Investors: Exxon Is Protected in Cyprus, But Turkey Will Risk Rationality Here
There are two things for certain right now offshore Cyprus: Peace talks aren’t going anywhere, and Exxon’s drilling is unlikely to be stopped by Turkey. Turkey is now getting desperate because of worsening relations with the U.S., with Cyprus’ offshore oil and gas bonanza looking to be increasingly far from Turkey’s reach.
Over the weekend, Turkey sent its Fatih drillship to start drilling off Cyprus, in the Exclusive Economic Zone (EEZ) that is widely recognized as belonging to the Republic of Cyprus, but which Turkey claims as its own.
Cyprus has responded by issuing international arrest warrants if the ship refuses to leave the EEZ. This threat was heard first by the crew of the Fatih over radio, as revealed to our sources in Istanbul on Monday, and then put into force on Tuesday by the Cypriots.
As of Tuesday evening EST, the Fatih was still drilling in the EEZ and its position remained unchanged.
This is a game with dangerous consequences for Turkey. This goes far beyond its provocations earlier in the year when it sent a ship into the EEZ but did not drill and turned it around and redirected it to the Black Sea. That was for show. This time it’s still for show, but it’s a show that is likely to end disastrously for Erdogan.
Erdogan’s geopolitical desperation centers on some very specific developments that go beyond the usual trading of barbs and threats with Washington or Cyprus. It is a sizable threat to Turkey that there is now legislation floating around Washington that is pushing for military aid to Cyprus. It would not only lift the arms embargo on the island nation, but would also authorize additional military aid, in retribution for Turkey’s stubborn insistence on buying a Russian missile defense system despite NATO’s objections. Cyprus, the U.S. and Greece (we can count Egypt and Israel, as well) are all focusing on Turkey now, and they will protect Exxon’s drilling in whatever way they deem necessary. Now, if Cyprus moves to arrest the crew of the Fatih, Turkey may respond militarily. Is Turkey willing to start a regional war over this though? Not under normal circumstances, but with Erdogan under pressure and having recently seen some cracks appear in the AKP power base, anything is possible. He is prone to irrational actions and is now dangerously isolating Turkey.
We also note that Turkish oil importer Tupras is scrambling to secure new supply after the country was denied a waiver to continue importing Iranian crude. They are potentially targeting Iraq, Russia and Saudi Arabia to make up for Turkey’s loss of over 900,000 tons of crude per month from Iran (47% of its total imports).
Libyan Stalemate Continues, with No Clear Gains for Either Side
As we continue to follow the conflict in Libya from our sources on the ground in Tripoli for you, the key developments to note this week are that while there have been no significant gains for either side in continued clashes, there have a been a series of oil-related kidnappings that have largely been kept quiet.
The head of the oil workers union has been kidnapped, and a senior employee of French Total SA was kidnapped and then released, according to sources on the ground, with one Libyan news agency claiming that an unnamed armed group was paid a 300,000 euro ransom for his release. Total has not confirmed this incident. The kidnapping of the oil workers union head has been confirmed by the NOC, and his whereabouts remained unknown as of late Tuesday EST. A Libyan Airlines pilot has also been kidnapped in Tripoli. The airline company has issued only vague responses that suggest that it may support Haftar’s move on the capital, but that kidnapping is somehow related to this end game.
What Investors Need to Know About Exxon’s Fate in Guyana on the 10th
With 13 major discoveries wracked up in Guyana and a highly favorable production sharing agreement that has been the cause of a fair amount of controversy, Exxon and Hess now find themselves at a critical juncture in the middle of an intense political crisis. On May 10th, the Caribbean Court of Justice (CCJ) will rule on a battle between two ethno-political groups, the ruling Afro-Guyanese and the Indo-Guyanese opposition. The ruling will determine whether a no-confidence motion against the ruling government is valid or not, and if it is considered to be valid, new elections will have to be held within 90 days. The key question for investors here is whether a new election would mean changes to the royalty agreement for Exxon which could potentially delay the start of its massive phase 1 production plans or otherwise jeopardize the entire project. While awaiting the CCJ’s ruling, the current coalition government managed to approve the permit for Exxon’s Phase 2, which in turn enabled Exxon to make it’s delayed FDI on that phase. Production from phase 1 is slated to launch in 2020, so the battle to control the sudden wealth Guyana is expecting has taken on new proportions. Sources in Guyana believe that it is unlikely that a new election would create a level of political instability that would disrupt E&P plans or force a change in the PSA; however, the Friday decision could rock this boat significantly.
