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June 19, 2018
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Stay tuned, the Energized Economy Newsletter will be publishing a special edition on Thursday with all of our OPEC meeting coverage including a special podcast.
"Saudi, Inc." is now available! Order your copy from Amazon or Barnes & Noble. Signed copies are also available from the San Marco BookstoreAudio book and Kindle editions are available as well.
 
In This Newsletter

1) Guest Podcast: Crude Oil Special featuring Anas Alhajji, Joe McMonigle, Dr. Ellen Wald  (MacroVoices)
2) Guest Podcast: Futures Radio Energy Markets & Geopolitics (Futures Radio)
3) Recommended Reads:
- Platts: 
Expected Chinese evasion of US sanctions on Iran clouded by trade (Platts)
- Axios: Generate - On Trump's OPEC tweets (Axios)
- AFP in Yahoo Sports on Saudi soft power (AFP)
4) 
OPEC and the future of oil production cuts (Thomson Reuters)
5) Oil Market Dynamics Already Shifting Ahead of U.S. Sanctions On Iran (Investing.com)
6) 10 Companies Leaving Iran As Trump's Sanctions Close In (Forbes)
7) 8 Major Companies Still In Iran (Forbes)
8) Deciphering OPEC's Mixed Messages About Oil Production (Investing.com)
9)
Why a UN report does not indicate problems for Saudi FDI (Arab News)






Transversal Consulting has partnered with Thomson Reuters to produce this analysis of the upcoming OPEC meeting. Below is a preview, click here to read the complete analysis:


Oil Market Dynamics Already Shifting Ahead Of U.S. Sanctions On Iran
(also on investing.com)

Skepticism was probably the most common response to President Trump’s decision last month to reinstate U.S. sanctions on the Iranian oil industry. While Secretary of State Mike Pompeo said that Iran would face some of the “strongest sanctions in history,” critics were wondering whether any European firms would abide by the American standards.

National security advisor John Bolton warned that secondary sanctions could be a possibility against companies that did not take America’s sanctions seriously, but this may have a been a threat that the Trump administration was hoping it would never need to honor. Now, a month later, it appears that big players in the oil industry are not only taking note of the sanctions, many oil industry firms are preparing to halt or significantly decrease purchases of Iranian oil.

Here’s a look at some of the significant moves and what this means for oil markets.

1. French oil company Total SA (NYSE:TOTannounced it would pull out of its deal to develop the South Pars 11 natural gas field with Chinese company CNPC and Petropars, a subsidiary of the National Iranian Oil Company (NIOC).

2. Lukoil (OTC:LUKOY), Russia’s second largest oil company, decided to halt plans to take a stake in an Iranian oil field. Though no contracts had been finalized, Lukoil had shown a great deal of interest in developing new oil assets in Iran.

3. Reliance Industries Ltd (NS:RELI), which owns the world’s largest refining complex in India, said it will no longer import Iranian oil. India is the second largest importer of Iranian oil, behind China.

4. Nayara Energy, another Indian oil refiner, announced that it has begun reducing its purchases of Iranian oil. Nayara (formerly known as Essar Oil) was recentlypurchased by the Russian oil company, Rosneft (MCX:ROSN). Nayara was one of the largest purchasers of Iranian oil in India.

5. European refiners including Italy’s ENI (MI:ENI) and Saras, Spain’s Repsol (MC:REP) and Cepsa, and Greece’s Hellenic Petroleum (AT:HEPr) all stated that they plan to stop purchasing Iranian crude oil by the time sanctions take effect.

6. Daelin, a Korean contractor, recently cancelled its $2 billion contract to refurbish and upgrade an Iranian refinery in Esfahan.

Right now, however, purchases of Iranian oil are surging. It is clear that this current surge is due to the imminent return of sanctions. Iran is making more oil available for purchase at lower prices and refiners are rushing to buy as much as they can before sanctions take effect. The final date set by the U.S. before sanctions start on international purchases of Iranian oil is November 4, 2018.

When it comes to development, the departure of larger foreign oil firms from Iran does leave more room for smaller firms willing to take the risk to move in. The Russian state-owned oil company Zarubezhneft has signed a deal with Dana Energy, an Iranian company, to develop two small oil fields in western Iran. The deal is for only $742 million, compared to the South Pars 11 deal, which was $4.8 billion. The smaller international firms—which will take on Iranian projects because they have little to no exposure to U.S. enforcement—can make up for the loss of some international business but not nearly all.

China, the largest purchaser of Iranian oil, is working to improve its relationship with Iran. It has no plans to halt purchases of Iranian oil, but the sanctions could interfere with even this relationship. Even though Iran can take some payment in yuan (just as Venezuela has agreed to do), it is still unclear how China will pay Iran while ensuring that Chinese banks do not run afoul of American sanctions.

