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Global Intelligence Report - 2nd November 2018

Putin Erdogan

-Geopolitical analyst for global consulting firm
-China-focused consultant for Fortune 500 companies and major international institutions
-High-level Turkish government sources in Ankara
-Top aide to Turkish deputy foreign minister
-Turkish presidential chief advisor

Containing China, Destroying American LNG

For investors, the biggest bet to make right now is on LNG. And what happens next will be key, right ahead of mid-term elections. Trump needs a win in this war against China—hence all the speculation that we will see some sort of deal come out before elections. But in order to even begin to speculate on what that deal might be, we have to understand that the trade war has become about something much bigger than tariffs meant to boost U.S. manufacturing. This is about containing China’s growth, and LNG plays a massive roll in this. It’s a game the US absolutely must win.

From where we stand, Exxon Mobil is positioned to be the biggest beneficiary of the trade war in terms of LNG. The supergiant is harvesting Chinese LNG demand and avoiding China’s tariffs on U.S. natural gas imports at the same time.

China’s strategy is now changing. Most significantly, the trade war is making big foreign investors a part of the Chinese strategic element. Exxon is taking full advantage of this. According to an intelligence expert at a China-focused consultancy in Europe, and it’s this move that has hedge funds most interested.

China’s 10% tariff on U.S. LNG imports is going to radically shift this playing field. The first U.S. victim is the Magnolia LNG terminal in Louisiana, backed by Australia’s LNG Limited, which is now delaying its final investment decision (it won’t happen this year) because it can’t line up the necessary Chinese buyers. The new FID is now targeted, maybe, for early next year, but that will depend on what happens with the tariff war, and if any deal between the U.S. and Chinese is made. Forget about Europe, this was always about China. These projects aren’t going to get off the ground if they can’t target the huge Chinese demand growth.

So watch what Exxon is doing … It’s not waiting for any U.S.-China deals. It’s circumventing the entire ordeal. Exxon is going to help build an LNG import terminal in Huizhou (in China’s Guangdong region), which it will also supply and in which it will have a major stake. That stake is a huge coup for Exxon, which is proving to be quite lucratively counterintuitive on the trade war. One might even think it had foreseen what Trump would do to America’s LNG prospects. Exxon has major LNG projects in both Papua New Guinea and Mozambique, so it will supply the new Chinese terminal with non-U.S. LNG—and no tariffs. Exxon’s LNG will also have more transportation advantages to China.

Major global hedge funds who number among our clients are now homing in on the LNG question with a very different attitude. They’re hedging their bets on whether a deal will be made to save American LNG, and if not, who is going to come out on top among the supergiants. Who will get the Chinese market?

Turkey, Iran and Saudi Arabia

First … Khashoggi: There are two figures in Turkey who are being rewarded for their role in leaking the details of the Khashoggi murder, which resulted in a confession by Saudi Arabia. Erdogan’s spokesman Ibrahim Kalin and his communications director, Fahrettin Altun, according to a presidential chief advisor. Kalin and Altun received the information on Khashoggi’s murder in the Saudi consulate in Istanbul from the heads of the National Intelligence Agency (MIT) and from Interior Minister Suleyman Soylu and his staff. Once they had the intelligence, they were tasked by Erdogan with its calculated distribution. They hand-picked foreign and local journalists to publish the information, which led to the Saudi confession.

“Our strategy was aimed at shaping the narrative and public discourse, keeping up international pressure on Riyadh and force them to admit the killing,” the source said, adding that Erdogan congratulated Altun and Kalin, and willfully kept himself at a distance from the ongoing investigation’s results. Even after the Saudi confession, Erdogan refrained from discussing the details of the murder and the investigation in public.

Turkish opposition claimed that Erdogan let some Saudi suspects leave Turkey after a phone call from the Saudi King; however, we believe this is a baseless claim and no sources in Ankara can confirm this.

Meanwhile, according to a former deputy undersecretary at Finance Ministry who is now the head of a key committee in the ministry, Kalin's fast rise through the ranks have made several Erdogan loyalists and older senior figures of the ruling AKP "jealous" and there are ongoing "plots" to convince Erdogan to sideline Kalin, “such as by appointing him to a foreign capital as an ambassador”.

