Orient Oil and gas Report issue 4-16

ORIENT OIL & GAS REPORT

Issue 4-166 April 2016

ORIENT OIL & GAS REPORTOrient Research Center – Washington, D.C.

Issue 4-16 6 April 2016



Editorial: Saudi Arabia Ramadan’s Bonds and the Oil Production April Deal

ANALYTIC 2: Stock Markets Watch Helplessly as Sovereign Funds Pull Away Their Petro-Dollars

ANALYTIC 3: Middle East Producers are Heading East. Seriously This Time

ANALYTIC 4: Pressures on GCC Currencies Peg with the US Dollar

ANALYTIC 5: Russians to EU: South Stream..Nyet! But Let Us See!

ANALYTIC 6: Egypt: Welcome Frackers!

NEWS & TRENDS:

Kurds Open Invitation to Russia

Iran Getting Ready to Hit the 2 mbd Exports

Oman Increases its Output

Dollar Down, Oil Up

Azerbaijan Enjoys Good Oil Revenues

Oil Output Freeze Deal Does Not Still Impress Tehran

Global Banks More Cautious on Oil

Corruption in Libya’s Oil Sector

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Table of Contents

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Editorial: Saudi Arabia Ramadan’s Bonds and the Oil Production April Deal

Saudi Arabia plans to launch an estimated 5$ billion international bond issue, a step likely to be timed before the start of the Ramadan in early June. An increase in oil prices would certainly help market this landmark issue if it is timed right. Saudi Arabia plans to launch an estimated US5.0$ billion international bond issue, a deal likely to be timed before the start of the Ramadan in early June. The pricing of that landmark issue will with no doubts be helped by a higher oil price. Saudi Arabia plans to launch an estimated US5.0$ billion international bond issue, a deal likely to be timed before the start of the Ramadan in early June. The pricing of that landmark issue will with no doubts be helped by a higher oil price. On February 18th 2016, S&P has downgraded Saudi Arabia›s debt rating to ‹A-/A-2- from ‹A+/A1-.It was the second debt downgrade in less than 6 months. S&P said that the agreement between Saudi Arabia, Russia, Venezuela, and Qatar to freeze production won›t impact the firm›s assumptions that oil prices will average 40$ a barrel in 2016, and thus do little to improve Saudi Arabia›s fiscal standing. Riyadh is betting on an increase for several months in oil prices following the deal to pressure S&P to change its assessment.

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S&P notes that Saudi Arabia is currently prepared for a deficit of %13 in 2016, but the firm believes the kingdom›s budget assumptions are based on oil trading at 45$ a barrel. The level of 45$ seems to be the target of Riyadh in the maneuver of the freeze deal.This is one of the reasons why we will see in April a decision to freeze oil production levels, despite of the fact that few believe such a decision could play a medium range effect on the prices. But the focus of Riyadh is not necessarily expanding, at least for now, to the long term conditions of the market. The Saudis know very well that prices are functions of a complex set of factors, and that the current high levels of production is not conductive of any sustainable increase in prices in the medium range.

Furthermore, Saudi Arabia is accepting proposals for a five-year bank loan of between 6$ billion and 8$ billion from unnamed banks. Riyadh is currently seeking the best loan terms with an option to increase the borrowing ceiling.The move comes as the oil kingdom is depleting its massive surplus of cash, one of the largest in the world, to offset its growing budget deficit, which hit 98$ billion last year. Saudi officials estimated recently that the national debt will grow by 50 percent over the next five years as the country weathers the biggest oil glut since the 1980s.

Comparative Saudi debt levels are still very low. It makes sense to tap international debt markets as an important way to fund spending without absorbing liquidity from domestic banks. The move, however, should be short term. Saudi Arabia has to find ways to both reduce public spending and increase the share of non-oil sector in the GNP.

True that Riyadh has already taken some steps in the way of cutting expenditure, but energizing the non-oil sector takes different planning and longer time. In December, Riyadh announced a series of spending cuts for 2016 in an effort to shave 14 percent off its annual budget as oil prices are expected to remain under pressure well past 2016. In March 2016, it reduced its construction budget. The government plans to spend 224$ billion this year, down from 260$ billion last year. Nevertheless, the country faces an 869$ million deficit in 2016.

Cutting public spending risks a wide public backlash because the kingdom’s citizens are used to generous subsidies on fuel, electricity, water, healthcare, education and food.It is clear that the Kingdom is heading into a new phase of its history. In this course, all possibilities are opened and maximum prudence is needed.While the road to borrowing is hardly new to the Saudis, the consequence of sharp cuts in public spending comes in a sensitive moment in terms of regional security. Saudi Arabia took upon itself to lead an effort to improve Arab security when it was most threatened. If it becomes vulnerable to oil-price generated financial pressures at this critical moment, it is not only the Kingdom that will be at risk.

