Smoke and Mirrors in the Strait of Hormuz
Iran has seized another ship in the Persian Gulf. That makes three such seizures in a month. Iran claims the ship was smuggling fuel to Arab states, and was suggesting that the tanker was Iraqi, which Baghdad denies. Seven crew members were on board, and are now detained, according to Iranian news agencies. In all likelihood, the small vessel was, indeed, smuggling fuel, but Iran is interested presently in more headlines about seizing “foreign” ships for the appearance of its power over vital shipping lanes in the area. In the meantime, Iran says it will deny the UK passage through the Strait for as long as the British the ship carrying Iranian crude that was seized off Gibraltar.
This is still a game of smoke and mirrors for the time being, but it will get out of hand the moment major powers work towards creating “coalitions” to patrol the Strait of Hormuz, the Gulf of Oman and the Persian Gulf.
The US is having a hard time putting together its “international coalition” to secure the Strait of Hormuz for commercial vessels, but the UK - with Boris Johnson at the helm - is now the lone country to have agreed to join up, two weeks after calling for a similar European-led mission that no one wanted to join. China is mulling over the idea of joining forces to secure shipping routes with the US, despite its continued purchases of Iranian oil in defiance of US sanctions.
As Washington attempts - rather unsuccessfully - to put its plans in motion for an international coalition to secure ships in the Strait of Hormuz, Iran and Russia are instituting their own plan to initiate joint naval exercises in the Indian Ocean, at the point where it flows into the Gulf of Oman, the Strait of Hormuz and the Persian Gulf. This is what came out of a recent visit to Moscow by the commander of the Iranian Navy.
Those “exercises” would happen between now and next spring and are intended to send a very important message: Russia and Iran are allies, and defense cooperation just ticked up a notch. If the US plays hardball in the shipping lanes, it won’t be going up against Iran alone; it will be going up against the Russian navy.
The fact is, US elections are coming up and Trump’s dangerous warmongering over Iran have not helped him in the polls, so he will most likely change tack. He wins more points with peace and that’s what he’s after right now. We expect a change in course on the Strait of Hormuz, even with Iranian saber-rattling.
What to watch behind the headlines? Iran sitting down with arch-enemy UAE to figure out an MOU on their militaries in the first bilateral talks since 2013 … These are the real actors in this region.
Sweeping New Everyone-But-Chevron Sanctions on Venezuela
Washington has now moved to cut off Maduro completely with a new round of sanctions against Venezuela that freezes all government assets in the US. That means US companies are banned from dealing with the Venezuelan government. It’s also a precursor to sanctions against foreign firms or individuals that assist Venezuela. In other words, Russian and Chinese companies operating in the Venezuelan oil patch should be concerned. This is a sweeping embargo, and the toughest measures against Maduro to date. But what will happen to Chevron’s assets there, now? Last week, Washington gave Chevron a three-month extension to keep operating in Venezuela. If the oil giant’s waiver had been allowed to expire at the end of July, Maduro had threatened to seize the assets and offer them to the Russians and the Chinese. Where does it leave Chevron now if this latest move is designed to impose sanctions on any company engaging in business or offering support to anyone affiliated with the Maduro government? Trump can’t really have it both ways. Letting Chevron stay is essentially supporting Maduro. But the hawks in his administration feel it would disadvantage US oil and gas companies to let Chevron implode in Venezuela, where it has been for a century already. Does that mean the sanctions apply to everyone in the world but Chevron? For the time being, it would seem so.
There’s also one additional kink in this chain: Russia and China aren’t going to comply.
Global Oil & Gas Playbook
- The very sanctions designed to cripple the Venezuelan government by squeezing its cash cow, PDVSA, may turn out to be the thing that saves PDVSA from destruction. A US court ruled last week that shares of PDVSA’s US-based refinery, Citgo, could be seized by PDVSA creditors - Crystallex in this specific case, who has been waiting to be paid. The court ruling had set a dangerous precedent for other creditors who are chomping at the bit, with Citgo being PDVSA’s most valuable asset. But the recent round of sanctions actually protects Citgo. With this assurance, Venezuelan opposition forces led by Guaido have indicated that Citgo may stop making payments on the only bond that is not in default.
