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The War That Won’t Happen & The War That Already Is

New York

Even with dissident Iranian sources providing a form of confirmation that the Iranian leadership ordered the September 14th attack on Saudi oil facilities, there will be no war. The Saudi Crown Prince, MBS, has made that clear, calling for a political solution. A war, after all, would preclude an Aramco IPO that is now in full force, with the latest enticement to potentially skeptical investors being the oil giant’s promise to pay out a total annual dividend of $75 billion--up from the some $58 billion that Aramco paid the Saudi government in dividends last year. Riyadh has also moved to re-risk a bit over Aramco’s royalty payments, lowering royalties when oil falls below $70, but increasing royalties when oil is above that mark.

The dividend pledge comes after some more bad news for the Kingdom with Fitch’s downgrade of Saudi Arabia’s sovereign credit grade from A+ to A on fears it could be drawn into a deeper conflict, either with Iran or with its own allies.

The Saudi Crown Prince took to the airwaves this week to warn the world that if Iran isn’t deterred (preferably through a political, not military, solution) oil supplies will be further disrupted and oil prices will be “unimaginably high”.

That said, oil prices at this point aren’t even responding to Iran--they’re responding to macro-economic data, and particularly to demand fears over the US-China trade war. Those fears have been further exacerbated by sources in Washington who claim that Trump is considering delisting Chinese companies from US stock exchanges, which would further destabilize international markets.

In the meantime, look for more talk of political solutions even in the face of intensifying Iranian bravado as MBS attempts to watch this all go away and convince investors that security issues were a blip on the radar. The next big event: An October fest of sorts in which the Saudis host a bunch of billionaires that they will fly in to Riyadh and then transport on yachts to talk about investing in tourism.

Ukraine: It’s About Oil & Gas

Ukraine wants independence from Russian gas, but there’s something it wants even more: American military support. But they also need gas transit fees from transporting Russian gas through Ukrainian territory to European markets. It was never really about independence from Russian gas--it was about money from Russian gas. And that is now being cut off, leaving American military aid as the carrot that convinces Kiev to stay the course on the Russians.

Russia is already putting the squeeze on Ukraine, and Kiev is prepared for a scenario in which Gazprom completely turns off the transport spigot, leaving Ukraine with zero transport fees as of January 2020. The only Ukraine benefits from this policy is getting American military support. (The potentially transactional nature of the flaunting of this support in a quid pro quo for an investigation into the Biden family’s connections to a Ukrainian energy company is the crux of the ongoing impeachment proceedings).

Why does Ukraine think Russia will turn off the spigots in January? Because it can. Even though some one-third of Russian gas headed to Europe currently passes through Ukraine, the existing agreement is set to expire at the end of the year, and by most accounts, Russia can still meet its gas commitments, even if the Nord Stream pipeline isn’t up and running by then.

Russian Fallout from US China Shipper Sanctions

When the US sanctioned Chinese shipping company COSCO last week, the fallout was felt well beyond its intended victims. US-listed Teekay LNG has seen its Russian JV blocked due to complicated association. COSCO Dalian is 50% owner of China LNG Shipping, which is in turn a partner with Teekay’s 50-50 Yamal LNG JV. Novatek’s Yamal LNG plant in northern Russia could suffer as a result because it uses the Teekay JV’s LNG tankers that are capable of going through Arctic ice.

And this isn’t the only fallout: Shipping is getting exorbitantly expensive. Following the new sanctions, oil freight rates jumped because buyers were trying to get alternative vessels, pushing up the rates of those not sanctioned by as much as 50% immediately after the sanctions, and another ~10% since, though part of that can be attributed to the normal uptick in winter demand.

All Aboard the OPEC Train

OPEC’s Secretary General Barkindo has invited 97 oil-producing countries in the world to join the production cuts that the OPEC/non-OPEC alliance has cooked up to keep prices high. Of course, Barkindo uses more palatable words such as “manage the oil supply” or “oil market stability” to describe its production cut plans.

The call to get more countries on board is a clear indication of the waning clout of the oil cartel, with founding member Venezuela having almost zero control over its oil exports and Iran in essentially the same boat. Saudi Arabia—the heavyweight in OPEC—has done more than its fair share of production cutting and export cutting to arrest bloated global oil inventories, but it is not enough. OPEC now only controls 35% of the oil market, and even with the overzealous production cutters in the group, it is insufficient to move the oil-price needle. And if Saudi oil installations were attacked in scale again, there is nothing OPEC could do to cover lost supply.

Realizing its insufficiency, OPEC has called on Russia and a handful of others, including Mexico, Azerbaijan, Bahrain, Brunei, Malaysia, Oman, Sudan, South Sudan, and Kazakhstan—to join the cause. While this brought the cutters to controlling 55% of the global oil market, it still isn’t enough, and nothing highlighted this more than when Saudi Arabia dropped its production by another 5.7 million bpd after the attacks on its oil infrastructure on Sept 14. Prices spiked for a very short while, before Saudi Arabia raced to bring back its production. But prices fell shortly thereafter, highlighting OPEC and its allies’ impotence when pitted against the US/China trade war that has soured the oil demand outlook and depressed prices.

