Storm Clouds Gathering
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Storm Clouds Gathering

by | published June 28th, 2019

It is approaching midday. I am told it is sunny outside in London. The heat wave rocking the continent has apparently spared Britannia, although it is supposed to hit on the weekend.

Could have fooled me because, since my arrival, I have been ensconced in meetings at the margins of the annual Iraq Petroleum conference. And in here, stormy is the weather of the day.

My network of energy and policy contacts will upon occasion use conferences like this one as an opportunity to meet – supplementing those we call for own purposes – to address problems and prospects. In our gatherings, the agenda and disposition are usually quite different from whatever may be happening in an official conference program.

That is certainly the case this time around, although I often straddle between formal and private meetings. This time, I have a part to play in the conference proceedings tomorrow when I comment on ways to reduce financial risk in the energy and infrastructure projects the Iraqi ministers will announce. These are scheduled to be multi-billion-dollar commitments to areas around Kirkuk and Mosul taken back from ISIS.

While ministers and officials on the conference floor attempt to paint a strong picture of the investment advantages provided by Iraq and its oil and nature gas resources, they tap dance around the elephant in the room.

Nonetheless, it is the beast on the minds of all the participants…

Two Items to Keep an Eye On

Just about everybody here believes war is coming in the Persian Gulf. It is now more a question of when rather than if. The only ones still holding out any hope are the Brits (apparently, more interested in staying afloat during the impending change in prime minister and the ever-present pitter-patter of the never-ending Brexit mess).

Meanwhile, in my sidebar meetings, work has already begun on how large private direct investment intends to weather the storm, along with the public policy initiatives necessary to facilitate and secure such funding. Much of this money is directed to energy projects across the globe.

And when that is considered, two matters become paramount. First, these public and private practitioners do not like surprises. Beyond everything else, predictability is by far the desired investment environment. They prefer to swallow hard and work with people they do not like personally (one of the lessons, as it happens, I used to tell my university students they needed to learn in life) rather than to navigate unknown volatility.

Risk may provide opportunity as well as having a downside. But dealing with it is something these guys would prefer to delegate as my responsibility.

Second, it makes no difference what part of the full energy spectrum or where in the world an investment is being considered. What transpires with security and oil in the Persian Gulf will have an immediate impact.

Both these truisms lay heavy on everything taking place in this executive meeting room high up on the Thames. We are on the Embankment overlooking Westminster. Across the water, Elizabeth Tower and the famous Big Ben are draped in scaffolding, as a multiyear renovation is underway.

I have the growing feeling that image is reflecting what is going on in our conversations as well. These are important figures with direct lines to government leaders and worldwide finance. I have known many of them for years, which makes what I am hearing more unsettling.

The milieu surrounding the table is hardly one of resignation. People like these may change emphasis or direction, but they never throw in the towel. No, what is manifest is a profound sense of boiling over frustration.

And that frustration is directed at the U.S.

This is not anti-Americanism as such. All coming to our periodic meetings, especially those from the Middle East, have expected global leadership from Washington. They saw the U.S. providing an underlying sense of stability, even when they may have individually disapproved of what was being pushed as the agenda.

I do not represent U.S. interests or policymakers when attending these meetings. My responsibility is to provide analysis and counsel. But, as the only American in this group, I am occasionally the brunt of criticism because of my citizenship anyway.

As one of our participants wryly put it yesterday, “You Americans used to provide often overly tragic drama. These days it is more an embarrassing carnival show.”

I have done this long enough to expect matters to change during the conversations as a result of external event or a cell phone instruction somebody may receive from the “powers that be” back home.

However, the past two days have been more hectic than usual. There is an urgency and it is beginning to show.

Important developments have surfaced, and they have a seminal bearing on both the conversations here and what begins on Sunday evening as my next task (more on that in a moment).

And I intend now to fill you in on some of these. Remember, as mentioned in the last Oil and Energy Investor article, the Chatham House Rule under which we operate prevents associating a name with a particular opinion or position. Nonetheless, what is discussed, along with any general conclusions reached, can be revealed.

