Saudi Arabia - joining the dots
A series of blog entries exploring Saudi Arabia's role in the oil markets with a brief look at the history of the royal family and politics that dictate and influence the Kingdom's oil policy
AIM - Assets In Market
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Iran negotiations - is the end nigh?
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Yemen: The Islamic Chessboard?
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Acquisition Criteria
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Valuation Series
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Tuesday 14 April 2015
Victoria Oil & Gas: Cameroon's emerging integrated utility
Wednesday 8 April 2015
Suppressing the Brotherhood: Avoiding a Repeat of History
Almost two years on, it is worth revisiting the above event and explore the context behind it in light of the current Houthi conflict in Yemen. Despite the lack of a label as a coup, it is widely accepted that Morsi's removal was an organised affair with Saudi Arabia (and the UAE) pulling strings in the background.
The Gulf States remember well the Nasser regime in Egypt where he toppled the monarchy in 1952 and then attempted to export the revolution throughout the Arab world, promoting nationalism as alternatives to the system of ruling monarchs in the Gulf. Between 1950 and 1970 the monarchies of Iraq, Yemen and Libya fell and in 1969, there was a failed attempt to overthrow the establishment in Saudi Arabia. In fact, Saudi Arabia was in the midst of a proxy war against Egypt in Yemen between 1962 and 1970 where the Saudis backed the return of Imamate rule (following their ousting in the republican revolution of 1962) and Egypt backed the revolutionaries.
It is against this backdrop that Saudi Arabia views the Muslim Brotherhood: an organised political movement that poses a threat to the remaining monarchies in the Gulf. Saudi Arabia made clear that it would welcome Morsi's ouster and a few days after the event actually happened, Saudi Arabia together with the UAE and Kuwait provided millions of dollars in financial aid to help "repair Egypt". This backing clearly demonstrates the Gulf States' support for the new regime in Cairo.
In Saudi Arabia, the Brotherhood is now designated as a terrorist organisation and any support to the group will result in imprisonment. In the UAE, a crackdown has effectively ended the Brotherhood'sactivities in Abu Dhabi and Dubai. Kuwait still has a Brotherhood presence, but is converting its stance to anti-Brotherhood.
Qatar remains a spanner in the works which continues to provided financial and political support to the Brotherhood. To show its disapproval, Saudi Arabia, the UAE and Kuwait withdrew their ambassadors from Doha in March 2014 in a move designed to force Qatar to reconsider its loyalties. However, whether Qatar will submit to its neighbours' desires remains to be seen as it continues to strive to be the premier Gulf State over Saudi Arabia.
Friday 3 April 2015
Gulf of Aden: Dire Straits
The Gulf of Aden is a strategically important shipping route linking the Mediterranean Sea and the Indian Ocean. The port city of Aden controls the Bab al-Mandab strait, the gateway between the Red Sea and Gulf of Aden through which 21,000 ships pass through each year. According to the EIA, 3.8mmbbl/d of crude oil and refined products passed through this route in 2013 alone.
The capture of Aden by the Houthis on 25 March 2015 was therefore a huge concern to the international community, with the US, Saudi Arabian and Egyptian navies stepping up its forces in the region. At the beginning of April, the Chinese were reported to be diverting vessels to the region as well.
At first glance, the involvement of Egypt is unexpected. Egypt had learned not to meddle in foreign affairs after its previous military intervention in Yemen in the 1960s led to the death of 26,000 Egyptian soldiers. Back then, Egypt's President Nasser saw that Yemen was going through what Egypt went through a decade earlier - a revolution against the monarchy, followed by what would be an installation of a republic. Nasser, a champion of pan-Arabism, lent his support to the Yemini republicans. However, what was expected to be a swift war turned into "Egypt's Vietnam" that lasted almost a decade.
One of Egypt's key sources of income is now at risk. The Suez Canal contributed over USD5 billion in tariffs in 2013 to Cairo's coffers, now under threat, means Egypt can no longer turn a blind eye to the developments in Yemen. More importantly for Egypt, its participation in Operation Decisive Storm, allows it to demonstrate its loyalty to the Gulf States which have contributed over USD20 billion of aid in funds and oil products to an ailing Egypt since the ousting of Mubarak in 2011.