Anwar Al Taqi – Esam Aziz

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ANALYTIC 1: OPEC Future Questioned

For most of its existence, OPEC has been haunted by the classic collective action problem facing all cartels—the difficulty of getting all players to restrain their own output and buoy global prices when each in isolation faces an incentive to maximize production. In 1982, the organization

initiated production quotas for individual member states in order to support targeted price levels. However, OPEC members had obvious incentives to disregard their own quotas, leaving production cut decisions to other members—and allowing the free riders to reap the benefits of higher prices.Since 2008, the organization has only had a target for total production, without individual quotas, making the collective action problem even more severe. This situation was mitigated—though not fully resolved—at OPEC’s November 2014 meeting, when Saudi Arabia pushed the cartel to defend its portion of the global market, at the expense of letting prices fall even further.This strategy makes intuitive sense. It transfers the burden of adjustment onto other producers, both within OPEC and outside of it, including countries that in the past took advantage of Saudi Arabia’s willingness to manage the oil market by increasing or decreasing its exports. And it is beginning to force non-OPEC production to shrink as relatively expensive conventional and unconventional oil projects become uneconomic.

It also puts pressure on other OPEC nations, including many with inflated state budgets that can only be supported with higher oil prices. These producers face the tough choice between increasing exports and pushing prices even lower, or decreasing exports to help balance the market, allowing Saudi Arabia to quickly assume their market share. After forcing consolidation among these fringe players, the kingdom will be better able to exert market power in the future.While Saudi Arabia could tolerate, albeit reluctantly, greater production from smaller OPEC states, it is far more concerned about increased exports from Iran, should international sanctions on the country be lifted as part of the nuclear deal. It is conceivable that the combined production of Iran and Iraq—which is also trying to rebuild its oil industry after a long period of war and other disruptions—could exceed that of Saudi Arabia within a matter of years.

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OPEC has a long-term view, and it has learned from history—more precisely from the aftermath of the oil price surge of the 1970s.

Embargoes and high prices in the early 1970s brought new producers to the stage, notably Mexico, Norway, the United Kingdom, the U.S. state of Alaska, and the Soviet Union, rapidly expanding global supply by the end of the decade. In response, OPEC started cutting production, which led to a significant loss of market share but did little to stabilize prices, as non-OPEC producers kept on pumping even more. It was Saudi Arabia, the swing producer that absorbed these losses, while most fellow OPEC countries were free riders.

Saudi Arabia’s oil output contracted to 2.4 million barrels per day (mbd) in August 1985, down from more than 10 mbd in 1980. In 1986, when the kingdom eventually opened the floodgates and ramped up production to 5 mbd, prices immediately collapsed, falling 50 percent from 1985 to 1986.This undoubtedly hurt OPEC economies. In Saudi Arabia, which had cut production from 1982 onward, the state budget was already in deficit when the price collapsed.Yet the long-term effect of the low price was a declining market share for non-OPEC producers in the United States and Northern Europe, whose higher production costs were no longer sustainable in the new price environment. OPEC learned an important lesson: accept the immediate pain and come out stronger in the long run.

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ANALYTIC 2: Stock Markets Watch Helplessly as Sovereign Funds Pull Away Their Petro-Dollars

Liquidity from central banks was a prime reason stock markets have gone up so much in recent years. Yet, there›s another huge source of global liquidity that also pushed up markets worldwide. It›s one that›s now reversed, and is draining liquidity from the global markets: Sovereign wealth funds.

The total assets of sovereign wealth funds, as of March 2015, were estimated at 7.3$ trillion by the International Monetary Fund. That figure has doubled just since 2007.

The IMF adds that at least 4.2$ trillion of this wealth was energy-related.

A good part of this accumulated oil wealth was placed into global financial markets by countries like Saudi Arabia. But now plunging oil and gas prices have pushed these countries into budget deficits. For example, Bank of America estimates that 30$ per barrel oil will balloon the Saudis› 2016 budget deficit to 180$ billion. Add to that more than 100$ billion in reserves spent in trying to defend its currency (riyal) peg to the U.S. dollar.

So it›s no surprise that the Saudi Arabian Monetary Authority (SAMA) says their foreign assets fell by a record 108$ billion in 2015. SAMA owned 423$ billion in overseas securities as of November. Saudi Arabia has stated their intention to sell a piece of Saudi Aramco in an IPO.

In the Gulf region alone, the IMF estimates the fiscal surplus of 200$ billion in the -201520 period will now turn into a 145$ billion deficit over the same period. This deficits are pushing the oil-producing countries to liquidate some of their holdings and free up monies. Even Norway was forced to tap into its massive 820$ billion sovereign wealth fund - the Government Pension Fund Global - for the very first time last October.The Deputy Chairman of Rothschild & Sons, Paolo Scaroni, told Bloomberg «The sovereign wealth funds are selling, they are selling a lot.» This is a key reason I believe that the stocks of the big financial institutions have been hit so hard in the market selloff.