OPEC has few moves left, and recruiting additional unofficial members are its only hope. While most of the 97 oil producers are unlikely to join, including some of the world’s largest producers such as the United States, Canada, and China, even one or two additional joiners could give OPEC a boost in managing the oil glut.

Keep An Eye on the Guyana-Suriname Basin Right Now

But don’t look at the obvious, endless string of discoveries by Exxon/Hess. Look now at what’s happening right on the other side of the maritime border in Suriname, where Apache’s drillship has officially started drilling, and first results could be in a matter of 2-3 weeks.

Jumping back to the Guyana side, much-awaited elections now won’t be held until March 2020, timed to coincide with Exxon’s first production from giant Liza. Tensions are bound to rise with the country’s first-ever oil revenues at stake.

Turkey Ups the Ante Offshore Cyprus

A Turkish drillship is scheduled to start drilling at a second location offshore Cyprus in a matter of days, according to Turkey’s Energy Ministry. But what was intended to be a major threat to Cypriot offshore drilling is actually a Turkish drillship withdrawing from Cypriot waters earlier this month and relocating after apparently coming up empty-handed.

Global Oil & Gas Playbook

• Iran has announced plans to create a new oil terminal on the Sea of Oman to establish an alternative crude export route that would bypass the Strait of Hormuz. According to the Iranian Oil Ministry, the country’s national oil company has already signed a contract worth around $52 million with three domestic companies to supply 50 pumps for a 620-mile pipeline that will run from Bushehr province to Bandar-e-Jask on the Sea of Oman. The government expects that the terminal will export its first crude within 18 months.

• Occidental Petroleum has closed on the sale of its Mozambique LNG project for $3.9 billion to the French energy major Total. The sale is part of Occidental Petroleum’s ongoing divestiture goal after buying Anadarko Petroleum for $38 billion. To help finance it, Oxy previously agreed to sell Anadarko's Africa assets to Total for $8.8 billion, which includes the Mozambique LNG export project. In the August agreement between Occidental and Total, companies are working on closing the remaining transactions in Algeria, Ghana and South Africa.

• Sempra Energy will sell its Peruvian businesses to a unit of China Yangtze Power Co for $3.59 billion as part of Sempra’s plan to exit South America and focus on its domestic and Mexican market. The assets up for divestment include an 83.6% stake in Luz del Sur, as well as interests in energy services firms Tecsur SA and Inland Energy SAC. The two companies also entered into an MoU for potential LNG cooperation, which could see Sempra supplying China. For Q4, Sempra Energy is also planning to put its electric businesses in Chile up for sale.

• Fracking company Cuadrilla is officially moving out of the Preston New Road shale project in Lancashire, UK. Equipment is now being moved from the site and the company has said it has no plans to apply to extend the operating license. The project was suspended indefinitely on August 26th when its operations were said to have caused a 2.9-magnitude earthquake.

• The US sanctions on Venezuela and Russia have been unable to stop payments that Venezuela must make to Moscow to make good on its debt. Venezuela is now making payments to Russia in rubles to not run afoul with sanctions. Venezuela’s sanctions on its central bank have stymied its way of paying any debt in US dollars, and its ability to pay creditors with oil have also dried up, as shippers are reluctant to transport Venezuela’s oil due to the sanctions.

• The Brazilian government says that more than a dozen companies have registered for the November auction of drilling rights off the coast, including Chevron, ExxonMobil and Royal Dutch Shell. Brazil expects to raise as much as $25 billion. The so-called transfer-of-rights auction concerns a zone of Brazil’s southeastern coast where state-controlled Petrobras obtained rights to 5 billion barrels of oil from the government in 2010. The company found more crude than it was entitled to in the deal, leaving the government with a surplus to auction off.

• Indonesia and Libya’s NOC have discussed the possibility of Pertamina returning to Libya to participate in oil projects. Indonesia’s interest in Libya coincides with talk of German Wintershall DEA’s potential exit after a clash with NOC over oil licenses.

• Ecuador plans to leave OPEC as its government attempts to boost its revenue. While it only produces around 530,000 barrels of crude per day--and hasn’t been adhering to the production quotas set by OPEC anyway--the breaking away of Ecuador strips more clout away from OPEC.

• The Trans-Anatolian Pipeline (TANAP) operating consortium says natural gas flows from Azerbaijan to Europe are now on track for commercial flows to start in October 2020. After that, the pipeline is expected to reach its full commercial capacity within 2-3 years, transporting 16 billion cubic meters of gas per year. Annual revenue at full capacity is expected to be around $1.45 billion.

• Norway’s $1 trillion wealth fund has the green light to sell oil and gas stocks worth $5.9 billion, even though two years ago it sought to sell about $40 billion in such stocks. The fund holds 95 oil-producing companies, making up 0.8% of its benchmark for equities and including ConocoPhillips, EOG Resources Inc., Occidental Petroleum, and CNOOC. The initial $40 billion plan was reduced in a political compromise that shielded the world’s biggest oil companies. According to the country’s Finance Ministry, the fund will maintain stakes in refiners and other downstream firms.

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