Tullow in the middle

The fight for oil is nothing new – ownership of oil commands tremendous wealth. Countries fight over the black stuff in wars, and perhaps less barbarically nowadays across a table. Individuals go after it in the hope of getting rich, as evidenced by the large number of independents that have popped up in the past couple of decades.

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Iran negotiations: the US conundrum

The intensifying rift between President Obama and Congress poses a risk that could derail the Iranian nuclear talks.

Republican Bob Corker, Chairman of the Senate Foreign Relations Committee, has sponsored the Iran Nuclear Negotiations Act of 2014 which calls for the President to submit any Iranian deal to Congress for approval. The bill would remove the President’s current authority to waive any sanctions imposed by the legislature. In short, Congress will have the final vote on any deal with Iran.

The Foreign Relations Committee will vote on the bill on 26 March and if approved, would move to a vote in the Senate. Should it progress beyond the Senate, Obama retains the right to veto the bill, however, given the Republican majority and signs of Democrat support for the bill’s measures, the bill could become veto proof.

The passing of such a bill would more than throw a spanner in the works and could seriously scupper the negotiations as well as reverse the progress made to date. It would raise further questions around President Obama’s authority in international negotiations which have already been partly undermined by the Republican letter to Iran on 9 March.

A scenario that could play out, should the bill be implemented, is the blaming of the US by the international community on the breakdown of the nuclear negotiations (should it occur). The US would no longer be seen as a reliable and trustworthy partner which would make it difficult for the US to garner future support for additional sanctions against Iran.

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Afren - A Shakespearen Tragedy

The story of Afren has the makings of a Shakespearean tragedy. The protagonist is one of the largest and most successful international E&P companies. Its fall from grace is swift as a corruption scandal unfolds and the company falls victim to fate - the fall in oil price drowns the company in debt. There is a slither of hope towards the end as Seplat steps in with an offer to save the company, but all is lost when the merger talks are terminated. Afren meets its downfall when the creditors circle in, taking away whatever dignity is left as the company lies in a helpless and weakened state. The proposed restructuring by the bondholders leaves existing shareholders massively diluted who are left with just 11% of their original holding.

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.

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Iran framework agreement - Kerry makes the rounds with the P5+1 and Gulf States

Over the past few weeks, John Kerry has been busy meeting with his P5+1 counterparts and members of the Gulf States in the run up to the 31 March 2015 deadline for the framework agreement on the Iranian nuclear programme.

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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.

1. 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.
2. 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.
3. 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.

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Saudi Arabia - joining the dots: Part 6 - Emergency meeting

Saudi Arabia - joining the dots is 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.

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.

Ms Alison-Madueke also admitted that "When you cede market share continuously, you drive yourself into oblivion...many OPEC members are going to suffer greatly from a a drastic fall in the price". There-in lies the dilemma - the OPEC members' problem lies in the deeply rooted dependence on oil revenues and large social programmes; cutting production risks further loss of oil revenue, while maintaining production keeps the oil price low...and no-one wants to be first mover. Huge structural reforms are needed but these will not be easy, especially in the aftermath of the Arab Spring and will likely take many decades to achieve.

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Saudi Arabia - joining the dots: Part 5 - Breakeven, OPEC's downfall

Saudi Arabia - joining the dots is 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.

Part 5 - Breakeven, OPEC's downfall

The above chart, taken from the Wall Street Journal, paints a grim picture.  It shows the oil price required by the various OPEC members to meet their budgets. As of 10 October 2014, Brent was at USD90/bbl; today it is at USD62/bbl. All the OPEC countries are in the red, and some are in a worse position to handle this low oil price environment than others.

Saudi Arabia, for now, will be able to survive. Others are crying in pain - Venezuela, Iran and as of late, Nigeria as it enters into a period of elections with campaigns funded by oil money and the corrupt paid off with oil money. As an interesting aside, Iran (a Shiite power) blames its neighbour and rival, the Sunni Kingdom of Saudi Arabia for using the oil prices as a political weapon and keeping prices low by refusing to cut production.

After years of high oil prices, Saudi Arabia has managed to amass over USD750bn in reserves. However, it also has a large social programme and a high youth unemployment rate; keeping its citizens content and off the street has been in the aftermath of the Arab Spring. Following the ousting of Egypt's Hosni Mubarak, King Abdullah implemented $130bn in new social programmes including unemployment payments, housing and scholarships for Saudi's to study abroad. 

Most worryingly, Saudi Arabia tends to outspend its budget and the Kingdom will need to run a deficit in a USD50-60/bbl oil price environment.

Saudi Arabia has issued a record budget of USD229bn for 2015, with a 5% deficit forecast. The split is as follows: 25% education, 19% health and social, 7% transport and infrastructure, 7% water and agriculture, 5% municipal and 36% "other priorities". Other priorities is largely composed of military spend, which is of increasing importance with the ongoing ISIS conflict in the region.

Al-Naimi's policy has been to defend market share, to the annoyance of King Salman, at the expense of allowing oil prices to fall. However, with oil prices at their current low levels, Saudi Arabia is chipping away at its massive monetary reserves with an over-inflated and hard to cut back spending programme. This policy (or Al-Naimi) may need to be changed in the absence of an oil price rebound in 2015.

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