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The Royal Bank of Scotland›s Head of Credit Macro Research, Alberto Gallo, estimated that the gross flow of petrodollars into the global economy fell to a mere 200$ billion last year from 800$ billion in 2012. At least RBS› Gallo has a sense of humor about the situation. Speaking of all the withdrawals, he said to Bloomberg, «Petrodollars are becoming petro-pennies.»

That›s not good, especially when stock markets are already under pressure from the Fed raising rates, which also drained liquidity from the global financial system. For the stock market to get back into a sustained rally mode, we need at least a stabilization in the price of oil.

The world has to adapt to the return of the Petrodollar back home. This might necessitate a structural change in many patterns used to predict the course of the financial market. But above all, it may change the whole structure of oil producing relations with major powers in all fields. We are detecting signs of this already appearing on the global theatre at present.

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ANALYTIC 3: Middle East Producers are Heading East. Seriously This Time

In the early 1970’s, Richard Nixon negotiated a deal with Saudi Arabia that in exchange for arms and protection they would denominate all future oil sales in USD. Since these dollars did not circulate within the US, and thus were not part of the normal money supply, economists felt “petrodollars” was a better descriptor. Until recently, petrodollars effectively helped balance the global financial system, but it looks like that era is coming to an end.The battle to retain and even increase global oil market share is intensifying. Both Saudi Arabia and Russia, the world’s top two crude oil producers, continue to ramp up production amid an unprecedented supply glut and associated price collapse for crude that is rocking the world financial system.

While they may agree to freeze production at current levels this month. The deal may not change oil price structures in the medium range (It will have an impact in the short term though).Recently, several analysts once again downgraded their global oil price forecast, many forecasting prices in the lower 20$s-range, while Standard Chartered called for oil prices to reach an unimaginable 10$ a barrel – something until recently would have seemed like a misprint in the financial press.As sanctions against Tehran’s energy sector are lifted, though there are still various other sanctions in place over the country’s ballistic missile program and sponsorship of terrorism, Iran is entering the oil market in one of its worst moments. With Iran ready to pump half a million barrels per day to the market, which is already over supplied by around 1.5 million barrels a day, the battle for oil market share will get even uglier in both Europe and Asia.Now, the Saudis are furthering their talks with Chinese oil majors Sinopec and CNPC to finance refineries to help Saudi petroleum sales in China. On Tuesday, Saudi state media said, without giving details, that Saudi Aramco and Sinopec signed an agreement for strategic cooperation.Khalid al-Falih, chairman of state-owned oil giant Saudi Aramco, said that talks are in advanced stages, while projects include refineries in the Chinese city of Qingdao and in the provinces of Yunnan and Sichuan.



The talks come after Saudi Arabia said it’s considering a Saudi Aramco IPO that could include listing at least part of its exploration and production assets. It would be the most valuable company in the world, dwarfing other oil majors. Saudi Aramco has both the world’s largest proven crude oil reserves, at more than 260 billion barrels, though those figures are a subject of debate, and the world’s largest daily oil production. In 2012, the company generated 1$ billion in revenue daily. The Wall Street Journal said that many oil-market observers expect the kingdom to package its expanded refining and chemical arms into a new listed company.

While joint refining ventures between oil companies and various countries is nothing new, the timing of this most recent disclosure deserves extra attention. The Saudis have to ward off Russia and Iran in both Europe and Asia and particularly China, the world’s second largest oil importer after the US, for market share. The situation has been exacerbated since the Saudis share of the Chinese market increased only %2 in the first 11 months of 2015. However, overall oil import growth by China ticked up %9 during this period, while Russian oil imports, amid accelerated geopolitical maneuvering by Russian President Vladimir Putin, rose nearly %30.

In light of Russia’s inroads in China’s oil market, the Saudis have little choice but to invest its petrodollars in the Kingdom. After all, there are other ways of protecting oil market share than just ramping up production; you can in essence secure more oil market share by building refineries to soak up that production.

What will be interesting now is to see what both Russia and Iran will do. For the mid-term Iran won’t have the necessary funds to keep in step with the Saudis, but as funds and foreign capital begins to rebuild the Iranian oil sector, Tehran will likely meet the Saudis on the playing field of providing funding for joint ventures, with the associated geopolitical ramifications that development will bring to current Saudi-Iranian diplomatic relations.Russia is in a dilemma. With nearly %70 of Russian state revenue derived from its oil and gas sector, Moscow also can’t sit idle while the Saudis cleverly maneuver new deals in China. Watch for Russian oil companies to also make their move, though currently with sanctions against Russian energy companies by Western powers, they, like their Iranian counterparts, will take time to implement any new strategy.