Moreover, Iran needs riyals (or currency that can be exchanged for riyals) to continue paying its government employees amid massive inflation. Also, even though Chinese firms are positioning themselves to play even larger rolls in the Iranian economy, it is unlikely that China will be able to absorb all of the Iranian oil relinquished by Iran’s other customers. China still has long-term contracts with Saudi Arabian oil company Aramco and receives a great deal of oil through a direct pipeline from Russia.

10 Companies Leaving Iran As Trump's Sanctions Close In
(also on Forbes.com)



8 Major Companies Still In Iran
(also on Forbes.com)




Deciphering OPEC's Mixed Messages About Oil Production
(also on investing.com)

After oil prices took a nosedive last week on news that OPEC and Russia were moving towards increasing production by as much as 1 million barrels per day, the big oil producers now appear to be backtracking—or at least delivering mixed messages. This kind of posturing is likely designed to prevent price swings like the market saw ten days ago and should not be interpreted as a firm indication of what OPEC will or will not do in Vienna on June 22 and 23.

Saudi Arabia, Kuwait, Oman and the UAE met “unofficially” in Kuwait this past weekend. The ministers refused to say anything about the discussion other than issue a vague statement about maintaining their “existing cooperation and [continuing] the successful endeavor carried out by the participating countries.” Most OPEC watchers would interpret this statement as an indication that the Persian Gulf power-players do not support an increase in oil production at OPEC’s next meeting.

However, the ministers followed up this statement with a call for “sustaining the current partnership in order to continuously adapt to ongoing market dynamics in pursuit of the interests of consumers and producers.” This statement would indicate that the Gulf producers are, in fact, open to increasing production as indicated by market conditions. The oil market is looking increasingly tight as Venezuela’s oil production continues to plunge, more global refiners indicate they plan to halt purchases of Iranian oil, and oil from the U.S. continues to face bottlenecks in Texas and North Dakota.

Lastly, the ministers stressed that investment levels in oil projects still have not returned to levels necessary to provide for future demand. Saudi Arabia in particular has emphasized this benchmark as key to the recovery of the oil market after the 2015 price collapse.

This is really a meaningless benchmark for ministers to rely on. The problem with using capital expenditures and investment as a benchmark is that this price-point is different for every company. In fact, some oil companies, like Royal Dutch Shell (NYSE:RDSa) for example, have drastically altered their spending and investment strategies and may never again invest in the kind of massive oil projects that used to be the hallmark of major international oil companies (IOCs).

Even with more revenue from higher oil prices, some companies may choose to increase the dividends they offer to shareholders or may decide to invest in smaller-cap projects in shale oil regions instead. There is no way to predict what this magic “investment-stimulating” number will be.

These statements were likely intentionally vague and designed to counteract statements made at the recent St. Petersburg Economic Forum that indicated OPEC and Russia were keenly interested in increasing production. Those statements alone pushed oil prices lower whereas last Saturday’s Kuwait meeting did not appear to impact oil prices.

Russia is also taking care with its statements this week. Russian oil minister Alexander Novak is planning to meet with Russian oil companies to discuss increasing production this week. Lukoil (OTC:LUKOY), the second largest oil producer in Russia behind Rosneft (OTC:OJSCY), has already indicated that it supports easing production caps and other Russian oil producers are also expected to support increasing production. At the same time, however, Novak reined in this exuberance with a statement on Tuesday where he said that any possible adjustments to production would depend on demand.

Meanwhile, Aramco raised most of the prices on July oil contracts for customers in Asia, northwestern Europe and the Mediterranean. This should not be read as an indication that Saudi Arabia does not intend to increase production this summer. Future oil contracts are priced based on current market conditions and if OPEC+ does increase production Aramco will likely respond to any price changes in its August, September and October contracts.

Rather than reading these mixed messages and tight-lipped statements as indications that OPEC+ does not intend to raise production at all at their meeting in June, market watchers should simply see the producers as trying to prevent wild price swings as they hold their usual pre-meeting discussions.


