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The Oil Kingdom Is Wasting Money

Saudi Arabia

Another Wild Waste of Saudi Money

As some of the saner elements of Saudi Crown Prince’s circle of advisors feared, investors will be perplexed to learn that a big chunk of the money raised from the Aramco-Sabic deal will be pumped into Saudi Arabia’s NEOM futuristic city project on the Red Sea, according to our high-level sources in Riyadh.

The Aramco-Sabic deal, as we have noted previously, was a scheme to get more cash for the Saudi sovereign wealth fund (PIF). Aramco bought the Sabic shares from PIF in what was a very complicated and undesirable way to raise money and which saddles Aramco with an asset it doesn’t need at all. This was a sacrifice for Aramco and a benefit for the PIF (such things happen with state-controlled entities, even when they do not make market sense).

Of all the things that could be done with the money raised by PIF from this sale, the worst fear among financial advisors was that it would be wasted on NEOM - a robot-led city that represents yet another audaciously grandiose project pushed by MBS, and which we are certain will fail miserably. There aren’t any foreign investors we are aware of who want to get in on NEOM outside of the Chinese who operate on an entirely different set of investment criteria (their only criteria being diplomacy and power footholds; for instance, as a way to break further into the Saudi arms market).

In the meantime, the Khashoggi affair is still causing problems for the Saudis, with our sources inside the PIF saying that they’re having a hard time getting anyone interested in taking their money in the form of investment.

Taking the US-Iran Conflict to the Brink, and Then Backing Down

Watch very carefully what happens next surrounding US-Iran tensions. There are many indications that this is – again - a Trump effort to bring things to the brink before backing away to gain additional leverage. This is a tactic that is difficult for investors and analysts to grasp because the temptation is very high to consider, each time, that this means war (with trade, with Iran, etc). In the case of Iran, though, there is always the danger that Trump will take things too far, beyond the point at which there can be any backtracking, as proxies begin to take matters into their own hands.

However, the indications are back-and-forth that Trump wishes to scale tensions back again, most recently telling the public that he is not even gunning for regime change in Iran, let alone all-out war. Bolton was also in the UAE this week (arriving Wednesday) to talk Iran, and Trump seems to think that Tehran is now ready to sit down at the deal table, though our assessment is that he has overplayed his hand on this one. The minute it becomes clear that Iran isn’t ready to sit down at the table, Bolton announces that Iran is “most certainly” behind the attack on Saudi tankers off the coast of the UAE (where he is presently visiting). Bolton is taking cues from the UAE propaganda machine.

The Saudis, too, are scrambling right now - according to royal circle advisors among our assets -to maintain a careful balance of escalating tensions but trying not to escalate too far. Right now, the UAE is fearful that the Saudi crown prince may act out of line with what is the wider intention. In other words, they are worried that he is too eager to pull the trigger on this one, and are trying to keep him under control. He is the wild card here. In the meantime, MBS is trying to dangle more active courting of China and Russia in front of Washington in an attempt to suggest that - post-Khashoggi - he has plenty of friends who do not judge him and does not rely on the US. He is using this as leverage to convince the Trump administration to make the Khashoggi fallout disappear and in return the Saudis will push through key policy plans of a mutually beneficial nature.

Against the backdrop of all of this, French Total SA has indicated that it may quit Iran because of Europe’s failure to salvage the nuclear deal and, by connection, trade between the EU and Iran. At stake is Total’s $1-million Iran gas project. The problem is that with sanctions waivers no longer being extended, European shippers and insurers (Maersk, Allianz) are already cutting the cord, leaving Total little incentive to stick it out. The Europeans have definitively lost this battle.

Algerian Oil Twist Is All About France

In another twist in the Anadarko asset sale, Algeria is blocking French Total SA from acquiring Anadarko’s Algeria assets, which was intended to be part of the deal when Occidental merged with Anadarko following Chevron’s withdrawal from its acquisition bid. Total was to acquire Anadarko’s assets in Algeria, Ghana, Mozambique and South Africa in a deal agreed to by Occidental. For reasons that have not yet been explained by Algerian officials, they wish the assets to remain with Anadarko, which produces over 300,000 bpd in the country.

Anadarko is the operator in Algeria of blocks 404a and 208 with a 24.5% stake in the Berkine basin (the Hassi Berkine, Ourhoud and El Merk fields in the Algerian Sahara). Total already holds a 12.25% stake in these operations, which produced 320,000 boepd in 2018.

The move, of course, is political in nature and represents Algeria’s desire for just about anyone other than its colonial occupier to have control of these lucrative assets and potentially undermine Sonatrach, which itself is a reflection of the national interest. France may be meddling significantly in neighboring Libya, where it also has massive oil interests, but in Algeria, it’s playing it very cautious - despite the political chaos that would normally provide it with an open window - because of the long, bloody history between the two. Algeria’s post-Bouteflika interim military clan leadership is extremely fragile right now, and mass protests are more than a continually looming threat. The last thing this interim leadership wants right now is any stronger a French foothold. Right now, protests have the ability to turn Algeria into the next Libya - only far, far messier. Algeria’s vow to block Total’s acquisition of Anadarko’s assets isn’t a message to investors - it’s a message specifically to the French.