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ANALYTIC 4: Pressures on GCC Currencies Peg with the US Dollar

The Example of the Saudi Riyal coupling with the dollar is good enough as a more or less pattern to other regional currencies. If The Saudi Riyal is de-pegged against the US Dollar, most other currencies would have to follow.And there has been already some whispers that the peg between the dollar and the riyal will soon be

broken. Today, one U.S. dollar equals 3.75 riyal and this has been the case for 3 decades. While Saudi officials insist that the marriage of the two currencies is permanent, financial pressures on Riyadh have their ways.The reason why Saudi Arabia would want to de-peg against the U.S. dollar is because of its rising deficit. This deficit was ignited due to lower oil prices. Additionally, lifting the sanctions on Iran could add 1 million barrels per day to the oil supply. Let›s not forget that Japan is also restarting its nuclear reactors which could hit oil demand by 100000 barrels per day.Statistics show how the Saudi current account (and budget) went into deficit this year (budget deficit is %15 of GDP). This is the first evidence to support why the riyal needs to devalue, because there is a correlation between a country›s budget deficit and its real exchange rate. The higher the budget deficit, the lower the exchange rate.This current account/budget deficit coincided with the drop in oil prices from 100$/barrel to 29$/barrel in 2015. Saudi Arabia needs oil prices to be in the 100$/barrel range for its economy to function properly.Since 2015, Saudi Arabia has tried to keep the peg by selling its foreign exchange reserves. This trend cannot keep going indefinitely, which leads to believe that the probability of de-pegging is pretty high. History tells us that a currency always devalues when the foreign exchange reserves are getting depleted. This is the second sign of a looming de-pegging pressure. We are not there yet, but lower oil prices certainly increase the chance of it happening and this is especially the case for a country where oil accounts for %90 of its exports and %40 of its growth. Realistically, there are no near chances of any reversal in the price of oil, especially due to the lack of growth in China. When looking at this quantitatively, we estimate that when the Brent crude oil price goes below 30$/barrel, the drain in foreign exchange reserves could rise to around 18$ billion/month or 70 billion riyal per month. That›s a very steep decline and simple math predicts that at current oil prices, reserves could be depleted in less than three years.

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The next question is:

«What happens when the riyal is de-pegged from the U.S. dollar?»First of all, when the de-pegging occurs, the riyal will fall against the U.S. dollar. This is implied by a spike in the Saudi Riyal forwards market. This de-pegging event will need to be cushioned by a rise in interest rate swaps. This is because a de-pegging event will cause investors to abandon the riyal. Capital outflows will occur and as a result, the government will have to increase interest rates to defend its currency. This fear of rising interest rates will trigger investors to buy interest rate swaps at a higher rate.

Second, when the riyal drops against the U.S. dollar, the amount of foreign exchange reserves will shoot upwards as it is priced in U.S. dollars. It is estimated that the riyal would drop by more than %10 in the event of a de-peg. The forwards market already prices in a %3-2 devaluation in 12 months. A %10 devaluation against the U.S. dollar would almost erase all the losses in foreign exchange reserves incurred in 2015, which is what the Saudi government wants to see. This of course, happens on the back of the savings of the citizens of Saudi Arabia.

Third, the U.S. dollar would surge higher, which will result in a steep drop in commodity prices, especially oil. Crude oil could collapse to 20$/barrel in a matter of days. What we see is that Saudi Arabia is exporting its deflation to the U.S., just like China has been doing for the past year by devaluing the yuan against the U.S. dollar. The same happened with Kazakhstan last August, Azerbaijan last December and the Hong Kong dollar has been posting decade lows against the U.S. dollar. So investors can bet on this via the rise in the U.S. dollar or by shorting oil and commodities.

Fourth, when commodity prices go lower, the stock market will drop with it. We already saw that January 2016 was the worst performing January month in decades, led by surging credit risk in the energy sector. So investors need to prepare for bankruptcies in this sector. Last but not least, since 2011, we have seen a negative correlation between equities and precious metals. Investors would start buying gold before everyone else piles into it, especially when most of the managed money is short gold at this moment. A significant short squeeze could occur.

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ANALYTIC 5: Russians to EU: South Stream..Nyet! But Let Us See!

Moscow has stopped all the works related to the South Stream gas pipeline project, it is effectively closed, Kremlin spokesman Dmitry Peskov said. The statetment came after EU Ambassador to Russia Vygaudas Usackas said the European Union was ready to discuss the South Stream project›s implementation if it complied with the European Union›s Third Energy Package.«The South Stream project does not exist, it is closed, no work is being carried out, the project has been discontinued amid the position of the

European Commission,» Peskov told reporters.

