest stretch hard to complete in time to begin operations next year, as planned.

COVID Market Update

Oil prices have had a horrific week. Prices were first battered by reports that OPEC had increased its production by 160,000 bpd for September over August figures. Russia also increased its production, and exports for the whole group was up also. Mostly these gains were attributed to Libya and Iran, who are not required to cut production under the deal. This may not have had such a significant effect on prices, except the oil demand growth picture hasn't improved. Favorable jobs data in the US may have lifted prices under normal circumstances, but the 875,000 added jobs announcement was tempered by reports of two major airlines cutting a fair amount of jobs. Then on Friday, President Trump announced that he and the First Lady had tested positive for the coronavirus--this spooked the markets further, sending already low oil prices from Thursday plunging by another 4% in the early morning hours. Any positive rig count data is expected to have only a muted effect on these prices given the multitude of bearish news this week. Poor BH data, however, will likely pressure prices further.

- Houston-based Oasis Petroleum, with assets in the Williston and Delaware Basins, is the latest shale-patch member to file for Chapter 11 protection. Chapter 11 didn't come as much of a shock, after two weeks ago, Oasis skipped its debt payments. Formal default was forthcoming in mid-October. It is shocking, however, that Oasis managed to eke out a Q2 profit as its revenues fell sharply.

- The second shale bankruptcy this week came from Lonestar Resources US, which operates mainly in the Eagle Ford, producing 14,000 bpd. Lonestar had total debt of $546.3 million as of the end of June and has defaulted on two debt payments. Its market cap is now $4.96 million, compared to hundreds of millions back in 2014.

- Shell will cut as many as 9,000 jobs worldwide. This is, Shell says, to facilitate its shift away from fossil fuels and toward low-carbon energy, in an effort to simplify Shell's structure. It hopes to save more than $2 billion annually through this move in the next couple of years. But Shell's job cuts follow multiple other oil industry job cuts, brought on by the low oil prices and crashing oil demand thanks to the pandemic. Whether because of a shift to low-carbon or pandemic--or perhaps a bit of both--the job cuts will add to the industry's talent woes. Within a day, Shell's shares sank to a level not seen in 25 years.

- Norway's Equinor has joined the staff cutting oil companies and has plans to cut 30% of its exploration staff over the course of the next three years as it tries to maintain efficiency and cut costs amid the oil price slump and waning demand. Equinor is not planning, however, to alter its exploration plans for this year or next. This is the second round of job cuts that the oil major has announced in the last couple of months.

- Exxon is expecting another lousy quarter for its production business in the form of its third consecutive quarterly loss for that side of the business. Analysts are expecting a loss anywhere from $.07 to $.30 per share.

- The coronavirus pandemic has brought OPEC together again as the cartel struggles to shore up its forecasting ability in the face of "uncertainties". A special meeting was held this week to discuss how to improve analyses, transparency, and data reporting among stakeholders.

Deals, Mergers & Acquisitions

- Oil and gas mergers and acquisitions--although few in number--are critical if the industry is to survive. Devon Energy and WPX are the most recent examples. The new entity, or rather the new Devon, will hold $6 billion in debt against $6 billion in equity and have the capacity to produce a half a million barrels per day. It'll be larger than both Apache and Marathon Oil. Expect to see more M&A activity in the sector in the months to come.

- It appears that Rosneft and Aramco are giving up on purchasing a stake in Indian refiner Bharat Petroleum Corp as both energy giants continue to struggle over their nearly self-made oil price crisis. The refining industry isn't looking like a sound place to put what little cash there is in the industry just yet, as gasoline and other refined products have seen a sharp dropoff in demand. Asia's profit margins for gasoil, in particular, is at the lowest level in four months, as inventories are still too high.

Discovery & Development

- Exxon Mobil appears to be closer to a deal with the Government of Guyana over the offshore Payara project. While many had feared the new PPP government that took office in Guyana after the March elections would attempt to renegotiate contracts with Exxon, as we pointed out in numerous newsletters, this was not likely. The deal now appears to be on track with only some adjustments to Exxon's gas flaring, which has been under scrutiny in relation to its Liza-1 well, which was expected to reach 120,000 bpd in August. In the Payara project--the third development in Exxon's Stabroek block--the oil giant is eying 220,000 bpd. Any further delays could push Exxon's start date for Payara back to 2023.

- London-based Pantheon Resources had a shocker of an announcement this week, after finding 302 million barrels of recoverable oil from its Talitha Project on the Shelf Margin Deltaic horizon in Alaska. Pantheon owns 89.2% in the project. It is one of three targets that Pantheon has in the area, although Talitha is the shallowest. NPV at 10% per annum is $2.7 billion at Brent between $45.84 and $54.89. This project is just a stone's throw from the trans-Alaskan pipeline.

- Moscow-based Lukoil has achieved commercial production from its FIlanovsky field in the Caspian Sea--it is Russia's largest oil discovery in more than two decades, with recoverable reserves of 129 million tonnes of crude and 30 billion cubic meters of gas, producing 6 million tonnes per annum.