News Column

Brent crude, Iraq and the Alstom energy merger

July 1, 2014

World oil prices higher on risk of supply disruption from Iraq

Despite the loss of the Baiji refinery and ISIS's battlefield successes in Mosul and Anbar Province, Brent crude has not traded above $115 a barrel. This means that while the world oil market has priced higher risk of supply disruption from Iraq, It does not see any systemic threat to the 2.5 million barrels a day Basra Light exports from the southern oil terminals of Basra or the Kurdish pipeline networks to Turkey. Oil production and exports in Iraq have not been paralyzed by the fighting between the ISIS insurgent brigades and the Iraqi Army, unlike the case in Libya, where production plummeted from 1.6 Mbd in the Gaddafi era to almost nothing as rival warlords, militias and tribes seized the state's oil export terminals, refineries, pipelines and storage complexes.

This is not to suggest that an oil panic cannot lead Brent to spike higher to $120 a barrel if the insurgents move closer to Baghdad or threaten Jordan. Even as US Special Forces and Iranian intelligence officers from the Pasduran Inquilab (Revolutionary Guards) assist the Iraqi military confront the insurgents militia, Brent crude has retreated $2 from its 115-71 high. The oil market believes the insurgents will not capture Iraq's vast oilfields and pipelines in Basra Province in the south, even though they overran one of the Iraqi Air Force's largest airbases and have taken Tikrit, Saddam's birthplace.

The news that the Kurdish Regional Government (KRG) in Erbil plans to boost production now that it controls the northern Iraq's oilfields and that the US Congress will allow condensate exports also pressured oil prices, as did the surprise fall in US GDP data.

The US had banned oil exports after the Arab will embargo in the aftermath of the Yom Kippur/Ramadan war in the Middle East in October 1973. However, as a surge in shale oil production finally promises US energy independence, the US Congress will relax its 40 year ban on oil exports. This could spell a major change in the politics and economics of global oil and gas markets.

The US Department of Energy has also reported that crude oil inventories rose by 1.74 million barrels to 388 million barrels, another data point that pressured Brent crude at a time when economic growth worries have resurfaced and the ISIS threat to Basra's oilfield and export complexes has been contained by US and Iran de facto military intervention on behalf of the embattled Baghdad government. Note that even gold slipped lower below $1320 an ounce, thanks to the weak US GDP data and a lower Iraq risk premium Chinese GDP growth and industrial production data has been mediocre, meaning no new demand shock for crude and distillate products. The West's failure to impose more serious auctions on Russia even though Gazprom cut gas supplies to Ukraine (and the Kremlin annexed Crimea) has capped the geopolitical risk premium in oil prices to the $114-$116 range. This is at least $10 lower than Brent's spike after Nato began its aerial bombing in Gaddafi's Libya three years ago. Libya was a game changer supply shock for the oil market, unlike Iraq, even though Iraqi oil reserves and production are so much higher than Libya.

The French government has intervened to block GE's acquisition of Alstom's$20 billion energy business. The French economy minister was outraged that the Elysee Palace was not consulted about the planned takeover and even invited a rival bid from Germany'sSiemens. GE was forced to revise its takeover bid and while it acquired Alstom's gas turbine business, the French government will take a 20 per cent stake in the remaining firms.

The Alstom takeover was crucial for France because the industrial conglomerate provided power services to the French military-nuclear complex. President Francois Hollande, who's Socialist Party had been mauled by the National Front in elections to the European Parliament, used national security as an excuse to intervene in the original GE-Alstom merger. Even though France has been a "dirigiste", interventionist state since General de Gaulle established the Fifth Republic in 1958, energy deals are often blackballed by sovereign states due to political considerations. The US Congress forbade China's CNOOO to acquire Californian oil and gas provider Unocal, later acquired by Chevron. The Kremlin destroyed Yukos Oil after its owner tried to sell a strategic stake to Exxon without the approval of Russian President Vladimir Putin. Thatcher's Tory government, despite its free market ideologies, once forced Kuwait to divest its accumulated stake in BP.

GE will form 50-50 ventures with Alstom in renewal energy, nuclear energy and steam engines, with the French government retaining the ability to veto any strategic decision. Since Alstom employs 18,000 French workers, is Frances' preeminent industrial brand and plays a strategic role in the French nuclear deterrent the TGV rail networks and power infrastructure it was inevitable that the Elysee Palace will veto takeover deals in 2014. The GE-Alstom deal also faces review by French trade unions and the EU's antitrust regulators. Energy is considered such a strategic national resource in the Gulf that Saudi Aramco, Adnoc, Qatargas and Kuwait Petroleum are not even listed in the regional stock markets. Will the Gulf's state-owned oil and gas national champions be privatized or listed in the stock markets?

The writer is a Dubai-based research analyst in energy and GCC economics.

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Source: Khaleej Times (United Arab Emirates)

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