In late 2014, Moscow announced the cancellation of the South Stream, intended to traverse the Black Sea to deliver Russian natural gas through Bulgaria, Serbia, Hungary and Slovenia to Italy and Austria. Following the cancellation, Russia announced plans for the Turkish Stream gas pipeline to replace the South Stream. Yet, Greece and Bulgaria are pressuring the EU to knock on the Kremlin doors again. Greek Ambassador to Russia Danae Magdalene Kumanaku said to the media that the EU should find ways to bridge the gap with Moscow on that matter. “Greece more than welcomes the construction of pipelines on its territory which will contribute to the diversification of gas supplies and energy security,” she said.

Bulgarian authorities are pushing hard for new negotiations on the South Stream pipeline project, a Russian Deputy Energy Minister has said. Bulgaria receives about 80 percent of its gas from Russia and has accurately been described as a battleground between Turkey and Russia. The same description may also be applied to the EU-Russia struggle in Bulgaria and in the Balkans as a whole. Certainly, Russian media have targeted Bulgaria for a long time, routinely broadcasting messages demonizing the North Atlantic Treaty Organization (NATO), for example.

However the issue of South Stream received new traction in public discussions recently because Russia continues to seek another way to dominate Balkan and Central European gas supplies while bypassing and isolating Ukraine from Europe. When Russia’s original idea for South Stream ultimately failed, Moscow approached Turkey, in 2015–2014, about building Turkish Stream—a pipeline across the Black Sea to Turkey that would end at the border with Greece.

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Since this proposed gas pipeline would entirely avoid EU territory, Brussels would have no authority over it and would not be able to block it as it had done with South Stream. But even before Turkey shot down a Russian plane that had violated Turkish airspace in November 2015, the Turkish Stream project had failed because Ankara found its cost to be exorbitant. Indeed, while it was still originally being considered, South Stream’s projected price had also kept increasing, meaning it was quite unlikely that project was ever financially sound.

Nevertheless, Russia has persisted in trying to expand or develop new dependencies in Europe on its energy exports. More recently, it has proposed expanding the Nord Stream pipeline, which runs from Russia to Germany, under the Baltic Sea, by constructing a parallel line—Nord Stream II. Moscow would like to be able to use this expanded trans-Baltic pipeline capacity to send more of its gas directly to Germany, which would then ship Russian gas throughout Central and Eastern Europe. But Nord Stream II has aroused a storm of protest from Central and Eastern European governments, nine of which—Estonia, Latvia, Lithuania, Poland, Hungary, the Czech Republic, Slovakia, Romania and Croatia—have recently signed a public letter of protest against it, addressed to EU President Donald Tusk. Strangely absent from the list of signatories was Bulgaria. Undeterred in its quest for a pipeline route that would evade the EU and allow it to dominate the Balkans and Central Europe, Gazprom signed an agreement in late February with the Italian Edison company and Greece’s DEPA to build an interconnector that would ship Russian gas from Greece to Italy, and utilize the previously proposed ITGI Poseidon pipeline project to connect Greece and Italy. Clearly, this agreement represents an effort to resurrect South Stream, albeit in a different guise.

These maneuvers suggest that steady EU resistance to Russia’s schemes to undermine its authority and forge bilateral deals with Germany or Balkan countries like Bulgaria can prevail, if such legal and political defiance can be maintained. But it also suggests that doing so will require a long struggle. And clearly, some pro-Moscow elements in the Balkans and Germany are committed to undermining the EU and securing Russian gas on what they wrongly believe would be advantageous conditions for themselves. Moscow’s ambitions to isolate Ukraine and retain preeminence in Central and Eastern European energy markets have not gone away. However, the remorseless logic of economics may yet force Russia to accept the fact that the only sensible and realistic way to bring gas to Europe is through the existing Ukrainian pipeline network—by following purely commercial and not political means. Bringing Moscow to this realization will take a long time and steady nerves from Brussels. In the meantime, one can reasonably expect more gambits like this Bulgarian one to find ways to preserve Russia’s way of doing energy deals in the Balkans.

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ANALYTIC 6: Egypt: Welcome Frackers!

Warming up to the fracking industry, Egypt welcomed Shell and Apache intentions to start their local joint venture which is ready to start work on a pilot project in the Western Desert, involving hydraulic fracturing, by the end of March. For Shell, this project represents an expansion of its presence in the gas industry of the North African country, which used to be a net exporter of the fuel before the revolution. It has substantial reserves of gas, including the biggest deposit in the Mediterranean, the Zoher Prospects, and much of these are awaiting development. In other words, Egypt’s gas industry has growth potential that the Anglo-Dutch company has not failed to overlook.This expansion, which builds on the already solid presence of BG Group in Egypt, is part of Shell’s efforts to maintain its position as a leading global supplier of gas, as stated in its annual report.