Second, the phone call with Trump …

Erdogan and Trump discussed two Syrian issues on a 1 November phone call—Manbij and Idlib. That was made public. What was not, according to a top aide of a Deputy Foreign Minister in charge of chancellery, was a series of three key bilateral issues that were also discussed: One of them was the ongoing U.S. sanctions on Turkish ministers Suleyman Soylu and Abdulhamit Gul, which were imposed after the prolonged arrest of U.S. Pastor Andrew Brunson. Erdogan reminded Trump that Brunson had been released and Turkey now expected sanctions to be lifted. Trump promised nothing during the phone call and said only that he would check on that, according to the source. The second issue was Khashoggi, and Erdogan urged Trump to apply pressure on Riyadh to find and punish the perpetrators of the murder. Trump, again, was vague and noncommittal. The third, and perhaps the most important issue, was the upcoming second stage of U.S. sanctions on Iran. Both leaders held to their prior positions. According to the source, Turkey believes that--as Brunson has been released—Hakan Atilla will soon return to Turkey and Halkbank will receive a relatively soft penalty. Atilla was a senior executive of Turkish state-owned Halkbank caught doing sanctions busting favors for Iran. Erdogan’s son-in-law, Berat Albayrak—the new finance minister--is already selling this in Ankara as his own success even though they have received no guarantees from the U.S. whatsoever.

After the phone call on November 1, the atmosphere in Ankara top circle was one of diminished hope for receiving a waiver from Washington in Iran sanctions. "We have explained again to the U.S. administration our dependence on Iranian energy supplies. It is not a choice for us, it is a necessity. If we cannot get the waiver, then we will expect that we will face the minimum amount of repercussions from the U.S, relying on improved relations between the two presidents," our source said on Thursday.

On Friday morning, the Turkish Energy Minister said he had “heard rumors” that the U.S. would include Turkey in the waiver list, but Ankara had not received any written notification to that end. So, the bottom line is, Turkey is either counting on a waiver, or counting on Washington handing out weak punishment for non-compliance, because either way, Turkey is going to import Iranian oil.

India’s Expected Sanctions Waiver

Washington is gearing up to officially grant India a waiver from the Iranian sanctions in exchange for a pledge to cut its Iranian oil imports by 35 percent. But this isn’t just about oil. India not only needs Iran’s help as a hedge against growing Chinese power in the region, but also to help fight a Sunni radical threat in neighboring Pakistan and Afghanistan. In this respect, it is not in Washington’s interest to impede India’s interests, even if that means forfeiting a zero-Iranian-oil goal for New Delhi. There is also a major transport corridor in which India has already invested $500 million, and which relies on Iran. Iran is pressuring India subtly to avoid pressure from Washington over oil sanctions by openly soliciting support from China and Pakistan for the project. This is meant to be a message to India not to bow to Washington’s every demand or risk losing to its regional rival, China, and its number one enemy, Pakistan. The project—the International North-South Transit Corridor—features the Chabahar port as the key link and is meant to be a tool for countering China in the region. It should also be noted with interest that at the same time as reports are emerging about a near-deal for India on an Iran sanctions waiver, Iranian state-run press are flaunting the same transport corridor as an “alternative to the Suez Canal”, with the cooperation of Iran, Russia and India. It’s a ‘Silk Road’ for Iran, Russia and India, so Washington will have to play this one carefully. It needs the counter to China, and countering both China and Iran simultaneously will backfire. Truly countering China will mean embracing an India-Iran silk road competitor.

Global Oil & Gas Playbook

Deals, Mergers & Acquisitions

• Chesapeake Energy has inked a deal to acquire WildHorse Resources Development for almost $4 billion in cash and stock. The deal includes debt of $930 million accumulated by the Eagle Ford-focused producer and will add to Chesapeake’s portfolio some 420,000 net acres in the Texas shale play, as well as access to a new hot spot: the Austin Chalk. Savings over the first five years following the deal would come in at $200-280 million annually, Chesapeake has calculated.