However, it would be wise to remember that the Saudis and Egyptians were once on opposite sides of the battlefield in Yemen. The Egyptians had backed the republicans in the 1960s civil way, whereas the Saudis lent their support to the ruling Imam monarchy. Saudi Arabia's policy how not changed though - it and its Gulf allies understandably view the protection of the status quo a priority, i.e. protection from any threat against the ruling monarchies. In the 1960s, it was against Nasser's spread of revolutionary ideology. Since 2011, it has actively worked behind the scenes to undermine the Muslim Brotherhood in Egypt, a moderate religious political group which the Saudi's saw could garner popular support in the Gulf if left unchecked. In 2015, the Iranian backed Houthi movement on the Saudi border is the next, and possibly not the last, challenge to the Gulf ruling system.
Wednesday 1 April 2015
Saleh: Enemies become allies
The Houthi movement was founded in the 1990s to revive a branch of Shia Islam known as Zaidism. Historically the Zaidis had ruled over North Yemen until their toppling in 1962 during the Yemen Civil War. Since then, they have been increasingly marginalised by the new regime which viewed Zaidism as a threat.
In the beginning, the Houthi movement was peaceful. It sought a voice in a regime where it was being opressed. It called for a partnership with President Saleh to work things out and not for his overthrow. However, the Houthis also saw the United States as an enemy of Islam and President Saleh’s alliance with the US on the “War on Terror” shaped the events that followed.
President Saleh was seen by the Houthis as a traitor; the Houthis were vocal in pushing for his ousting. In response, President Saleh stepped up efforts to repress the movement, including attacks on Houthi villages. The movement became increasingly military in order to defend itself with six wars being waged upon them by the Saleh Government between 2004 and 2010. The wars led to massive deaths in the Sadaa region, the stronghold of the Houthis, and had the effect of alienating much of the Northern Yemeni population.
The Arab Spring came at an opportune time for the Houthis who capitalised on the Yemeni’s discontent with the government and lack of progress on the economic and security fronts; the Houthis openly supported the protests against President Saleh. Following the removal of President Saleh, the Houthis stepped up as a candidate to fill the power vacuum and vowed to set up its own political party to participate in the country’s next elections. Support for the Houthis grew, although its appeal was probably less to do with its ideology and more of a common hatred against Saleh’s repressive regime.
The Houthis realised that in order to be heard and to make an impact, it would have to do so through the political arena which would legitimise the movement. However, it is now becoming evident that its extension into politics is part of a grander plan to gain governing and military dominance. Three years after the Arab Spring, Yemen’s interim government headed by President Hadi, had yet to make any noticeable improvements to the country. The Houthis saw this as the time to act and in 2014, launched an aggressive military campaign in the north of Yemen culminating in the capture of the capital Sanaa in September 2014. Government departments and the airport were seized and President Hadi was placed under house arrest. The capture of Sanaa was months, if not years in the planning. By mid 2014, the Houthi’s had already surrounded the capital and its final move into the city was executed at lightening speed.
The Houthi’s could not have achieved all this without military support. In a twist of events, this support is coming from ex-President Saleh, who once upon a time, aggressively tried to crush the Houthis during his reign. Saleh’s loyal followers, including those in the country’s army and security services have aided the advance of the Houthis, or in some cases actively chose not to protect against their advances. The Houthi alliance with Saleh is a strange one, but one that has allowed the former to widen and strengthen its grip and the latter to orchestrate the destruction of the new regime and the Hadi government, an act of revenge against those who overthrew him. How long this alliance lasts, only time will tell, but probably for no longer than one needs the other.
Monday 30 March 2015
Yemen: The Islamic Chessboard
Saturday 28 March 2015
Tullow in the middle
Monday 23 March 2015
Iran negotiations: the US conundrum
The intensifying rift between President Obama and Congress poses a risk that could derail the Iranian nuclear talks.
Wednesday 18 March 2015
Afren - A Shakespearen Tragedy
This series chronicles the rise and fall of Afren, our flawed hero, with a share price high of 170p at the beginning of 2014 which falls to 5p at its demise.
Iran framework agreement - Kerry makes the rounds with the P5+1 and Gulf States
Tuesday 10 March 2015
Iran negotiation: an untimely letter
On 9 March 2015, Republican senators issued an open letter to Iran that essentially warned the latter any deal entered into with President Obama would be considered an "executive agreement" that would require Congress ratification and more importantly, could be revoked by the next president.