And getting at Egypt’s gas through hydraulic fracturing is relatively easy—at least in terms of environmental opposition to the process. Egypt is in no position to block gas development as the nation is energy-starved and in urgent need of new sources of supply.Shell and Apache together control half of the enterprise that will develop the Western Desert field, which is part of the North East Abu Gharadig oil and gas deposit, the other half in the hands of Egypt’s General Petroleum. Shell is the operator, with a 52 percent interest in their half. Three wells will be drilled at the field by June, when Shell and Apache will discuss the full-scale development of the project with the Egyptian government.A Wood Mackenzie report last year noted Shell’s focus on gas, especially on LNG, as a major growth driver for the company. Now, after the acquisition of BG Group, itself with a solid gas portfolio, the Anglo-Dutch firm has practically become the largest player in the global LNG field.

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Over the near-term, this might not be a reason to cheer, given the bearish gas market at the moment; but over the medium- and long-term, a focus on gas may well prove to be the smartest move. According to the International Energy Agency (IEA), global gas demand will continue to climb over the next five years, albeit not at a significant rate. Growth drivers will be markets in Latin America, the Middle East, and Africa, where demand currently outstrips supply.The current market turmoil has created a once in a generation opportunity for savvy energy investors.Whilst the mainstream media prints scare stories of oil prices falling through the floor smart investors are setting up their next winning oil plays.

With its gas portfolio and this latest addition to its gas operations, Shell is among the companies in a very good position to benefit from this demand growth. But then again, Egypt is not the most stable environment to work in, and security concerns are mounting. In August 2014, an American employee of Apache Corp. was killed in an apparent carjacking in the Western Desert. While this particular type of incident was a one-off, energy security experts see a growing problem with everything from militant bombings to organized crime.According to University of Oxford energy expert Justin Dargin, “the chaos following Mubarak’s ouster has caused terror attacks aimed at the energy sector—especially of the natural gas sector—to increase dramatically.” With the exception to Sinai, however, militant attacks far have been focused largely on urban centers and security forces, and not really on oil and gas installations. The fear, however, is that eventually oil and gas could become a primary target because of its importance to the future stability of the Egyptian government.

NEWS & TRENDS:

Kurds Open Invitation to Russia

Iraqi Kurdistan is keen to attract Russian oil companies to work on its territory, the Interfax news agency quoted the head of the Iraqi Kurds› representative office in Moscow as saying.The semi-autonomous region of Iraq is ready to take all necessary measures, including security ones, to ensure that Russian energy firms can work safely there, Aso Talabani told the agency.Gazprom Neft, the oil arm of state gas company Gazprom, is currently working on four projects in Iraq, of which three - Halabja, Shakal and Garmian - are located in Iraqi Kurdistan.The company is continuing to explore the Halabja and Shakal blocks and is extracting a small amount of oil at Garmian.

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«Iran Getting Ready to Hit the 2 mbd Exports

After taking the appropriate steps and after Iran›s return to the oil market, it is expected that Iran›s oil sales will soon return to the level of 2mn bpd Ali Tayyebnia was quoted as saying by the official Shana news agency.Recently, industry sources told Reuters that Iran, OPEC›s No. 3 producer, is expected to raise its oil exports in March to around 1.65mn bpd from 1.5mn bpd a month earlier on the back of higher crude shipments to Europe.

The state-run National Iranian Oil Co. (NIOC) is expected to ship around 300,000-250,000 bpd to Europe this month after it finalised term deals with France›s Total and Spanish refiner Cepsa, effective from March 1, the sources said. The French oil major has a contract to buy about 200,000 bpd, while Cepsa›s deal was for about 35,000 bpd, one source said. Total is expected to lift at least 5mn barrels in March, the source added.

Litasco, the trading arm of Russia›s Lukoil, Cepsa and Total have become the first buyers in Europe after the lifting of sanctions and lifted trial cargoes in February. Hellenic Petroleum, Greece›s biggest oil refiner, has said it will receive its first shipment of Iranian crude oil at the end of March. Tehran is working to regain market share, particularly in Europe, after the lifting of international sanctions in January. Oil exports rose by 500,000 bpd to 1.5mn bpd in February, a senior NIOC official said on Tuesday. The sanctions had cut Iranian crude exports from a peak of 2.5mn bpd before 2011 to just over 1mn bpd in recent years.

Oman Increases its Output

Statistics released by ministry of oil and gas showed that the total production had amounted to 29,397,683 barrels for last month.It also showed the total quantities of crude oil exported abroad during February 2016 at 28,804,712 barrels, a daily rate of 993,266 barrels, a rise of 12.67 per cent compared to the previous month.China›s imports have declined by 26.39 per cent in February, compared to January 2016. On the other hand, exports to Taiwan, Singapore and South Korea increased by 1.67 ,7.93 and 9.79 per cent respectively in comparison with the previous month.