So here goes.

The Coming Storm

Three striking matters are intensifying the urgency of the situation here.

First, the Iraqi government has declared that its national territory cannot be used to launch any U.S. attacks on Iran. To indicate the gravity of this decision, the declaration was not conveyed through the U.S. Department of State (via the ambassador in Baghdad), to the White House, or to National Security Advisor John Bolton (who was in region).

So that there was no misunderstanding about Iraqi intention, it was sent directly to U.S. military commanders at Central Command in Qatar.

The Iraqi position is mirrored in Erbil, the seat of the Kurdistan Regional Government in northern Iraq. This semi-autonomous area is often at loggerheads with the central government in Baghdad. But not this time.

The Kurdish border is a very porous one, comprising a primary smuggling route in and out of Iran. But the Kurds do not want their territory to have any involvement in hostilities.

Second, China is now making moves to confront head on the resumption of U.S. sanctions against Iran. The opposition has been building for some time. But in the last few days, Beijing has resumed importing Iranian oil in frontal rejection of the U.S. restrictions.

A calculation is underway on this one. There is little belief among my group that there will be any resolution on the U.S.-China trade front from any head of state meeting at the G20 underway in Japan.

The Chinese are expecting a photo op and some general positive statement when Presidents Donald Trump and Xi Jinping meet tomorrow (Saturday). Trump may even proclaim a breakthrough (as he usually does after such meetings) only to have nothing follow from it.

Those around the table back here in London assume that the mantle of resistance to the U.S. sanctions will move to Beijing and even possibly Moscow from Europe. It has been increasingly clear this week that the U.K., France, Germany, and the E.U. will be unable to forge an approach protecting the JCPOA (the nuclear accord with Iran every signatory except the U.S. still adheres to) from erosion.

Teheran has threatened to terminate its agreement and resume full nuclear fuel enrichment. Only China and Russia still have some leverage to prevent it.

Developments on the sanctions front have prompted some lively conversation in my meetings about structuring fiduciary mechanisms to reflect the new reality. That means venues for Chinese and Russian energy and trading initiatives may open in wider financial circles.

There are two overriding conclusions on this issue emerging. One is that there will be opportunities to profit from the developing network to bypass the sanctions. The other assumes there will be no involvement by American-based financial interests.

Such a determination of no need or desire to have U.S. money participation in global moves of energy finance may well be the most dramatic indication of how far matters have changed. These individuals usually dislike shouldering a heavier risk burden. But they are prepared to do so, in this case, to avoid being restricted by U.S. policy.

Third, and most ominously, the moves afoot speak of a dramatic change in the normal dynamics of geopolitics (and the geo-finance that parallels it). The post-World War II fabric that has for over six decades withstood a Cold War, power politics, the rise of ethnic and religious-centric conflict, and non-state actors like Al-Qaeda and ISIS is eroding.

What will replace it is currently unknown and very much in process. It will take more than one election cycle or change in national attitude to correct this. Looks to me there is a snowball about to roll down a hill and run over anything in its path.

It will not soon alter who the main players are. But it may well alter the playing field.

One thing is certain: Those who control the financial strings are not planning to relinquish that control anytime soon.

Here’s my problem moving forward. The “next task” I referred to above is to convey some substantive talking points to another group. This is scheduled to begin at the very end of the weekend, but the location is not yet decided. It will either be Paris or Lausanne, Switzerland.

If those meetings are in Paris, I may have a better chance with the next stage. A meeting in Paris means Marina and I will be staying at one of our favorite hotels in the “City of Light.” This is the Shangri-La, on Avenue d’Iéna close by the Eiffel Tower.

And that hotel just happens to be right next door to the Iranian Embassy.

Any movement at all in Paris (or conversely in Lausanne where I also held my last substantive meeting with the Iranians) means my next round of “shuttle” meetings also has some upside. They are scheduled for mid-September in Dubai and Doha. Needless to say, I’ll bring you along for these as well.

Providing parties still have an interest in talking rather than shooting.

Sincerely,

Kent

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