Energy Markets
Escalating tensions between the United States and OPEC+, via Saudi Arabia, have triggered some short-term market swings for oil. But a more powerful market force is about to be unleashed - it’s just that analysts can’t seem to agree on which powerful force will be victorious. On the one hand, the looming recession threatens to restrict demand for crude oil, which would have a significant impact on pricing. On the other hand, if Russia makes good on its promise about the oil price caps, a significant amount of oil supply will be taken off the market, with Russia left likely struggling to find alternate homes for its crude oil. Currently, Russia is producing 9.9 million bpd. If it indeed refuses to ship crude oil to any country participating in a price cap, that figure will be slashed considerably, although it is not yet known which countries would participate. Estimates are that another 1 million bpd could be pulled off the market should Russia follow through with its threat - at a time when OPEC+ will likely see a million bpd cut itself. The United States is still in no position to increase domestic production to that extent. So far, the G7 has failed to make much progress on instituting a crude price cap in Russia. Oil prices are set for a big move in the coming months... it's just unclear whether that will be a spike or a crash.
Politics, Geopolitics & Conflict
Turkey’s Erdogan has played both sides of Putin’s…
Energy Markets
Escalating tensions between the United States and OPEC+, via Saudi Arabia, have triggered some short-term market swings for oil. But a more powerful market force is about to be unleashed - it’s just that analysts can’t seem to agree on which powerful force will be victorious. On the one hand, the looming recession threatens to restrict demand for crude oil, which would have a significant impact on pricing. On the other hand, if Russia makes good on its promise about the oil price caps, a significant amount of oil supply will be taken off the market, with Russia left likely struggling to find alternate homes for its crude oil. Currently, Russia is producing 9.9 million bpd. If it indeed refuses to ship crude oil to any country participating in a price cap, that figure will be slashed considerably, although it is not yet known which countries would participate. Estimates are that another 1 million bpd could be pulled off the market should Russia follow through with its threat - at a time when OPEC+ will likely see a million bpd cut itself. The United States is still in no position to increase domestic production to that extent. So far, the G7 has failed to make much progress on instituting a crude price cap in Russia. Oil prices are set for a big move in the coming months... it's just unclear whether that will be a spike or a crash.
Politics, Geopolitics & Conflict
Turkey’s Erdogan has played both sides of Putin’s war on Ukraine to his own benefit from the beginning. Ever the “mediator”, Erdogan’s medium-term goal has long been to turn Turkey into an energy hub - an end to which it is necessary to court the Middle East as well as Israel and to pick up some of the crumbs that fall from Putin’s war with the West. Turkey can be nothing more at this point than act as a transit and distribution hub. With little oil and gas of its own, and with Israeli and Cypriot discoveries cutting Turkey out of the riches of the Eastern Mediterranean (where Ankara meddles in Libya as its only leverage), Erdogan is hoping to play transit master from the Black Sea, much like he has done on a smaller scale for oil coming out of Iraqi Kurdistan. When Putin on Wednesday suggested that Turkey become Europe’s new energy hub, the game became clearer. Turkey is hoping to become a key beneficiary of Russia’s weaponized energy strategy. Putin says Russia could redirect Nord Stream supplies to the Black Sea, through Turkey. Putin’s war on Ukraine has also given Turkey more leverage in discussions over a subsea pipeline between Israel and Turkey that could bring Mediterranean gas to Europe. The Turkstream pipeline is the only one left that is not under attack of some sort because it is the pipeline providing Russian gas to Putin’s last friends in Europe: Serbia and Hungary. Russia this week said it would consider building additional TurkStream lines, which bypass Ukraine, carrying natural gas from Russia to Turkey and then into Southern Europe via the Black Sea.
Turkey has also said this week that it would begin exploring for oil and gas offshore Libya, as it attempts to entrench itself in this strategic Mediterranean location.
As Energean gears up to start testing its pipeline against the backdrop of an Israeli ramp-up of the start of natural gas extraction from the offshore Karish field, the U.S. has brokered a deal to end the maritime dispute between Israel and Lebanon (two states technically at war) that has seen Hezbollah threaten to attack. The deal basically sees Israel keep its Karish field and drilling rights, while Lebanon gets another field in the disputed maritime territory - the Qana field, which has not yet been explored.
As Hungary and Serbia continue to support Russia and Russian energy, the two countries agreed this week to build a pipeline to supply both with Russian Urals crude to counter sanctioned shipments that would normally come from Croatia.