The trading of Oman Crude Oil Future Contract at Dubai Mercantile Exchange (DME Oman) witnessed a rise during February similar to other oil types in the world. It averaged between US31.94$ and US26.83$ per barrel. Meanwhile, Oman oil price (April Delivery 2016) stood at US30.23$ comprising a rise of 2.83 cents compared to the March 2016 delivery.The crude oil prices for most reference oils recovered during February trading compared to settlement prices in January 2016. The prices hovered around US30$ per barrel. Omani crude oil restored some of its profits lost last month.

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This increase is attributed to a number of reasons that directly affected the prices, namely the depreciation of the US dollar to record levels in the past seven weeks. This depreciation makes the raw commodities priced in the US dollar less costly for holders of other currencies.It is also attributed to the decline in US shell oil production and the recovery of Asian transactions after the release of the US data, which showed a decline in the number of oil rigs operating for nine successive weeks.

Dollar Down, Oil Up

Oil prices edged higher for the second day in a row on Mar 31 on dollar weakness in the aftermath of Federal Reserve chief Janet Yellen›s dovish signals this week.

US benchmark West Texas Intermediate for delivery in May added two cents at US38.34$ a barrel on the New York Mercantile Exchange. Brent North Sea crude for May delivery, the global benchmark, rose to US39.60$ a barrel in London, up 34 cents from Wednesday›s settlement.Prices swung back and forth into losses and gains before settling slightly higher.

The rise in prices «is mostly a function of the lower dollar. The dollar is down strongly today and was at a five-month low at one point, so crude oil came back, rallied into the green,» said Bob Yawger of Mizuho Securities USA.

A weaker greenback typically bolsters the appeal of the dollar-priced commodity for buyers using stronger currencies. The dollar has slumped since Yellen sounded a cautious tone on Tuesday on raising US interest rates, given the global economic slowdown.

Analysts said the market remained focused on the global oversupply of crude, which is keeping a lid on prices. The United States reported Wednesday that commercial crude inventories had climbed last week to another record high, underscoring the glut.

Yawger pointed to reports that OPEC had boosted production in March, even as the -13nation cartel plans to meet with non-OPEC producers next month to discuss a potential output freeze to stabilise the market. Oil prices are down more than 60 per cent from mid-2014.

That flies in the face of the Apr 17 meeting so that was a bearish development and helped to the downside, he said.Tim Evans of Citi Futures highlighted that early estimates of March OPEC production suggested a net increase of 100,000 barrels per day.

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Azerbaijan Enjoys Good Oil Revenues

The Central Bank of Azerbaijan running payment balance statistics has reported of kept dependence of country’s foreign trade on fuel & energy complex in 2015.The CBA reported that for the past year fuel & raw material export brought 14.087$ bn to the country amid total export of 15.586$ bn.

At that, the export of oil and gas complex brought 3.796$ bn for Q4.05$ ,1 bn in Q3.356$ ,2 bn in Q3, and 2.8$ bn in Q4 of 2015. The oil and gas import reached 2.4$ bn against 9.77$ bn of the entire import.

At that, in 2015 oil export was estimated in 12.8$ bn, including 975.7$ million of revenue from export of oil products and 11.8$ bn of revenue from exports of crude oil.

For comparison, over the 4th quarter of 2015 the revenue was 2.8$ from the export of oil: 2.3$ bn from oil export and 87.3$ million from petroleum products.The CBA does not publish more how the Azerbaijan International Operating Company (AIOC) and the State Oil Company of Azerbaijan (SOCAR) carried out export. No data is also brought about the export of gas by the Shah Deniz Partnership.

Oil Output Freeze Deal Does Not Still Impress Tehran

Since majority of OPEC nations along with non-OPEC Russia have decided to attend the Doha meeting scheduled for April 17 to discuss oil production freeze plans, all eyes were on Iran, which recently refused from participating in the meeting.Experts believe that such a decision of Tehran is understandable as the Islamic Republic suffered a severe decline in oil exports following the international sanctions imposed on it due to its nuclear program.Anne Korin believes that Iran realizes that the oil freeze plan is basically meaningless and falls short of what it desires.

“As far as Iran is concerned, despite the hand-waving from the Saudis about a freeze,

this is a continuation of proxy war in the economic arena,”

the co-director of the Institute for the Analysis of Global Security told Trend on March 28.She said that if the Saudis really wanted to drive prices up, they would have pushed through a significant production cut.

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They very well know a freeze won’t have impact until growing demand soaks up excess supply, which will take quite a while she added.

In February 2016, energy ministers of three OPEC members – Saudi Arabia, Venezuela and Qatar – and non-OPEC state Russia met in Doha to deal with decreasing oil prices and relieving the glut on the world oil market. They agreed to freeze the oil output at the level of January 11.