Clan Warfare Solidifies Military Power in Algeria
Algeria has long been ruled in the shadows by two powerful clans, a presidential clan and a military clan, and the military has now secured its powerbase by arresting the remaining influential members of the Presidential (Bouteflika) clan, including Bouteflika’s brother and two former intelligence chiefs. They were arrested for allegedly conspiring against the military clan led by army chief Ahmed Gaid Salah. Now that these figures have fallen, the military appears secure in power, if it can get past the Algerian masses who are very clued in to what’s going on here. For investors interested in the Algerian gas patch, there is a fairly keen sense of security in knowing that the military has largely taken control when it comes to Sonatrach, though we advise exercising caution because this is not over yet and there is still a fair amount of uncertainty coming from the public sphere. That said, there have been some interesting developments with Sonatrach this week, including French Total SA’s agreement to acquire Anadarko’s Algerian shale assets from Occidental if that deal goes through, along with four new oil and gas discoveries announced by Sonatrach in the country’s south, though details of those discoveries have not yet been revealed.
Cat and Mouse With Iran (Sort of)
It may seem as if the Trump administration is playing a dangerous game of war-mongering with Iran, deploying an aircraft carrier to the Gulf to counter alleged Iranian threats in the Middle East. However, this is more indicative of an Erdogan-style show than anything else. This is Trump using the regular rotation of an airship carrier in the Gulf and a lot of dramatic airship carrier footage on TV to lend the appearance of tough moves against Iran for public consumption.
Elsewhere in the Politicized Oil Patch...
- Noble Energy has been instructed to resume gas production from Israel’s offshore Tamar field after a ceasefire between Israeli forces and Palestinian forces in the Gaza Strip. Operations at Tamar were shuttered on Sunday over a major uptick in cross-border violence. Noble production platform in Tamar is within rocket range from the Gaza Strip.
- Venezuela's PDVSA now has a board controlled by Maduro and another ad hoc board controlled by the opposition - and the state-run oil giant has passed its April 29 deadline for making a $71 million interest payment on its 2020 bond (it has a 30-day grace period). Opposition leader Guaido (head of the National Assembly) has just approved the payment (reluctantly) to avoid a rush to collect on Citgo collateral. Maduro won’t pay and is refusing to protect Venezuela’s assets by going into default. Maduro is refusing to pay because Guaido controls Citgo now, and the PDVSA bond is backed by shares in the US refiner. At the same time, a US court has also stepped in to lend a hand over PDVSA, grating the company a 120-day stay its legal fight with a hedge fund over unpaid debt of over $180 million after it defaulted on four loans.
Global Oil & Gas Playbook
- The battle for control of Anadarko’s assets between Occidental and Chevron has seen yet another twist, with Anadarko indicating that it favors Occidental’s $38-billion bid over Chevron’s $33-billion bid. The deal would be for less than 20% of Occidental’s existing shares, which, as we mentioned last week, would mean that it does not need shareholder approval for the plan. This battle took nearly everyone by surprise because it is a risky move for Occidental, and this type of conflict rarely happens in the oil patch. However, from OXY’s perspective, this is really a do-or-die lunge at Chevron, because if Chevron ends up with Anadarko’s assets it will leave OXY highly vulnerable to takeover. Chevron is a comparable rival to Occidental, and securing Anadarko’s assets would have boosted it into the top 4 with the supermajors. At the same time, there is a secondary deal unfolding here, as mentioned above, with Total SA agreeing a deal to buy Anadarko’s African assets (including Algeria) for $8.8 billion (should Anadarko agree to the OXY bid).
- Iraq is planning a $53-billion megaproject with ExxonMobil and PetroChina to use seawater from the Persian Gulf to boost oil production. The country expects to generate $400 billion over the three-decade-long agreement. The project involves upgrading the Nahr Bin Umar and Artawi oilfields and boosting output from the two oilfields from 125,000 barrels per day (bpd) to 500,000 bpd. The oil-rich Iraqi south suffers from a water problem, and the massive Exxon/PetroChina endeavor would supply enough water to increase the pressure necessary to enable steady/increased production.
- Saudi Aramco is reportedly considering making its first move into US shale gas exploration with a potential investment in Norwegian Equinor, either through a JV or a stake in the Marcellus shale. Talks are unconfirmed and said to be only in the early stages.
- China’s CNOOC has hinted that it may be interested in expanding its presence in Brazil’s high-sought-after presalt offshore exploration blocks, where another auction is scheduled for the first week of November.