• French EDF has completed the sale of its 65% stake in the Dunkirk LNG terminal worth over $2.7 billion, to two consortia, one Franco-Belgian and the other South Korean. The deal was first announced this summer and also involved Total SA, which held 10% in the terminal.

Tenders, Auctions & Contracts

• Egypt will issue an international tender for oil and gas exploration in the Red Sea before the end of this year. Officials are now awaiting the data from the first phase of seismic research. Egypt is eyeing a major natural gas play here and is keen to become an exporter of LNG to Europe. The country is also working on a new production-sharing model with foreign companies designed to encourage Red Sea exploration. The new production-sharing deal is also slated to launch by the end of this year.

• Algeria’s state oil and gas company Sonatrach has sealed two deals with Italian Eni and French Total for offshore oil exploration in the Mediterranean. This will be the first offshore oil and gas drilling projects in the North African country, with drilling slated to begin in 2019 as Algeria seeks to reverse a continual decline in crude oil production.

• Ecopetrol has applied for a license for hydraulic fracturing as it seeks to tap Colombia’s shale oil and gas reserves. According to the company, fracking exploration could boost the country’s proven hydrocarbons reserves three times. If Ecopetrol is granted approval for fracking, it will begin drilling in an area where two geological formations meet, holding an estimated 2-7 billion barrels of crude.

Discovery & Development

• The first cargo of LNG from Cheniere’s new terminal in Corpus Christi is slated to be commissioned at the terminal on 15 November, several months ahead of schedule. The Corpus Christi facility is Cheniere Energy’s second, and the third in the United States. The facility will have a maximum capacity of 22.5 million tons of LNG, to be produced from five trains. But Cheniere is worried. Trump’s steel and aluminum tariffs make things for expensive and some materials are not even available in the US, according to the company’s CEO. China’s 10% tariff on U.S. LNG also threatens to price Cheniere out of the Chinese market right after it managed to gain a major foothold there.

• While details remain vague, Zimbabwe said this week that oil deposits had been discovered on its border with Mozambique. The ‘discovery’, reportedly made by Australian company Invictus Energy, is in a 200-square-kilometer area and the country’s energy minister has referred to it as “Africa’s largest oil reserves discovered to date”. There has been no word from Invictus on the alleged discovery. However, independent analysts have chimed in to note the difficulty of drilling on the terrain in question. While the energy minister is eyeing the commencement of drilling by 2020, the caveat, of course, is available funding. Invictus is expected to announce the alleged discovery later on Friday, 2 November.

• Italian Eni has made a new oil discovery in western Barents Sea in Norway at the Skruis Prospect. Preliminary estimates of the size of the discovery range between 50 and 60 million barrels of oil in place, 15 –25 million barrels of oil recoverable, with further potential to be evaluated.

• Following its fairly strong performance in Q3, Apache Corporation said this week that it will fast-track production in its Garten discovery in the UK North Sea. They are now moving initial production up from Q1 2019 to Q4 2018. The discovery was first announced in March this year, and the recoverable resource, according to the company, is expected to exceed 10 million barrels of light oil. Apache has 100-percent working interest in the block.

Company News

• Transocean reported a net attributable loss of $409 million for the third quarter of the year, down from a loss of $1.135 billion a year earlier. Transocean closed two acquisitions this year as well.

• BP reported a twofold annual increase in its profit for the third quarter to $3.8 billion, which was also the highest quarterly net result in five years.

• OMV boasted a 31% increase in its net profit for the third quarter of the year on the back of higher prices combined with lower production costs. The Austrian major said it expected a solid production rise through the rest of the year.

• Whiting Petroleum beat analyst expectations with its third-quarter results, reporting a net result of $84.7 million, or $0.92 per share, versus analyst forecasts for EP of $0.58.

• Anadarko’s Q3 results missed analyst projections, coming in at $0.82 per share, or $0.06 less than analysts expected. Still, the company returned to positive territory from a loss of $0.77 a year earlier.

• Baker Hughes also returned to black in the last quarter, booking a net profit of $78 million from a loss of $7 million in the third quarter of 2017.

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