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Saudi Arabia’s Delicate Baku Balancing Act

Editorial Dept

OPEC (plus Russia) is meeting in Baku this weekend, and the Saudis are playing a delicate balancing act—not only disappointed in Trump’s less aggressive tactics against Iran, but also disappointed in the effects of the attack the Kingdom orchestrated against Qatar, which has managed to survive the embargo quite well and is now threatening to one-up the Saudis by getting into the US shale patch and by bumping up its already massive LNG offerings. All of this has an effect on what the Saudis end up doing to influence oil prices. They aren’t feeling particularly generous with Trump, who would like to keep oil prices low. The Saudis need about $80 a barrel to fund their economic diversification, pay for the war in Yemen and all the expensive PR that is necessary to get MBS over the very badly executed murder of a critic, journalist Jamal Khashoggi. As far as assassinations go, that was probably the most expensive one the world has ever seen. On Wednesday, WTI hit $58/barrel on shrinking US inventories, and Brent’s been hovering around $67/barrel. OPEC has never been more geopolitical than it is today, and geopolitics will figure heavily into this weekend’s meeting.

The Saudis have already announced plans to cut crude oil exports in April to below 7 million barrels per day (bpd), while keeping output well below 10 million bpd. Aramco’s oil allocations for April are 635,000 bpd below requests made by refiners and clients of Saudi crude.

Oil & Gas Story of the Week:

Norway’s sovereign wealth fund will divest from its interests in upstream oil and gas after the government recommended the move first proposed in 2017. This means stakes worth billions of dollars will be sold—news that sent the stocks of energy majors diving. But there is a favorable catch for the integrated majors.

The government of Norway advised only a partial divestment from the oil and gas industry: the sovereign wealth fund will sell its holdings in pure-play production companies but keep its stakes in integrated companies such as BP, Shell, and Chevron.

It’s a pragmatic decision and has nothing to do with environmentalism. The bottom line is that Norway has become too reliant on the returns from its oil and gas interests, as evidenced during the 2014 price crisis.

To reduce the likelihood of a repeat of the situation, the world’s largest sovereign wealth fund, worth about $1 trillion, needed to reduce its exposure to an industry where volatility had always been considerable but was only becoming more intense post-2014.

Some have tried riding the environmental wave, arguing the decision to divest was motivated by environmental concern as well as financial reasons but the official line remains strictly focused on financial security rather than any sustainability concerns as evidenced by the fact the fund will keep its holdings in the supermajors.

In other words, this is Norway moving with the times, and getting out in front of the big fight to come that has oil majors who aren’t jumping on the renewables bandwagon scrambling for another foothold.

Renewables Story of the Week:

Solar stories still dull in the media space, but Goldman Sach’s is now saying that utility-scale solar power capacity should grow by double digits globally this year and next. It’s the fastest-growing source of electricity generation, and it’s stealing share from fossil fuels (especially coal, but also natural gas). For many, it still seems like an investment before its time, but 2019 may prove that wrong. According to Goldman, utility-scale solar installations will reach 108 gigawatts this year—that’s a 12% increase on 2018. Between 2019 and 2020, it is expected to grow an additional 10%.

Nor is this the only takeaway from this week in energy, which was highlighted by a huge conference in Houston. The other takeaway is that the US is about to take its place on the wind energy map. There seems to be an overriding view that Trump is bent on killing renewable energy; however, we find this to be a very simplistic view. While Trump has certainly been vilifying the “climate change camp”—which is expected of him—under his administration we are actually seeing the rise of wind energy. At this point, it is more useful to disregard talk of “climate change” and instead watch what each renewable sector is doing specifically. Offshore wind is very much worth looking at, and oil and gas giants themselves are moving it forward because they are shooting for lower-carbon footprints in earnest. And costs of development have been falling. But the big change now is that US states are officially interested in buying this power, with New York and Massachusetts being the biggest points of interest. Most notably, December saw giant Equinor win a development site off the coast of Massachusetts in a federal auction. So Trump is helping to further the development of wind, and at the Houston conference, this came into clearer focus. Offshore wind power in the US is going from zero to hero, and it’s the first time that we see a real investment opportunity from the US side.

Intel Notes

Politics, Geopolitics & Conflict

- The United States has imposed new sanctions on a Russian bank Evrofinance Mosnarbank over its dealings with Venezuela's state oil company PDVSA. US Treasury Department said that in 2018 the net assets of the bank grow over 50 percent. The new sanctions call for all bank interests in the United States or in possession by U.S. nationals to be blocked. The bank, founded in 2011, is jointly owned by a group of Russian banks and Venezuela's National Development Fund.

- While France and Italy have been the key European players vying for control of oil-rich Libya, Germany is now signaling that it may like to get back into the game, though we are unaware of any direct expressions of interest by specific oil and gas companies yet. But this also comes as General Haftar (Libyan National Army) closes in on Sirte with his forces. Sirte is controlled by the Tripoli-based Government of National Accord (GNA), which is the (for now) internationally recognized government—but it is not likely to last much long. The GNA has declared a state of emergency in Sirte as Haftar approaches. They are calling this is declaration of war. Tripoli is next …

- Following the Israel officials remarks that its navy could act against Iranian oil “smuggling” to enforce U.S. sanctions, Iranian government said will respond firmly to any Israeli naval action against its oil shipments. Iran's Defense Minister Amir Hatami was quoted by local media that Tehran had the military capabilities to confront any Israeli intervention. Last week, Israel's Prime Minister Benjamin Netanyahu told naval officers last week that Iran was still resorting to clandestine measures to ship fuel.

