Global Energy Advisory January 22nd 2016

Politics, Geopolitics & Conflict

• Iraq’s oil-rich Basra continues to struggle with a conflict among rival Shi’ite tribes that threatens to spiral out of control to the point that Baghdad sent in a strike force to quell the unrest. The bulk of the unrest is close to two major oilfields—West Qurna and Majnoon. If the foreign giants operating these fields were shrugging off the multiple threats to their assets before, they shouldn’t be so dismissive now, though they continue to be in denial. This is not an area close to the fighting with the Islamic State, but the conflicts feed off each other’s tensions. That fact that the central government sent in tanks and made some 30 arrests will not go down well with the locals who already have some autonomy sentiments—not happy with the distribution of their province’s oil wealth with the rest of the country.

• In a new twist to the struggle between the Iraqi central government and the Kurdistan Regional Government (KRG) in the Kurdistan region of Iraq, Israel has called for an independent Kurdish nation—one beholden neither to Iran or Turkey. One friendly to Israel, specifically. Israeli Justice Minister Ayelet Shaken said that Kurds and Jews had ‘common interests’ in trying to fight back the Islamic State, and intimated that the Kurds were carrying most of the weight in this fight. The minister said Israel explicitly declares its support for “the aspirations of the Kurdish people in the autonomous territories in northern Syria and Iraq.”

• Somalia’s al-Shabaab, emboldened further by the Islamic State’s progress, has struck at popular beachfront restaurants in the Somali capital, Mogadishu. The attacks used car bombs and gunmen, and the death toll was not yet known at the time of writing.

• In Libya, where the Islamic State has already made bold inroads, ISIS has set fire to oil storage tanks on a second assault at the Ras lanuf terminal in the north. The fire was started on Thursday. A week ago, ISIS also targeted Ras Lanuf and Es Sider terminals—which have a combined capacity of 500,000 barrels per day. Ras Lanuf has been shut down for just over a year due to the ongoing conflict in the country between two rival governments. Libya does not have the political will or unity to fight off ISIS, which is eyeing Libyan oil and making progress in getting it.

• Russian Gazprom has presented Ukraine's state-run Naftogaz with a $2.55 billion take-or-pay bill for the third quarter of 2015. Gazprom said the minimum annual amount of gas for that period was 10.485 billion cubic meters (bcm), making for a bill of $2.549 billion, which it says must be paid within 10 days. In October, Naftogaz said that the country was completing the purchase of gas from Gazprom, and a decision to continue to import gas from this supplier would depend on price. The following month, Ukraine halted purchases of Russian gas, saying the pricing offered by its European partners was much lower than that offered by Moscow. Two companies discussed the supply for the first quarter of this year but are still unable to agree on price.

Deals, Mergers & Acquisitions

• Premier Oil has agreed to acquire the UK subsidiaries of German E.On in a transaction valued at $120 million plus working capital adjustments. The deal covers interests in the Central North Sea, West of Shetlands area, and Southern gas basin with net production of 15,000 boe/d and reserves and contingent resources totaling 64 million boe. E.On's UK oil and gas upstream portfolio includes stakes in 40 licenses, including a 5.2% interest in the Elgin-Franklin field, a 47 percent interest in the Babbage field and a 50 percent stake in the Tolmount discovery. The industry hopes that the deal could spur other acquisitions. The British oil industry welcomes the deal as a sign of hope amid slumping oil prices.

• The government of Norway has offered 56 oil-drilling licenses on the Norwegian Continental Shelf to 36 oil companies, including Statoil ASA, BP PLC, Wintershall AG, Eni SpA and ConocoPhilips. Many of the licenses are close to existing, mature fields that are reaching their productivity end. Of those, 27 are in the North Sea, 24 in the Norwegian Sea and five in the Barents Sea.

• Italy’s Eni SPA is on the lookout for a partner for its petrochemical business, Versalis, which has been on a losing streak. Versalis produces chemical intermediates in Italy and France, as well as polyethylene, styrene, elastomers, oil field chemicals, and chemicals from renewable feedstocks. The petrochemical company has reported an adjusted operating profit of $102 million in the first half of 2015, compared to a loss of $200 million in the same period the previous year. Eni was initially trying to sell the Versalis since the October last year hoping to get as much as $1.1 billion. Last month, the company was said to be in talks with US investment firm SK Capital to sell the majority stake, but there appears to have been no movement on that since then in official reports.

Down and Out …

• BHP Billiton has written down the value of its U.S. shale assets by 7.2 billion dollars based on the oil price slump. The company also saw a slump in earnings last year as iron ore, coal, copper prices all plummeted. BHP will reduce the number of operated rigs onshore US from 7 to 5 for Q1 2016. That means three rigs in the Eagle Ford shale’s Black Hawk field and two in the the Permian basin. That’s down from the 26 onshore rigs the company was operating a year ago. Last summer, the company wrote down $2.8 billion pretax in US onshore assets, mostly in the gas-focused Hawkville field, also in Eagle Ford.

• European shares are at their lowest levels since October 2014 on falling oil prices. Germany's DAX, France's CAC and Britain's FTSE indexes were all down around 3%. Earlier this week, the International Energy Agency (IEA) warned that the oil market "could drown in oversupply" in the wake of Iran's return.

• Genel Energy—one of the largest producers in Iraqi Kurdistan and one of the key oil pioneers there—is forecasting lower revenue for 2016 based on sliding oil prices. Genel is forecasting $200-$275 million in revenue for this year, but that’s based on $45 per barrel. This compares to 2015 revenue of $342 million. How bad is this news? Well, according to Genel, they can handle it because its production costs are $2 per barrel.

Discovery & Development

• Two Israeli energy companies are eying a multi-trillion cubic feet deepwater gas field offshore Israel. Isramco and Modiin Energy are interested in the Og prospect in the Daniel East license, which they believe could hold a prospective reservoir of 1.1 TCF of gas. The Daniel West license also has several blocks with a prospective reservoir of 7.8 TCF of gas. According to the evaluation, the Og prospect holds a 38-43% probability of finding gas, while the probability of finding gas in the Daniel West license ranges from 24% to 57% depending on the specific prospect. This could be similar to the Tamar field, discovered by US-based Noble Energy and its Israeli partner, Delek. Tamar is already producing and is currently Israel’s main source of natural gas.

• Magellan Midstream and TransCanada are reportedly in plans to connect TransCanada’s Houston tank terminal to Magellan’s East Houston terminal. A joint company, HoustonLink Pipeline, will construct, own, and operate a 9-mile connecting the terminals. The new pipeline will provide TransCanada’s Keystone and Marketlink customers access to Magellan’s Houston and Texas City crude oil distribution system.

• Two joint venture deals between Argentina’s state-run YPF and American Energy Partners (AEP) bring another $500 million in investment commitment to the country’s shale venue. The JVs are in the Vaca Muerta shale, and the deals should boost already high confidence in this play. Aubrey McClendon—the former CEO and founder of US oil giant Chesapeake Energy--is behind AEP.