What Will Trump's Firing of Rex Tillerson Mean for Energy?

U.S. President Donald Trump fired Rex Tillerson, the secretary of State, on Tuesday, removing him as the nation's top international diplomat. The stunning development, which Trump said necessitated from the two having a 'different mindset' on major foreign policy issues and their 'disagreement on things' including the landmark Iran nuclear deal, capped a difficult tenure for Tillerson. The president replaced Tillerson with Mike Pompeo, the CIA Director, saying that the spy chief 'will do a fantastic job'.

Rex Tillerson’s Tumultuous Tenure

Former ExxonMobil XOM Chairman and chief executive officer (CEO) Rex Tillerson was the first oil executive and the second Texan to be in charge of U.S.'s international diplomacy. Trump and Tillerson have been out of step on a number of issues - from the Iran deal to North Korea and Russia.

The decorated oilman was one of the harshest critic of Russian actions, a stance at odds with the White House, and was supposedly against the proposed meeting between Trump and North Korean dictator Kim Jong-un. The former secretary of state also had serious differences with Trump on how to handle the Iran nuclear accord, from which the President wants to withdraw if it is not ratified per his satisfaction. There were a number of other instances where the two appeared out of sync.

Trump’s Cabinet Shuffle: All Eyes on the Iran Nuclear Deal

The removal of Rex Tillerson as secretary of state raises questions over the future of the Iran nuclear deal. There are indications that the 'more hawkish' Mike Pompeo might lead America's exit from the Iran pact if the European allies do not agree to toughen the terms by May 12. This has injected uncertainty into the oil market and can potentially send prices higher.

The Iran Nuclear Deal: On Nov 24, 2015, Iran reached a temporary accord with six world powers – the U.S., Great Britain, France, Russia, China and Germany – to restrict its nuclear activities in return for the Persian nation’s relief from international sanctions on oil, auto parts, gold and precious metals. Ultimately, the embargo was lifted in January 2016 after certification from the UN nuclear watchdog.

Trump Approves the Pact One Last Time: In October last year, the American administration decertified (but did not withdrew from) the 2015 accord – forged by then-President Barack Obama – on the pretext that the Persian Gulf country is in breach of the spirit of the agreement, which no longer serves U.S. national security interests.

On Jan 12 this year, the president gave the agreement a 'final' lifeline, agreeing to waive U.S. sanctions one last time and keeping U.S. in the deal. At the same time, President Trump demanded the European allies and Congress fix the 'disastrous flaws' in the pact within 120 days.

Insists on Key Changes to the Multilateral Agreement: For long, Trump has been expressing his opposition to the Obama-era agreement (the Joint Comprehensive Plan of Action or JCPOA), terming it as 'catastrophic' with bad terms for the U.S. His government now wants to delegitimize the pact in its entirety by asking for additional concessions from Iran on some key portions of the deal. The U.S. President is also trying to curb Tehran's ballistic missile program, cyberattacks and support for terrorist groups - issues mostly outside the purview of the JCPOA.

Tillerson’s Successor an Iran Hawk: CIA Director Mike Pompeo, who is set to replace Rex Tillerson, is a known Iran hard-liner sharing the President’s views on the nuclear deal. Unsurprisingly therefore, his appointment raises the specter of U.S. moving out of the historic accord.

Scrapping of the Iran Deal Will Affect Energy Markets

Renewed Sanctions Will Amplify Iran’s Struggles to Attract Foreign Capital: The 2015 deal was seen as a big win for Iran with the infusion of tens of billions of dollars into the Middle Eastern nation’s hobbling economy in return for curtailment of its nuclear program and site inspections. However, the country is still struggling to attract foreign investment, which is way short of the level required for it to achieve its economic ambitions. Things may become even tougher if U.S. President Donald Trump follows through with his rhetoric.

Trump administration’s withdrawal from the nuclear deal will likely lead to tougher U.S. restrictions against Iran. In particular, the decision could choke off foreign investment the Islamic Republic badly needs to restore the health of its ageing oilfields and boost output following years of crippling earlier sanctions.

Following the lifting of sanctions in January 2016, Iran’s crude oil production and exports have been on a rise. As per OPEC’s monthly report, the country’s daily oil output exceeded 3.8 million barrels in January, of which around 2 million barrels were exported.

The current statistics marks a considerable jump from an average of around 2.8 million barrels per day in 2013 when Tehran was under international sanctions for its nuclear program. Exports languished at about 980,000 barrels per day.

Therefore, it’s quite obvious that the return of sanctions would put pressure on OPEC’s third-largest oil producer’s energy industry and affect the market in general.

An American pullout of the nuclear agreement won’t immediately curb the flow of the Gulf country’s swelling crude exports as the U.S. is not a buyer of Iranian oil. Moreover, it is also quite unlikely that Trump will get Europe or China – Iran’s biggest clients – in reinstating the embargo on Tehran.

However, the U.S. might threaten the buyers of Iranian crude or any company with major investments in the country’s upstream sector, with financial penalties. This could force some of the companies, especially those with assets in the U.S., scale back purchases/investments out of fear of being kept out of the world’s largest capital markets.

A disruption to Iranian oil exports and investments in the country might cut off some of its supplies to the global market, thereby boosting crude prices.

These Companies Could be Hurt: With the U.S. still maintaining certain bilateral sanctions, domestic companies can’t enter into physical partnerships with their Iranian counterparts. However, some U.S. firms have been trying to bypass this by approaching the Office of Foreign Assets Control (OFAC) – the Treasury Department’s sanctions administrator – for licenses in specific sectors including oil and gas, provided these do not hurt U.S. policy interests.

However, there is no such problem for European and Asian companies, who have already started negotiating with local players to expand and fortify their presence in the Iranian market. Biggies from across the pond like Royal Dutch Shell plc RDS.A and Eni SpA E are among the firms who have been shortlisted for work in the OPEC member’s upstream sector oil and gas projects. Oilfield services behemoth Schlumberger SLB is also in the fray to potentially develop Tehran’s massive energy resources.

But it is French energy giant TOTAL S.A. TOT that stands to be the biggest casualty. In July 2017, the Zacks Rank #3 (Hold) company announced that it has signed an agreement with the National Iranian Oil Company (NIOC) for the development and production of phase 11 of South Pars (SP11) – the world’s largest gas field. This project will have a capacity to produce 2 billion cubic feet of gas per day or 400,000 barrels of oil equivalent per day including condensate.

(You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.)

The development contract marked the reentry of TOTAL in this reserve rich Middle-East nation, which it exited in 2006. TOTAL is the first among the global oil and gas major to strike a deal with the Iranian administration and begin work for the development of existing resources of Iran.

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