Details from a leaked UN report published by Reuters claim that Iran is moving quickly to expand its uranium enrichment capabilities with advanced centrifuges at Natanz while talks for a return to the 2015 nuclear deal flounder.
Violence could worsen in Iraq as the country on Thursday managed to elect a new president, who in turn immediately nominated a PM-designate who has the backing of pro-Iranian factions in direct rivalry with Moqtada al-Sadr. We are concerned that oil-rich Basra, where Baghdad’s violence spread last week, will be vulnerable.
Tensions between the United States and Saudi Arabia have intensified, with Saudi Arabia going so far as to issue an official statement in defense of its recent OPEC+ decision. Saudi Arabia maintains the decision was purely market-driven, while the United States has vowed to unleash consequences on OPEC+ for cutting production. President Biden said on Thursday there was more work that still needed to be done on the issue of high gasoline prices, and said he would address the issue next week, without offering specifics. Saudi Arabia maintains that the United States' request of OPEC+ to forestall the cuts for at least a month was driven by politics. Saudi Arabia voted in the UN this week along with the United States and its allies on the draft resolution on the territorial integrity of Ukraine: defending the principles of the Charter of the United Nations, which was interpreted by some as consolation to the United States for its OPEC+ actions, which - whether purposefully or incidentally - supported Russia by boosting its potential for oil revenues by boosting prices.
Deals, Mergers & Acquisitions
Vista Energy and Trafigura Argentina reached a deal to invest $150 million in Vaca Muerta after the two formed a JV last year to develop 20 wells in Vista Energy’s main Vaca Muerta development concession. The $150 million will go towards the development of three pads on the Bajada del Palo Oeste concession. Trafigura is chipping in $58 million for 25% of the rights to what is produced. Vista Energy is Argentina’s third-largest oil producer.
PGNiG shareholders have approved a takeover by refiner PKN Orlen, as part of PKN’s plan to grow into a global energy player. The deal is still contingent on final approval by Poland’s antimonopoly regulator, who has already said that the merged entity must divest itself within a year of Gas Storage Poland (currently part of PGNiG).
Diamondback Energy will purchase all leasehold interest and related assets of FireBird Energy for $1.6 billion in cash ($775 million) and stock (5.86 million shares of Diamondback). FireBird holds 68,000 acres in the Midland Basin capable of producing 17,000 bpd or 22,000 boepd. The acquisition will give Diamondback 350 locations next to its current Midland Basin operations, giving it a decade of inventory at its current anticipated pace of development. Diamondback plans to sell $500 million of non-core assets by the end of next year. Firebird’s major investors were Redbird capital partners and Ontario Teachers’ Pension Plan.
Australian coal miner Coronado Global Resources is in talks with Peabody Energy Corp about a “combination transaction”.
Honda and LG Energy Solution announced that their JV battery plant will be in Ohio. Overall investment is set to be $4.4 billion. Honda will also retool three Ohio plants as it looks to increase EV production.
Discovery & Development
Production has commenced on two of Eni’s gas fields in the Berkine Sud contract in Algeria, after being awarded the contract just six months ago. Berkine South was the first contract to be signed under Algeria’s new 2019 hydrocarbon law. Berkine South is operated jointly by Eni and Sonatrach, with a capacity of 1 million cubic meters per day by the end of the year. Eni also recently signed a new PSC for blocks 404 and 208 in the Berkine basin, together with Sonatrach, Oxy, and Total. Eni has plans to invest $4 billion in a site along the perimeter of Berkine to boost the reserves recovery factor and reduce CO2 emissions in order to produce 1 billion boe.
Britain has launched its first O&G exploration licensing round in years to boost domestic output to improve energy security. The NSTA is offering 898 blocks and is encouraging applications in the Southern North Sea, where resources are closest to existing infrastructure to speed along time to market.
Azerbaijan has opened the new IGB gas pipeline to Bulgaria to transport Caspian gas in yet another move that many hope will wean Europe off of Russian gas. Questions remain, however, whether Azerbaijan is capable of sending the amount of gas to Europe that it previously promised. Bulgaria, Serbia, North Macedonia, and Romania will all benefit from the additional gas. The IGC is expected to at least initially carry only 1 bcm per year from Azerbaijan to Bulgaria, which uses 3 bcm per year. IGB’s full capacity is 3 bcm, although this could be expanded to 5 bcm.
