Tensions Rise Over Russia's Downing Of A U.S. Drone

Politics, Geopolitics & Conflict

The diplomatic spat continues over Russia’s downing of a U.S. drone over the Black Sea on Tuesday. While the Russians deny having come into contact with the drone, EU officials say two Russian Su-27 aircraft were flying over international waters over the Black Sea and dumped fuel on the drone, flying in front of it, hitting the propeller and forcing it down. Moscow warned the U.S. to refrain from media “speculation” and flying near Russia’s borders. The incident has sparked talk of escalation between Russia and NATO. Ukraine has since reported that Russia has deployed 20 ships to the Black Sea, including missile carriers and auxiliary fleet ships, which are ostensibly being used to search for the downed drone, whose technology Washington is hoping to keep out of Moscow’s hands.

We have noted in earlier briefings this year that Baghdad appeared to be letting up on its legal pressure on Erbil over the Kurds’ unilateral oil activities, and this week we saw more concrete movement on that front. Iraq’s new prime minister, Mohammed Al-Sudani, said earlier this week that the two sides had reached a comprehensive agreement and that total oil revenues for oil produced in the Iraqi Region of Kurdistan are being deposited into a bank account supervised by Baghdad, the Federal government. At the same time, the Iraqi PM ensured the transfer of some $300 million to the Kurdish government, despite a previous court ruling that these budget transfers were illegal. These two developments are by no means an end to the dispute between Erbil and Baghdad; however, it is a positive indication that there is the potential for further forward momentum.

The diplomatic rapprochement between Saudi Arabia and Iran injected a small amount of certainty in oil markets just prior to the bank failures this week. This does not mean peace between rivals, it simply means that they’ll try direct dialogue first. It’s an important rapprochement for Iran, which has become severely isolated. The first moves in this direction have come in relation to Yemen, a key proxy battlefield for Saudi Arabia and Iran–and one from which Saudi Arabia has been trying to extricate itself for some time. In line with the deal to restore diplomatic relations, Iran has vowed to stop sending weapons to Yemen’s Houthi rebels. It may not mean peace for Yemen, but both proxies are expected to pressure their respective Yemeni beneficiaries to work toward peace.

Discovery & Development

Equinor made another discovery called Heisenberg at the Troll field in the North Sea–Equinor’s 8th discovery in that area in the last 3 years. The volumes for the latest find are estimated between 24 and 84 MMboe, weighted more heavily to the oil side. DNO is partner. The discovery can be connected to existing infrastructure that is connected to the Troll B platform. An appraisal well must be drilled to ascertain if the volumes are recoverable. Equinor and DNO are considering drilling an appraisal well in 2024. Equinor had its Rover South discovery last month in the same area. Equinor increased its stake just two weeks ago in four of the discoveries made in that area.

Shell has made the FID for its Dover deepwater development in the GoM. Discovered back in 2018, Dover is located in water depths of 7500 feet and will be tied back to Shell’s Appomattox production hub. The plans call for two wells at Dover–the first in 2024 and the second in 2025. Dover’s expected peak daily production is 21,000 boe.

Deals, Mergers & Acquisitions

British-based refiner Prax Exploration & Production–a unit of State Oil Ltd–has agreed to buy Hurricane Energy in a deal that values Hurricane at more than $300 million. The terms are 12.5 pence per share. Hurricane shareholders will receive a supplementary dividend in the form of a special payout of 1.87 pence per share in cash and a deferred consideration unit of up to 6.48 pence per share in cash. Prax is looking to make inroads in the upstream segment of the North Sea.

Exxon is eyeing a $15 billion investment through 2030 if it is successful in finding commercial quantities of oil in the Namibe Basin. ANPG, Exxon, and Sonangol signed an addendum to blocks 30, 44, and 45 in the Namibe Basin to increase the competitiveness of the area. Exxon is looking at drilling an exploration well next year as a direct result of the more favorable fiscal terms of the deal. The push to redo the fiscal terms is part of Angola’s goal of attracting more investments in its oil industry.

Saudi Aramco, ADNOC, and Emirates National Oil Co all placed bids to supply Kenya with oil as the African country looks to nationalize its crude imports to free up its foreign reserves. Kenya is hoping to defer payments to crude oil by at least six months.

Regulation

Citgo can now proceed with its $40 million lawsuit against its insurance company after a U.S. District judge this week threw out the insurance company’s argument that Citgo’s claims should be dismissed. Citgo is making a claim for the $40 million in crude oil after Venezuelan authorities seized 960,000 barrels of its oil after the U.S. sanctioned the country. The oil was in Venezuela in the process of being loaded on an oil tanker when the sanctions came down, and the Venezuelan military seized it.

Britain will hold another auction round for renewable power products worth about $247 million. It will be the 5th round of the Contracts for Difference auctions. It offers a guaranteed price for electricity for new renewable energy projects. Application is expected to open this month.

The creation of the Inflation Reduction Act seems to have put a new kind of uncertainty in the market if the EIA’s Annual Energy Outlook 2023 report is any indication. This year’s report focused more on long-term patterns and trends rather than on specific figures and predictions, with the EIA not even accounting for much of what was in the IRA due to the uncertainties surrounding it. The EIA sees the U.S. maintaining its net oil exporter status through 2050, with continued growth in U.S. petroleum production.

The EU is still divided on its renewables goals, with the inclusion of nuclear power still uncertain. France - a nuclear powerhouse relying on nuclear power to deliver 70% of the power it needs - strongly supports the classification of nuclear power as renewable energy when it comes to assessing goals. Other countries such as Spain and Germany are digging in in the opposite direction, with the latter throwing yet another spanner in the works by digging in over a potential ban on gas-powered vehicles.

The Biden Administration approved the controversial Willow oil project in Alaska this week, drawing criticism from environmental groups and some of Biden’s supporters. The project covers three drill sites in the National Petroleum Reserve in an area that could hold 600 million barrels of oil. The Interior Department has estimated that the project could yield 278 million metric tons over its 30-year lifespan.