Global Energy Advisory – 4th September 2015

Politics, Geopolitics & Conflict

If nothing else, we have Yemen to thank for upwards oil price volatility. So while the Saudis continue to play their high-output game, keeping oil prices low, at the same time the Saudi troop incursion across the border into Yemen with boots on the ground is causing intermittent oil price spikes. Saudi troops have entered Northern Yemen and taken control of two areas in the Saada province, the Shi’ite Houthi stronghold. The war affects oil prices because a key focus here is on Yemen’s oil-rich Marib province, which supplies the capital, Sanaa, which is under the control of Houthi Shi’ite rebels, nominally backed by Iran. The Saudis—in time-honored US-style bungling—are using this battle field as a proxy war against Iran. The initial beneficiaries will be Sunni jihadists who will gain a foothold in Yemen’s oil thanks to the Saudi (Sunni) meddling here. Right now, pro-government forces are trying to push the Houthis out of Marib province. If they do this, the rebels will likely be forced toward the Saudi border. In the meantime, Yemen’s port of Aden is increasingly becoming a jihadist playground—with IS allies infiltrating at what we are told is a steady rate. The Saudi-Iranian proxy war has made it possible for the IS to gain a solid foothold here, so consider this the extension of what is going on in Iraq and Syria.

Discovery & Development

• The big news of the week in terms of discovery is Italian Eni SpA announcement of a huge natural gas field offshore Egypt at the Zohr Prospect. Eni is billing this as the largest-ever find in the Mediterranean Sea. The deep-water deposit in the prospect in the Shorouk block may hold 30 trillion cubic feet of gas, equivalent to 5.5 billion barrels of oil. Egypt’s petroleum ministry also confirmed the discovery. Eni, through its subsidiary IEOC Production B.V., holds 100 percent of the Contractor’s working interest in the Shorouk Block and is the operator of the concession. The find is being billed as the savior of Egypt, and Eni is expecting to fast-track development here. Talk is that this discovery could supply all of Egypt’s energy needs for some two decades.

• Houston-based Erin Energy has entered into the next phase of onshore exploration in Kenya. These are government-approved additional exploration periods attached to the company’s two onshore blocks, L1B and L16. The additional exploration for this phase is valid for two years. Elsewhere, in Nigeria, Erin in June launched production at the offshore Oyo-7 well, which is expected to produce 7,000 bo/d following optimization of choke size.

• The UK Oil & Gas Authority has green-lighted production in the biggest new North Sea oil and gas field to have been discovered in the last decade. Danish company Maersk Oil, which discovered the Culzean field in 2008, will develop the field, which holds gas resources that are equivalent to roughly 250-300 million barrels of oil. When it hits peak production, the Culzean field should be able to produce enough gas to meet 5 percent of the UK's needs. Maersk Oil, along with its partners JX Nippon and BP, will be investing about $4.6 billion in developing Culzean.

Deals, Mergers & Acquisitions

• Schlumberger has agreed to buy Cameron International, valued at $14.8 billion. The significance of this deal is that if it goes through it would give Schlumberger a competitive edge in the industry. Cameron shareholders will receive 0.716 shares of Schlumberger common stock and a cash payment of $14.44 in exchange for each Cameron share. Pending shareholder and regulatory approval, the deal is expected to go through in the first quarter of next year. A combined Schlumberger-Cameron could streamline its operations and reduce expenses in this depressed oil price environment. Not only Schlumberger is gunning for Cameron; Keppel Offshore & Marine has announced it will acquire Cameron’s offshore rigs business for $100 million.

• Encana Corp has agreed to sell its Haynesville natural gas assets in northern Louisiana to GEP Haynesville LLC, a joint venture formed by GeoSouthern Haynesville LP and funds managed by Blackstone Group for $850 million. The assets include 112,000 net acres of leasehold primarily in DeSoto and Red River Parishes—plus additional fee mineral lands—where Encana operates 300 wells. Estimated year end 2014 proved reserves were 720 bcf of gas equivalent. The assets produced an average of 217 million cubic feet a day from 300 wells in the first half of the year. Encana plans to use the total cash consideration to reduce its net debt. For this year, more than 80 percent of the company’s capital will be invested in the Permian, Eagle Ford, Duvernay, and Montney.

• Angola’s state-owned Sonangol has agreed to acquire Houston-based Cobalt International Energy Inc.’s 40 percent interest in discoveries off the country’s coast for $1.75 billion. Cobalt made its first oil discovery from the Cameia-1 well in block 21 in 2011. Cobalt and Sonangol plan to decide whether to proceed with an investment to develop the Cameia discovery by the end of this year. First oil from this field was scheduled to be produced in 2018. Cobalt would continue to work with Sonangol to get formal sanction for its deepwater Cameia project in Block 21 by the end of the year. Cobalt operates the block with a 40 percent working interest, while Sonangol owns the rest. Cobalt is being investigated by the US Department of Justice due to allegations of a connection between its partner company in Angola, Nazaki Oil and Gaz, and senior Angolan government officials. Cobalt maintains that it was not aware that the Angolan officials held stakes in it.

• French Total SA has agreed to sell its service-station network and commercial sales, supply, and logistics properties in Turkey to Turkish conglomerate Demiroren Holding for about $356 million. Total will retain its lubricant and LPG operations in Turkey. Total’s management is selling after determining that it would be difficult to win the necessary market share to achieve high enough profitability. Total Oil Turkey is the fifth-largest oil distributor in the country. Its share of the market is estimated at 5.5 percent. Demiroren is one of Turkey’s largest business groups, present in a variety of fields, from manufacturing and construction to tourism, education and the media. Its subsidiary Milangaz is the country’s leading LPG supplier. Total plans to sell $10 billion of assets between 2015 and 2017, including $5 billion this year, due to low oil prices. Not only is Total divesting assets, but it’s also scaling back exploration and moving to reduce operational costs.

Regulatory Updates

• Everyone with interests in South Africa is impatiently waiting for the government to approve planned changes to the oil and gas laws, which were submitted back in January. Now the country’s ruling African National Congress is trying to push movement on the decision by urging the government to approve the changes to speed up investment in the sector. The changes in January were to the 2002 Mineral and Petroleum Resources Development Act. They were sent back to parliament due to concerns that the amendments violated the constitution. The bill included proposals to give the state a free 20 percent stake in all new oil and natural-gas projects and the option to buy an unspecified additional share at an “agreed price.” What does the industry think? There is concern here about the authority given at the Ministerial level to declare that a mineral is strategic. There is also concern about a proposal to shift control of oil and gas acreage licensing from the Petroleum Agency of South Africa to the Department of Mineral Resources.