Iran, which eyes regaining its pre-sanctions share in the oil market, has already announced that it will not join the oil production freeze plan. The country produced about 2.9 million barrels per day in January and the government is talking about adding a further 500,000 bpd to exports.Iran wishes to increase the inflow of petrodollars to the state budget by returning to the world oil market.

Meanwhile, Fereydoun Barkeshli, the former general manager at National Iranian Oil Company in OPEC, announced that Iran has lost more revenues from sharp fall in crude oil prices since 2013 than the entire loss under the crude oil embargo since 2008.Therefore, Barkeshli believes, Iran should welcome every opportunity, including an output freeze, if there are enough indications that Saudi Arabia and Russia are willing to help coordinate market balance.

I consider the Qatar meeting of major OPEC and non-OPEC ministers a major breakthrough, very much in line with OPEC tradition and style of shaping up and

engineering international oil market he told Trend, adding that in fact OPEC hadn’t made such a gesture for years due to the fact that market somehow automatically balanced itself and that geopolitical factors de-linked themselves from oil market fundamentals.

In fact, I personally watch the market with some excitement since it reminds me of the 1980s and 1990s when OPEC style was very much in place, Barkeshli stated.

However, this time the situation around the market is even more complicated due to the emergence of Russia and the shale oil, he added.

OPEC and Russia, in fact, never looked eye to eye when it came to cutting production, though Russian delegates politely attended some OPEC conferences and gave indications of cooperation without giving up a single barrel to support market stability,

he expalined.Barkeshli believes that “freeze for freeze” is a good start. “It is true that neither Saudi Arabia nor Russia have much more to add to the market, but the gesture is positive and in OPEC tradition of reaching consensus one step at a time,” he noted.

He further added that Iran has been forced out of the market for some years and all other producers supplied [the crude] at full force.“In the past when a country was deprived of its production quota it was supposed to pass its quota to another member as a quota loan. That meant that once a member was able to return to the market, it would get back its production quota.

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Unfortunately, OPEC gave up its quota policy back in 2012, but no producer expects Iran to freeze its crude production at the current level,” Barkeshli said, adding that there are currently 1.23 billion barrels of idle crude oil in the market and over four millions barrels of excess daily production of crude oil is supplied to the market.

Global Banks More Cautious on Oil

Banks are reducing their credit exposure to the energy sector in the wake of the plunge in oil prices, according to the latest Federal Reserve survey of senior credit officers released Thursday.Just under half of the banks surveyed said they had decreased their credit exposure to the oil patch since mid2014- when oil prices started to fall.The findings came in Fed’s quarterly survey of 21 banks who are the most active in the over-the-counter derivatives market, which included a special question on exposures to the declines in oil prices.

The reductions were accomplished by lowering risk limits to the sector and by allowing positions to mature without reinvestment.Two-thirds of the banks surveyed said they still had “somewhat significant” exposures to oil producers and processors. Fed Chairwoman Janet Yellen said this week that markets were concerned that the price of oil might be nearing a “financial tipping point” for some energy firms that could entail significant financial strains and increased layoffs.

Corruption in Libya’s Oil Sector

Though the fundamentals of the oil-based economy remain weak, the United Nations and Western leaders expressed support for prosperity in Libya.Members of a U.N.-backed national administration arrived in Tripoli amid a tense security situation in war-torn Libya. Formed under a peace agreement brokered by the United Nations last year, special U.N. envoy Martin Kobler said the Tripoli move was an important step toward national peace and prosperity.

The international community stands firmly behind them and is ready to provide the required support and assistance, he said in a statement.Libya›s political environment fractured in the wake of civil war in 2011, with factions establishing authority from opposite sides of the country.

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A report from Transparency International finds that, with nearly all of its economy funded by oil, an accountability vacuum exists in Libya between the government and the population.

Despite the relatively high levels of human development, a vast number of Libyans do not benefit from the oil-driven economy the report read. It is estimated that 30 to 40 percent live below the poverty line.

Italian energy company Eni hosted by Libyan delegates in Rome to discuss production opportunities less than a week after the signing of Libyan political unity agreements in December.Before civil war erupted, Libya, a member of the Organization of Petroleum Exporting Countries, was producing more than 1 million bpd. Libya last communicated directly with OPEC in 2014 to report crude oil production of around 480,000 bpd.

Transparency International said that, while oil is important to the Libyan economy, it›s also a source of potential corruption.

Considering the fact that almost the entire public budget is financed by oil revenues, immense sums of money are clearly being administered without transparency the organization said.While backing the arrival of the U.N.-backed government, U.S. Secretary of State John Kerry called on Libyan leaders to prevent spoilers from undermining future developments.

Now is not the time for obstructionists to hold back progress he said in a statement.

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Orient Oil and gas Report issue 4-16

Documents

Transcript of Orient Oil and gas Report issue 4-16