Why a UN report does not indicate problems of Saudi FDI

Investment in Saudi Arabia from abroad fell 80 percent in 2017, according to a report by the UN Conference on Trade and Development. But scratch beneath the figures and a different picture emerges.
This report sounds ominous for Saudi Arabia and the economic plans set forth under Vision 2030, but closer examination reveals a more complicated situation.
The 80 percent drop in investment from foreign firms in Saudi Arabia is a jarring number. However, it is less shocking when taken in the context of a global trend. The same UN report stated at the very beginning that “Global flows of foreign direct investment fell by 23 percent in 2017.”
Foreign investment in “developed and transition economies” fell significantly, and there was almost zero growth in foreign investment into developing economies. In other words, the drop in inward investment for Saudi Arabia is part of a global trend. The report does not reach a conclusion about why this trend has occurred, but it is likely due in part to healthy activity in the world’s largest economies and new regulation and tax laws in countries such as the US that encourage domestic investment.
A second reason for the major drop in foreign investment in Saudi Arabia came from the sales of foreign-owned assets to domestic interests. The UN report specifically mentioned this, giving the example of Royal Dutch Shell’s $820 million sale of its stake in the SADAF petrochemical plant to the Saudi state-owned company SABIC. The SADAF sale only accounts for about 15 percent of the drop in foreign direct investment in Saudi Arabia, but this sale should be seen as a sign of Saudi economic health instead of struggle. The purchase by SABIC shows that domestic industries are able to buy out foreign partners and invest domestically themselves.

Another possible reason for the drop in foreign direct investment in Saudi Arabia was the perception of political risk. Saudi Arabia went through major political changes in 2017. The country began preparing for social liberalizations such as the introduction of movie theaters and women driving — both seen as positive changes, but changes nonetheless. Global businesses can be conservative institutions, afraid to take chances in unknown situations.
For that matter, the changes in Saudi Arabia are still continuing. To that extent, many foreign investors consider Saudi Arabia a risky environment. For more than 50 years Saudi Arabia had a reputation for extreme stability and conservatism, but now the perception of the country is not as clear to many businesses. To be clear, any liberalizations— whether social, regulatory, or political— are seen as positive. However, some foreign investors will need time for the dust to settle to see how well the changes in Saudi Arabia succeed. A new generation will eventually take charge in Saudi Arabia and it appears to outside investors that new norms are being adopted. Investors want to be sure that these changes go smoothly.
Finally, there is a very simple fourth reason that foreign direct investment in Saudi Arabia fell in 2017: Vision 2030 required it. Internationally, many have mistaken Vision 2030 and recent efforts by the Saudi government as a drive to bring investment into the Kingdom. This is not the main goal. Rather, Vision 2030 and the PIF Program actually crowd out some foreign investment with Saudi-led domestic investment. The Future Investment Initiative (FII) conference held by the PIF in the fall of 2017 (and planned again for the fall of 2018) was meant as “discussions and debates to explore future developments in the world economy.”
Despite misconceptions that the FII was seeking to bring investors to Saudi Arabia, its goals included building relationships and helping business leaders understand opportunities related to Vision 2030. It was not a sales pitch to dump capital into Saudi Arabia. Despite recent deficits, the Saudi government is still cash-rich and the oil industry ensures it will continue to be. Saudi Arabia and Vision 2030 seek foreign partnerships for employment opportunities, economic diversification and knowledge creation; they do not necessarily seek foreign investment.
The PIF program calls for the PIF to invest in Saudi Arabia, to unlock new technologies and improve employment and the economy. When it does this, it also prevents foreign investment, which is fine economically. Take a well-known example: The AMC movie theater expansion into Saudi Arabia. When AMC Entertainment Holdings finalized plans to open 100 cinemas in the Kingdom, it did so in partnership with the PIF. AMC could have solidified the deal with a loan from an international bank, or it could have worked with a private equity investor in New York or London. AMC could have financed the expansion with its own cash. Instead, AMC partnered with the PIF, and an opportunity for foreign direct investment into Saudi Arabia disappeared. Saudi Arabia, and the PIF in particular, is crowding out some foreign investment.
Though this makes the data in the UN report look bad, it does not indicate problems for the Saudi economy.

About Ellen R. Wald, Ph.D.

A consultant and columnist on geopolitics and energy markets, Ellen writes regularly for several major publications. She is the president of Transversal Consulting and an adjunct professor of social science at Jacksonville University where she teaches Middle East history and policy classes. 
 



Dr. Wald is a frequent commentator on radio and television programs. She offers discussion and analysis of contemporary energy issues, with special emphasis on the Middle East. To arrange a media appearance or to discuss her consulting services, please contact her through her website.
 
About "Saudi, Inc."
 
“Saudi, Inc.” presents the history of Saudi Arabia through the central figure of Aramco, the oil company that brought riches, success, and regional dominance to its ruling family, al Saud.  It will be released in 2018, as Saudi Aramco prepares to launch its much-anticipated IPO, expected to be the largest in history with a possible valuation of up to $2 trillion. The book debut will also come amid the Kingdom’s massive investment in its Vision2030 plan for economic diversification; the rebirth of an economic and diplomatic relationship with the U.S. worth hundreds of billions of dollars in investment in both directions; and preparation by the next generation to take leadership positions in the Kingdom – transforming society, business, and the state.
 
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Photo of the Week
 
Reporters interview Saudi oil minister and OPEC President Khalid al-Falih before the November, 2017 OPEC and Non-OPEC joint meeting
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