- Libya Update: As of 6 August, Libya’s giant Al-Sharara oilfield remains shut down, after the NOC declared force majeure on the field on 31 July. This is expected to tighten the market for light grades (CPC Blend and Saharan Blend), which means would could see a slight boost in prices.
- With only enough petrol and crude oil to last 28 days, Australia is in talks with the US for the purchase of millions of barrels of oil. International agreements mandate that Australia have 90 days’ worth of supplies stockpiled. The country could buy and store the required amount domestically but is instead seeking to buy from America’s emergency supplies. Australia hasn’t met the IEA’s reserve requirements for years. This is another negotiation because the US wants Australian to play a bigger role in defense. It should not go unnoticed that at the same time that the US is hinting it may open up its emergency reserves to Australia, Australia is hinting that it may join the US Strait of Hormuz policing plans by possibly contributing a warship to the effort.
- Romania is preparing to launch its first onshore and offshore oil and gas licensing round in a decade. An anticipated 22 onshore blocks and 6 offshore blocks will go up for grabs. Romania’s last concession round was in 2009, when 30 blocks were auctioned off. But this also comes over rumors about Exxon’s intentions in the Black Sea where it owns a 50% share in extractions rights, along with Austria OMV (also 50%). Rumors began circulating in the media in late July that Exxon was going to exit this play, but Romanian sources are citing OMV reps as saying they have never been informed of any such exit. Exxon and OMV Petrom (which is controlled by Austrian OMV) delayed a decision of commercial extraction at this project, which was supposed to start in late 2018.
- New sanctions have been slapped on Russia for the March 2018 nerve agent assassination of former Russian agent Sergei Skripal on UK soil. This was not a specific choice made by Trump; rather is required as part of a chemical and biological weapons law. The law requires the White House to choose from a list of six specific sanctions, which include banning US imports of Russian petroleum. In this case, the White House did not ban US imports of Russian petroleum. Instead, it has banned US banks from participating in the primary market for non-ruble-denominated Russian sovereign debt and lending non-ruble denominated funds to the Russian government. The new sanctions will take effect around August 19th and will remain in effect for at least one year.
- Brazil’s state-run Petrobras has started selling E&P assets in the eastern state of Espirito Santo. Up for sale are the gas-producing assets in the Peroa and Cangoa fields, as well as the assets in the offshore Malombe gas discovery. Peroa and Cangoa produce about 900,000 cubic meters of gas per day. Petrobras is divesting $26.9 billion in assets between 2019 and 2023.
- French Total SA has signed an agreement to sell a 30% interest in Societe des Transports Petroliers par Pipelines (Trapil) to pipeline network Pisto SAS for about $290 million. Total will remain a minority shareholder with an interest of 5.55% and will continue to use Trapil infrastructure. Total is seeking to divest $5B in assets by 2020.
- The giant refinery and petrochemical project that India is planning to build with Saudi Aramco and the UAE’s ADNOC has just seen its price tag increase by more than 36% over a forced relocation prompted by protesting farmers. This refinery would be able to handle 1.2 million bpd. The original location was in the western state of Maharashtra but protests have now moved it to Roha. With the move, it will cost an estimated $60 billion to build, up from the $44 billion it was set to cost back in 2018 when the deal was signed with Aramco.
- One of the world’s largest cobalt mines--Glencore’s Mutanda mine in the DRC--is set to close as cobalt prices sink further in conjunction with higher operating costs. The mine will likely close its doors by year’s end - a bitter disappointment for Glencore, which no doubt was banking on profiting from the growing EV market.
- The US shale industry was dealt a hard blow this week as Concho Resources (NYSE:CXO), one of the biggest drillers in the Permian, cut its production targets for 2019 on reports that its wells were spaced too close together. It is widely understood that as Concho goes, so does the rest of the US shale market. A shale well’s fast-declining production in the first year of life puts enormous pressure on companies just to maintain production, and budgets sooner or later will have to give. CXO’s stock slipped over 5% on the quarterly findings, and other US shale top dogs such as EOG Resources, Pioneer, Whiting, and Apache were all trading down as grimmer prospects are anticipated.