The message it clearly sends out is that the US could back out of any agreed nuclear deal, raising serious doubts on whether the US will keep up its side of any bargain, including the lifting of sanctions. The letter was drafted by freshman Republican Senator Tom Cotton and signed by 46 other Republican senators. The timing of the letter is a major blow to the framework agreement which is due to be made by the end of March.
Hilary Clinton has denounced the letter saying that "these senators were trying to be helpful to the Iranians or
harmful to the commander-in-chief in the midst of high-stakes international diplomacy", while John Kerry called it "absolutely calculated...and unthought-out". Even Iran's foreign minister, Mohammad Javad Zarif, found the move by the select Republicans distasteful.
Cotton defended the letter and said that Obama is "negotiating a deal that is going to put Iran on a path to a
bomb". This in itself is a weak argument as the lack of action by the international community could also see Iran ramping up its enrichment programme and further developing nuclear capabilities. Whilst Iran could argue in future that any slight slip up by the US as reneging on an agreement, it is likely that this would be one of a myriad of excuses that they could use.
It is also worth scrutinising the letter further.
- The letter suggests that a "mere executive agreement" holds little sway in terms of power, yet it is worth remembering that the withdrawal of US forces from Iraq was by such executive agreement and not a treaty.
- It is also untrue to say that "future Congresses could modify the terms of the agreement at any time" - Congress cannot renegotiate such an agreement, but can pass legislation to contradict it and therefore nullify its terms.
- Also, the claim that the next president "could revoke the agreement" neglects the fact that the agreement will become binding international law through a UN Security Council resolution.
The letter muddies the water at a bad time (or a good time as some may say) as the negotiations intensify over the next few weeks. Although the damage to the negotiations and to President Obama's authority can be contained, it further chips away at the delicate pillars which have supported the efforts of the P5+1 which have progressed the discussions with Iran to the point they are at today.
Saturday 7 March 2015
Saudi Arabia - joining the dots: Part 6 - Emergency meeting
Part 6 - Emergency meeting
OPEC's traditional strategy has been to cut production to maintain prices, but recent behaviour of the cartel or at least that of its largest member (and swing producer) shows a marked deviation from the strategy.
Saudi Arabia has been a key driver of the protect market share strategy, convincing other OPEC members that a period of low prices would cut US supply and therefore restore the supply-demand dynamics of the market. However, Al-Naimi's stance of keeping to this strategy "even if prices hit USD20 a barrel" (December 2014) has scared the other OPEC members, who do not have the deep pockets to keep their countries afloat.
Nine months into the oil price decline, many of the members are feeling the pressure with fiscal reserves running low. Saudi Arabia and its Gulf neighbours are the exception with their vast monetary reserves, but with large social spending programmes, these countries are now running deficits and chipping away at those reserves.
Discussions between the various OPEC members on the next course of action are ongoing with the next meeting scheduled for June 2015. However, in February 2015, Ms Alison-Madueke, president of OPEC said in an interview with the FT that if the oil price "slips any further, it is highly likely that I will have to call an extraordinary meeting of OPEC in the next six weeks or so". Extraordinary meetings have to be agreed upon by all 12 members.
Sunday 1 March 2015
Saudi Arabia - joining the dots: Part 5 - Breakeven, OPEC's downfall
Part 5 - Breakeven, OPEC's downfall
Tuesday 24 February 2015
Saudi Arabia - joining the dots: Part 4 - The price wars, defending market share
The sudden fall in the oil price in the middle of 2014 and the subsequent lack of response by OPEC is a stark reminder of its members' policy of defending market share, although the cartel may openly deny it .
Forgotten in recent years and beyond recollection for those who are still young, the 1980s was the last time Saudi Arabia demonstrated its significant power in the oil markets in its efforts to defend market share. In hindsight, one questions whether Saudi emerged victorious from that war and whether it was worth fighting.
In the early 1980s, oil prices fell to record lows after hitting highs in the 1970s. Consumers (namely the US) vowed to reduce reliance of on oil given the high prices and actively implemented policy to switch to substitute energy sources, such as coal for power generation.
In an effort to shore up oil prices caused by falling demand, Saudi urged its fellow OPEC members to cut production. Saudi cut its own production by c.80% to 3.5mmbbl/d, but many of the other members refused to follow suit. Saudi was furious as by taking action, it had lost out on revenue and market share. In retaliation to the non-compliers, Saudi ramped up production to full capacity and flooded the market with crude. The excess production caused oil prices to slump to c.USD7/bbl and it was another 20 years, before oil price began to recover to pre 1980 levels.
