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Global Energy Advisory – 30th January 2015

Politics, Geopolitics & Conflict

Focus: Saudi Arabia

What has happened in Saudi Arabia with the passing of King Abdullah should be viewed as no less than a coup that was waiting for this death to make its final move. One way or another, the change of regime will herald significant change for Saudi Arabia—and more importantly, on a wider geopolitical level. Saudi Arabia is in trouble and surrounded by enemies on all sides—mostly of its own creation. At the helm now is King Salman of the powerful Sudairi clan, while King Abdullah’s Crown Prince Muqrin bin Abdulaziz, King Abdullah’s choice, is Crown Prince (for now), but his power will be significantly reduced and he will be shadowed by King Salman’s choice of deputy crown prince, Interior Minister Mohammed Bin Nayef. Perhaps more significantly, King Salman’s 35-year-old son, Mohammed bin Salman, is now defense minister and chief of the royal court (i.e. the royal gatekeeper), replacing a figure we are all happy to see go: Khalid al-Tuwaijri, the undeniable leader of Saudi Arabia’s murky foreign intrigues.

What we are primarily interested in here is what this will mean for Saudi Arabia’s foreign policy—which has, of late, been defined less by any coherent policy and more by dangerous foreign intrigue that has led enemies dangerously close to and even stepping their toes across its borders. It has also helped create major conflicts in Yemen and Syria.

The mess in Syria and Iraq right now, and indeed the mess that lead to the death of Saudi border guards earlier this month, is in part the monster of Saudi financing (organized by Tuwaijri and notorious friend, Prince Bandar bin Sultan) of the Islamic State in Syria in its various forms.

The replacement of Tuwaijri could herald some major changes in Saudi Arabia’s list of friends and beneficiaries, but we are not necessarily looking to King Salman for these changes--as he is aging and reportedly has Alzheimer’s—rather, we are looking to his son controlling the royal court and the deputy crown prince.

What the ‘new take’ on IS and the Syria/Iraq conflict will be is unclear. Saudi Arabia is already too late to the game-change room here.

While Syria is a clear and present danger, Yemen is an immediate threat—and one in large part of the Saudi’s own making. Yemen is on the brink of all-out civil war, as we mentioned last week. The President, Prime Minister and entire government has resigned before the Houthi militia. Yemen’s long-running former leader until three years ago, Al Abdullah Saleh, has gotten into bed with anyone who could help him destroy the leadership that replaced him, and there were plenty of takers, from the highest levels of officialdom in the UAE to al-Qaeda, which Saleh has been helping for some time in an attempt to undermine the government. There will be a war. Al-Qaeda has been boosted by the Houthi siege and the government’s resignation. Now it can justify its claims to be the only group that can defend Yemen’s Sunnis. The Houthis are largely backed by Iran. Saleh played all sides here, including helping the Houthis take over the capital. The Saudis also had their hand in this, through Prince Bandar. This is interesting in itself and shows the Saudi dilemma and the difficult Iran-related choices it is going to have to make regarding Syria. The situation now, however, is that Yemen is exploding on Saudi Arabia’s border, and the Kingdom is short on friends.

Saudi foreign policy has been deplorable and has largely consisted of creating new enemies and creating dangerous shifts in Middle East geopolitics, and beyond. This is because its greatest enemy is a Sunni population that is tempted by democratic change.

For global oil, the Saudi story is one of the most important due to the high level of foreign intrigue and its dangerous activities in Syria, Iraq and Yemen.

Russia/Ukraine

Charges against Russian diplomats in the US and the arrest of a Russian employee of Vnesheconombank in Manhattan for economic espionage will likely be met with a similar—and possibly more creative—response from Moscow. Yevgeny Buryakov of Vnesheconombank has been arrested and two other Russian diplomats who have now left the US have been charged with economic espionage. Prosecutors say they also recruited students and business consultants to assist them.

At the same time, we are looking at another escalation of violent tensions in Ukraine’s eastern areas of Donetsk and Luhansk, where the ceasefire has been revoked. Pro-Russian separatists claim to have now pushed Ukrainian troops out of two districts outside of Donetsk, with their goal to control the entire region. The EU is considering new sanctions against Russia.

Discovery & Development

• Trading giant Vitol and Italy’s Eni are planning to develop a $7-billion offshore oil and gas project in Ghana. Offshore Cap Three Point is the largest foreign-backed investment project in Ghana’s gas sector. Ghana National Petroleum Corporation (GNPC) is now assessing the commercial potential of a new gas discovery made in partnership with Vitol and Eni. The new discovery is in the deep-water South Tano basin.

• Bad news for Cyprus: French Total SA may be considering a withdrawal from exploration in Cyprus’ Exclusive Economic Zone (EEZ), with the effort so far coming up dry for gas in Blocks 10 and 11. A final decision is expected next week. If Total withdraws from what was a two-well commitment, it will see a $79 million fine. A drop in the bucket compared to the $170 million it would cost to drill the deepwater wells. So far, the only discovery made offshore Cyrus has been by US-based Noble Energy in Block 12—but even here spudding and appraisal have been postponed. Italy’s Eni is currently drilling a second exploratory well in Block 9 (the first one was not successful).

• Australian BHP Billiton is cutting its US shale operation by 40% due to the decline in oil prices. By the end of June, the company plans to reduce its number of rigs from 26 to 16. At the same time, it says it will increase output by more than 50%. The company will focus its drilling operations on its Black Hawk field in Texas's Permian Basin.

• The Algerian government is facing demonstrations across the cities in its southern desert area over plans to exploit shale gas resources, which locals fear will affect the already scarce water supply.

Deals, Mergers & Acquisitions (and debt problems)

• Energy Transfer Partners and Regency Energy Partners—both major pipeline companies—have announced an $18-billion merger deal. This deal effectively creates the second-largest energy infrastructure company in the US. Unitholders of Regency will receive 0.4066 ETP common units and a cash payment of $0.32 share, reflecting a total price of $26.89 (assuming closing prices as of 23 January).

• Canadian-based Southern Pacific Resource Corp. (oil sands) has filed for protection from creditors through an insolvency filing under Canada’s bankruptcy law, due to low oil prices. The company is in talks with debtholders and will file a debt-restructuring plan. In December, the company said it would not be able to make an interest payment of $4.2 million to convertible unsecured bondholders.

• Connacher Oil and Gas Ltd., another Canadian-based oil sands company, has also put itself up for sale as it seeks to fix its liquidity and capital structure.

Regulations, Arbitration & Labor Issues

• Oil companies and union representatives started talks last week for a new nationwide contract covering hourly workers at 63 US refineries. This represents some 64% of the refinery capacity in the US. In February, the three-year agreement between the oil companies and United Steelworkers union (USW) will expire. The workers are seeking double the annual pay raises, among other things—otherwise they are threatening strike.

• BP will freeze pay worldwide this year for over 80,000 workers as part of its rather drastic ‘cost-cutting’ plan.

• There is a significant amount of uncertainty for foreign investors in Tanzania’s gas sector due to government corruption scandals and the ministerial resignations (not to mention ongoing regulatory uncertainty). Tanzania’s energy minister, Sospeter Muhongo, has been forced to resign over alleged illicit payments of public funds to a private power company. Muhongo is being replaced by a figure who has little gas/LNG experience, George Simbachawene, the deputy minister of land, housing and human settlement development. Nothing will move forward until elections scheduled for October 2015.




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