Energy Shots #115:

Syria’s Effects on Crude Markets

Syrian opposition forces toppled the Assad government on Sunday, less than two weeks after the joint ‘Deter Aggression’ and ‘Dawn of Freedom’ operations launched on November 27.

A full analysis of the geopolitical influences on either side of the conflict is beyond the scope of ES #115.

• Consequences of Syria’s evolving government transition are multidimensional — major parties involved in the historical conflict include the U.S., Russia, Iran, Iraq, Israel, Turkey, ISIS, Al Qaeda, Hezbollah, and a lengthy list of proxy forces. Clients can forward specific questions about regional concerns to the Mobius team.

• This report from Syria Weekly provides a more detailed background of the rebel opposition’s operations between November 27 and December 3 for interested readers.

Instead, today’s ES uses a crude-centric lens to highlight potential direct and indirect effects of the Assad regime’s rapid collapse for regional supplies.

Direct Effects: Low Impact

Decades of conflict, damage, and underinvestment cut Syrian crude production from a peak of 677 Kb/d in 2002 to a recent trough of just 24 Kb/d in 2018.

• Syrian output averaged approximately 40 Kb/d in 2023, making it a relatively inconsequential member of the broader Middle East producer group. While output could theoretically return to early-2000 levels, comparatively limited crude reserves and infrastructure constraints will likely weigh on investment appetite.

Syria’s proved crude reserves are the lowest in the Middle East at just 2.5 billion barrels versus the 600 billion barrels held by Saudi Arabia, Iran, and Iraq, respectively.

Indirect Effects: Iraqi/Kurdish Supply

While Syria’s direct influence over global crude markets will likely remain minimal, the fragmented collection of forces under the two major opposition coalitions raises concerns about a lasting power vacuum and cross-border conflict/terrorism-related disruption risks.

• The leading Hayat Tahrir al-Sham (HTS) rebel group branched from Al Qaeda in 2011 and publicly severed ties with Al Qaeda in 2016. However, HTS remains designated as a terrorist organization by the US.

• ISIS maintains a strategic presence in easter Syria and is actively attempting to capitalize on the power vacuum following the Assad regime’s collapse.

• The Syrian Democratic Forces (SDF) operating in northern/northeastern Syria benefits from US support and was originally formed by Kurdish People’s Protection Units (YPG). The SDF controls 25%-35% of Syria’s territory, including a dominating share of roughly 90% of Syrian oil fields and 50% of gas fields. The SDF remains actively engaged in conflict with the Turkish-backed Syrian National Army (SNA) from the north and ISIS from the south.

While the SDF fundamentally differs from the Kurdistan Regional Government (KRG) in northern Iraq, the SDF’s Kurdish roots are noteworthy considering its expanded control over oil infrastructure in northern/northeastern Syria amidst a prolonged Iraq-Turkey pipeline dispute between the KRG and Iraqi government.

• The pipeline dispute has removed ~470 Kb/d of Iraqi/Kurdish crude exports from global markets since March 2023.

• After the Iraq-Turkey pipeline closed in March 2023, Kurdish production dropped from a 1Q23 avg. of roughly 400 Kb/d to 0 bpd due to insufficient storage capacity. Discounted local sales have helped Kurdish production grow to 250-350 Kb/d in Q3 2024, complicating Iraq’s compliance with OPEC+ output quotas.

Further aligned Kurdish interests in the region could give the KRG more leverage in negotiations with the Iraqi government in Baghdad.

• Last month, Baghdad proposed a doubling of the production and transportation fee it pays to the KRG, aiming to promptly reopen crude exports from the Kurdistan region into Turkey and enable new development interest from several IOCs.

Non-Oil Takeaways:

While Syria’s crude production and reserves are relatively limited compared to other regional participants, evolving government control and the potential for greater foreign development interest are meaningful for other natural resources in the region.

Notably, Syria holds the world’s fourth-largest phosphate reserves, and these reserves are almost entirely undeveloped.

• At 1.8 billion metric tons, Syria’s phosphate deposits represent approximately 3% of global reserves — far below Morocco’s ~70% share but near parity with #2-ranked China — and could attract Western investment as a non-Chinese-influenced phosphate source required for technologies like lithium iron phsophate (LiFePO4) batteries used in EVs and power storage.

Meanwhile, Syria’s multidimensional geopolitical landscape poses a wide range of downstream consequences to consider for energy and other commodity markets.

For more perspective on knock-on effects for Russia, Iran, Venezuela, or the U.S., please reach out to the Mobius team.

See you next Sunday.

ES.

This commentary contains our views and opinions and is based on information from sources we believe are reliable. This commentary is for informational purposes, should not be considered investment advice, and is not intended as an offer or solicitation concerning the purchase and sale of commodity interests or to serve as the basis for one to decide to execute derivatives or other transactions. This commentary is intended for Mobius clients only and is not considered promotional material.