That part of history continues to haunt Saudi today and one can see its remnants in Saudi's stern policy of maintaining production, communicated to the world in that all important OPEC meeting on 27 November 2014.
Luckily for Saudi, and other OPEC members, its low cost of production (<USD20/bbl) means that production remains profitable even at USD50/bbl oil price. The current price war will see much production around the world being choked with high cost North American unconventionals and mature North Sea production being hurt.
Whether Saudi still holds (or wishes to hold) its nominated role of swing producer is a key question to ask. For now, it still has the ability to retrench production, but its low cost production base will mean it can withstand lower oil prices for longer whereas its non-OPEC counterparts will fall over one-by-one unless prices rebound in the near future.
Sunday 22 February 2015
Saudi Arabia - joining the dots: Part 3 - The reshuffling has begun
Part 3 - The reshuffling has begun
Thursday 12 February 2015
Natuna Sea Block A PSC ("NSBA")
- KUFPEC (33.33%), PMO (28.67%*), Petronas (15%), Pertamina (11.5%), PTTEP (11.5%)
- Pertamina and PTTEP acquired their stakes as part of Hess' Indonesian portfolio
- NSBA supplies gas to SembGas in Singapore, together with South Natuna Sea Block B and Kakap, as part of a GSA signed in 1999 for a period of 22 years
- In 2008, PMO signed two additional GSAs to supply NSBA gas for power generation in Batam, Indonesia
- Due to delay in constructing the pipeline to Batam, a swap agreement has been signed for the Batam earmarked gas to be supplied to Singapore and another field to supply Batam instead
- The largest field on the block is Anoa which contains about half of the PSC's gas reserves. Gas from Anoa, Pelikan, Bison and Gajah Puteri are dedicated to the SembGas 1 GSA
- SembGas 2 is predominantly supplied by Gajah Baru which was developed as a second phase of NSBA
- Crude is piped by an 8" pipeline to the Anoa Natuna FPSO for processing and storage
- Gas is exported via the West Natuna Transportation System (operated by COP) and serves the three Natuna PSCs (NSBA, South Natuna Block B and Kakap)
- The network consists of 656km of pipeline, with a 470km section transporting the gas to Singapore
- A pipeline connecting the system to Batam is also planned but is the responsibility of the buyers of the gas
- The pipeline costs are recoverable under the PSCs
Aasta Hansteen Area
- Located in Norwegian Sea; Aasta Hansteen discovered in 1997 but remained undeveloped due to the remoteness
- Area includes Snefrid Sør and Haklang, both discovered in 2008
- Statoil (75%*), OMV (15%), COP (10%)
- Area thought to contain >2.4 GIIP, estimated recoery c.66%
- PDO submitted in January 2013 and received approval in April 2013
- Development will utilise subsea wells tied back to SPAR platform
- Power supply expected to be generated on platform due to high cost and difficulty of supplying electricity from shore (distance)
- First production expected in Q3 2017
- Aasta Hansteen will be first deepwater development in Voring Basin; facilities expected to be used by other fields and discoveries in area
- Gas will be exported by new 480km pipeline (Polarled pipeline) from SPAR to Nyhamna gas terminal; condensate will be offloaded from the SPAR
- Standalone economics are marginal, due to remoteness of area
- Tie-backs will improve economics (tariff income)
- Attractiveness of area surrounding Aasta Hansteen demonstrated by high take-up of licences in recent licensing rounds
- Polarled pipeline will draw further investment and exploration
- Government announced changes to fiscal regime in May 2013 - PDO submitted prior to announced change so should be eligible for transitional terms (7.5% capital uplift vs. 5.5%)
Sunday 1 February 2015
Saudi Arabia - joining the dots: Part 2 - Scandal
In 2006, the then King Abdullah created the Allegiance Council in 2006 to help select future rulers. In March 2014, Prince Muqrin was appointed by Abdullah to be the next in line after Salman, placing Muqrin to be the third in line to the throne at the time. Prince Muqrin has now been elevated to second in line following the death of Abdullah.
Muqrin |
Bin Nayef |
Monday 26 January 2015
Saudi Arabia - joining the dots: Part 1 - The return of the Sudairis