In the meantime, Italy’s Eni is diving back into the Algerian political chaos by renewing a contract to import Algerian gas from state-run Sonatrach until 2027, with an option to extend two additional years. Sonatrach accounts for about 15% of Italy’s gas imports.

It is also against this shifting backdrop that Algeria announced a new gas discovery in its southwestern Tindouf province, with officials reporting “positive indications” of capacity to produce around 275 cubic meters of gas and some 300 liters of condensate per hour. It is the first gas discovery in Tindouf province, which immediately opens up new potential for Algeria. The question now is which message will resound louder with investors: A significant new discovery or blocking Total’s acquisition?

Haftar Gains Ground Toward Center of Tripoli

Haftar is now only several kilometers from the center of Tripoli, having made gains over the past couple of days in fighting back militias loyal to the Government of National Accord (GNA). Our own boots on the ground in Tripoli have been forced to evacuate their location in the suburb of Ain Zara, which has come under direct fire in the conflict.

Qatari-run media (Aljazeera, etc) are now blasting the digital airwaves with evidence that the UAE was running weapons cargos to Haftar ahead of the launch of his offensive on Tripoli, using an Arab-Israeli airline scheme to keep cargoes consistent. This is not likely to win the anti-Haftar external opposition much support because it has been clear from the start that the UAE was fronting this operation.

Amid the chaos, the NOC has announced it will develop the North Hamada oilfield, in the country’s Northwest region. This is part of the Ghadames basin, which is shared with Tunisia and Algeria. They’ve actually picked up the momentum on development in an attempt to get it producing before Libya disintegrates into full-blown civil war part II, which we find an unusually risky development justification. The project is not terribly significant in the bigger Libyan oil picture, and will likely produce only 25,000 bpd at its peak. It is owned by the NOC and Indonesia’s Medco Energi Internasional.

Global Oil & Gas Playbook

- Another defeat for coal, this time in one of its heartiest playgrounds - Poland. The country’s state-run utility, Tauron, is considering the sale of one of three coal mines under its jurisdiction as carbon emissions costs increase the point that renewable energy is actually cheaper. If the sale goes through, the proceeds may go to construction of onshore wind farms.

- Israel said it will participate in US-mediated negotiations with Lebanon aimed at resolving a dispute over a maritime border that had dogged Mediterranean oil and gas exploration. Last year, Lebanon signed its first contract to drill for oil and gas in its waters, including in a block disputed by its southern neighbor Israel. A consortium comprised of Total, Eni and Novatek was awarded two of Lebanon’s 10 exploration blocks. We’ve been waiting on this one for years due to the massive Israeli gas finds that could be repeated in Lebanon’s portion of the Levant Basin.

- Papua New Guinea PM Peter O’Neill has resigned explicitly over his signing of a $13-billion deal with Total and Exxon for a massive LNG project with Total and Exxon. The deal landed him a no-confidence vote in parliament, which he managed to survive last month. The project would almost double Papua New Guinea's gas exports; however, local communities are still hurting from past deals that did not benefit the public.

- Saudi Aramco has ended negotiations with Russia’s Novatek gas producer over the Arctic LNG-2 project. Negotiations had been going on for a year and a half, and the Saudis appear to have gotten cold feet over potential sanctions, as well as over the terms of the potential deal. We think this was additional leverage the Saudis are using to sweeten the deal with Trump over Iran and the Saudi plot to get Washington to quash opposition at home to Saudi money in the wake of the Khashoggi assassination. The Saudis are increasingly courting China and Russia, as we have mentioned, and the purpose in part is to build up these relations and start a fair amount of deal-negotiating, some of which can result in new deals, and some of which can be used for leverage with the US.

- The Norwegian Petroleum Directorate (NDA) has granted Equinor a drilling permit for a section of the North Sea, just west of the southern part of the Johan Sverdrup field. The total contract value for these services is estimated at about $290 million for the 3-year fixed contract term.

- Spotlight on CNOOC: We are interested in the following series of developments for the Chinese state-run oil giant this past week:

- CNOOC has launched production in a deep-water Gulf of Mexico field--Appomattox--ahead of schedule. The announcement of the launch is significant because it represents the first commercial discovery to come online from the Norphlet formation discovery. The original production launch was to be in the second half of this year. The projections here are 175,000 boepd at peak.

- CNOOC has also begun spudding it’s offshore Ireland high-impact Iolar well, in partnership with Exxon.

- The Chinese giant is also making a move to expand its retail oil business, opening dozens of petrol stations in Myanmar, as it solidifies its foothold here--with bragging rights as the first big foreign investor to enter this fuel market.

- Spotlight on Eni: Italian Eni has won four new offshore oil and gas blocks from Ivory Coast (along with French Total SA, which also won two). Things are looking good for Eni’s future production numbers. Eni already has six exploration plans approved by the Mexican government, putting it in the running to become Mexico’s largest shallow-water producer behind state-run Pemex. Argentina this week also awarded an Eni-led consortium an exploration license for offshore block MLO 124 following an April 16 bidding round. The block is in the Malvinas Basin and Eni holds an 80% working interest, as operator.

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