- Trump has asked Congress to remove India from the list of preferential trade partners, which could start another trade conflict. It is the latest US attempt to counter what it sees as unfair trade practices, with President Trump has repeatedly criticized India for high tariffs. India said the US move would have a "minimal economic impact". The US also announced to end Turkey's preferential trade status, saying it no longer qualifies. Separately, U.S. Secretary of State Mike Pompeo has urged India to stop buying crude oil from Venezuela.

Oil & Gas Discovery & Development

- Saudi Arabia’s Aramco announced a potentially substantial natural gas discovery in the Red Sea, without, however, divulging any details as to how much gas it contains. The company said it will now step up its exploration efforts in the area after it completes a feasibility study on the discovery. Gas has gained more prominence on the Saudi energy agenda lately with Aramco looking into gas and LNG acquisition opportunities abroad as well as new investment projects at home as it seeks to boost the portion of natural gas in its energy mix.

- Malaysia’s Petronas plans to increase its exploration budget this year focusing particularly on natural gas and LNG to reduce its exposure to super volatile oil prices. Petronas’ total budget this year could be around $12.22 billion and a solid portion of it will go into the LNG Canada project where Petronas has partnered with Shell, PetroChina, Kogas, and Mitubishi. The project will cost $30 billion.

- Colombia’s Ecopetrol, the state oil company, plans to spend $500 million on fracking over the next three years despite vocal opposition from environmentalists and local communities. Plans are to drill 20 wells and frack them to tap its unconventional oil resources. The sum is part of the company’s $12-15-billion budget for the period.

- More trouble in the Alberta oil sands patch … Canadian Imperial Oil Ltd, which is majority owned by Exxon, will have to delay its Apsen oil sands project for another year because the provincial government has imposed output cuts due to pipeline bottlenecks. First output was planned for 2022, so we can add another year to the project, which would produce 75,000 bpd.

Renewables

- Australia plans to have 20 GW of solar generation capacity by the end of next year, adding new solar farms at a breakneck speed. Last year, some 1.5 GW of new capacity were added in the country, which boasts off-the-charts solar irradiation, and analysts expect this year to see even more additions, with installations multiplying at a rate of one mega project a month.

- Companies operating in the Netherlands will have to pay a carbon tax based on a new law announced by the Dutch government on Wednesday. This is the government’s way of making up for what it foresees will be an inability to keep planned emissions cut targets that will cost a total of $6 billion over the coming decade. The goal is to hit a 49-percent reduction goal by 2030. The plans have not been finalized but are expected to be so by the end of next month. Other plans include higher taxes on heating gas and airline tickets, increased use of renewable power, subsidies on EVs and more incentives for industry to cut emissions, among other things.

- If you’re still unsure where the collision between big oil and renewables will be, exactly, look no further than Shell’s own urging of the White House to tighten methane leak rules. In other words, Shell is calling on Washington to get tougher on the industry’s greenhouse gas emissions. This, as Shell jumps on board the climate change bandwagon in an about turn that represents a major PR stunt. BP is doing the same, telling the oil industry this week that it should engage with proponents of the “New Green Deal”.

Deals, Mergers & Acquisitions

- Aramco’s board is meeting this week to approve an international bond to fund the acquisition of a 70% stake in petrochemicals major Sabic. The acquisition is part of efforts to make Aramco more attractive for foreign investors when the time comes to list. The latest updates from Energy Minister Khalid Al-Falih are that the IPO will take place in 2021. The bond, Aramco’s first on the international market, also raised questions: such a bond will require the notoriously opaque company to disclose a lot of financial details to whet investors’ appetite to participate. We note that the deal does not make sense for Aramco, which has a conflicting strategy for chemicals.

- French Total has bought a 10% direct stake in Novatek’s Arctic LNG-2 project, which will bring its total stake in it, including its 19.4% holding in Novatek, to 21.6%. The French supermajor also has an option to buy an additional portion in the $21-billion project if the Russian operator decides to reduce its 60% interest in it.

Tenders, Auctions & Contracts

- Exxon is reportedly mulling the possibility of oil and gas exploration in Israel, which is something that so far has been left to the smaller players because the supermajors traditionally have been doing E&P in Arab Gulf states. But the Leviathan Basin where Israel made the major gas find that put it on the oil map for the first time is proving far too tempting. It’s also tempting considering that Exxon has been racking up discoveries in the Mediterranean, offshore Cyprus—and there’s a clear connector here. But at the end of the day, the path to Middle East peace will invariably be built on oil.

- Sinopec, China’s largest refiner, could sign a 20-year LNG delivery contract with U.S. Cheniere Energy but only if Washington and Beijing finalize their trade deal. For now, expectations are optimistic but last-minute surprises are always an option. Cheniere is the largest exporter of LNG from the United States and China is a key market for all producers of the fuel.

- Shell has signed two contracts in Colombia for the development of two offshore blocks in the Caribbean. Initial investments in the two projects would be to the tune of $100 million and the total spend could reach $650 million if exploration yields promising results.

- Baker Hughes and McDermott scored offshore field development contracts from BP for a natural gas project in Mauritania. The Greater Tortue Ahmeyim LNG project is a priority one for BP, which will feature a floating production and storage facility with an annual capacity of 2.5 million tons of liquefied gas. The resources of the field are estimated at 15 trillion cu ft. First production is slated for 2022.

Company News

- Italy energy giant Eni is promising high returns for investors with share buybacks and increased dividends. Over the next four years, Eni claims, there will also be stronger cashflow growth, based on its newly released 2019/2022 plan.

- German utility EWE has issued an invitation to interested parties to register interest for the acquisition of a 26% stake in the company that could be valued at up to $1.8 billion. In January, Reuters reported that Macquarie and Allianz were expected to submit a joint bid, as are Canadian pension fund OMERS, Australian infrastructure fund IFM and Dutch pension fund PGGM.

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