Global Energy Advisory March 18th 2016

Politics, Geopolitics & Conflict

• Kurdish Peshmerga forces, Shi'ite militia’s and Iraq's army are reportedly preparing to launch a joint offensive against the Islamic State (ISIS) in and around the oil-rich region of Kirkuk in the disputed territories of Northern Iraq. The joint operation is hoping to get closer to Mosul, which is the largest city in Iraq still held by ISIS. Last month, Peshmerga forces retook a small crude oil station near the northern Iraqi city of Kirkuk which Islamic State insurgents seized. State-run North Oil said that the militants had seized a crude oil separation unit in Khabbaz on Saturday morning and that 15 oil workers are still missing. Khabbaz is a small oilfield southwest of Kirkuk with a maximum production capacity of 15,000 BPD. This all comes, as we noted last week, as the Iraqi Kurds make a subtle play for control of Kirkuk, by supporting the local government’s move to separate from the central oil company and launch their own oil company.

• Russia has announced an imminent withdrawal of its forces from Syria, and while this is easy media bait, it doesn’t mean much. When Russia talks of withdrawing its forces, it’s talking about those that were involved in the support to the Assad regime beginning in late September. Keep in mind that Russia has major military bases in Syria—at Tartus and Latakia. It maintains this force and all the air support this suggests. The announcement of a withdrawal is really just Putin’s way of hitting the point home that it’s worked to push back ISIS and that Assad has been somewhat stabilized militarily. The Russians aren’t leaving Syria. They are there to say. Soon enough they’ll be exploring, in earnest, Syria’s portion of the oil-rich Levant Basin.

Discovery & Development

• Kosmos Energy has made a gas discovery at its Ahmeyim-2 appraisal well in the offshore area of Mauritania and Senegal. The well—located in Mauritanian waters—encountered 78 meters of net gas pay in two quality reservoirs. This is the basin-opening Tortue-1 discovery well, which was drilled to 5,200 meters. This discovery apparently means that there are enough gas resources in the Tortue West structure to develop and LNG project—all on its own. Now Kosmos plans to drill the first of three independent oil tests in its blocks offshore Mauritania and Senegal. Offshore Senegal, Kosmos will be drilling the Teranga-1 well in the Cavar Offshore Profond Block.

• Another discovery in Kenya by UK-based Tullow Oil suggests significant promise even outside the prolific South Lokichar Basin where Tullow made the original massive find that put Kenya on the energy map and paved the way for the country to begin an East African oil giant. The find was made in the Kerio Valley Basin in Kenya’s Great Rift Valley region. According to Tullow, it’s the most significant find to date outside Lokichar. We don’t have any exact estimates here, and testing is ongoing for commercial viability. In 2012, Tullow discovered 600 million barrels of oil in Turkana’s South Lokichar Basin.

• Italian Eni has launched production at the giant Goliat offshore platform in the Arctic, off Norway’s northern coast. It will need oil prices at $100 per barrel to break even most likely, so this is a long-term game and the production life is said to be around 15 years.

• Shell has launched oil production from its deep-water Parque das Conchas development in Brazil's Campos Basin, where the production is expected to add up to 20,000 barrels of oil equivalent per day at peak. Shell operates the field with a 50 percent interest, while India-based ONGC and QPI have 27 percent and 23 percent stakes, respectively.
• Shell and Chevron have shut in production at a UK North Sea platform due to a problem with the Lomond export pipeline.

• French Total SA will not go through with shale operations in southeastern France, despite the change that it would have been re-awarded the Montelimar permit after a legal battle. The current oil price environment has rendered this option unattractive to Total. The Montelimar permit covers over 4,300 square kilometers and five departments in France.

Regulations & Litigation

• The Obama administration is reversing a 2015 proposal to allow oil and gas companies to drill in the Atlantic Ocean off four southeastern states. The opposition from the coastal communities of Virginia, North Carolina, South Carolina and Georgia has been too stiff to go forward with this, and there has apparently also been opposition from within the Pentagon for national security reasons. The leases would have been offered up from 2017. The decision calls for closing the Atlantic and Pacific coasts to future development through 2022.

• The British government has abolished the petroleum revenue tax in an attempt to help out the flailing oil and gas industry. The tax was 35 percent. It will also be reducing the supplementary charge on oil and gas profits from 20 percent to 10 percent. Both moves are being backdated to the beginning of 2016. Great news for the industry, which saw shares in oil companies jump on the announcement. BP shares rose 3.5 percent on the day, and Shell rose 3.1 percent.

• Kuwait’s acting Finance Minister has unveiled government plans to raise money amid falling oil prices by taxing company profits and privatizing airports, ports and even some facilities that belong to the state-run Kuwait Petroleum Corporation. A value-added tax (VAT) will be introduced in 2018, but no timelines were offered up for the remainder of the plans revealed.

Deals, Mergers & Acquisitions

• The National Iranian Oil Company (NIOC) and Greece’s Hellenic Petroleum S.A. have signed an agreement to resume oil sales to Greece, finalizing a deal for up to 60,000 barrels per day of Iranian crude oil to Greece. That volume could increase to 150,000 bpd eventually. The first shipment is scheduled to arrive in Greece by the end of March. Between 2010 and 2012, Greece paid out up to $6 billion for Iranian oil. Sanctions put an end to that, but Hellenic Petroleum apparently still owes Iran $755 million from that period.

• Russian Rosneft has reached a preliminary agreement to acquire 49 percent in India’s largest oil refiner, Essar Oil. If the deal goes through, crude deliveries would begin this year. Essar operates the Vadinar refinery in Gujarat, the second largest private refinery in India, with a capacity of 20 million tons per year. This deal is said to be worth around $2.4 billion. It still needs regulatory approval, but if it gets it we could be looking at Rosneft supplying 100 million tons to Essar over a 10-year period.

• Marathon Oil is looking to sell its assets in Wyoming and quit the state as it divests its non-core. Most of Marathon’s Wyoming production is centered around older fields in the Big Horn and Wind River basins that produce a heavy variety of sour crude. In February, Marathon said it would sell up to $1 billion in assets this year. Marathon posted a $2.2 billion loss for 2015. Anadarko Petroleum also recently reduced its presence in Wyoming.

• We’re looking at another oil and gas licensing round in Norway now, which will include blocks in the Arctic Barents Sea. Applications will be accepted until September, and licenses will be awarded early next year. Some 32 blocks in the Barents Sea and 24 blocks in the Norwegian Sea are up for grabs, most of them mature. In last year's mature areas licensing round, Norway handed out 56 licenses to 36 companies. Analysts are predicting a 40% drop in oil and gas investment in Norway from 2014 to 2017.

• In one of the biggest oil and gas news stories of the week, Saudi Aramco and Shell have announced they will divide the assets of their Motiva Enterprises joint venture, handing over complete control of the largest U.S. refinery to the downstream affiliate of Saudi Aramco. This JV was formed in 1998. Shell and Aramco have had a 50/50 stake in it since 2002. It’s not going to sit well with some, particularly with the folks at the Pentagon who are concerned with national security. It means the Saudis get full control of a key refinery in Port Arthur, Texas, along with 26 distribution terminals. Under this divorce, Shell gets total ownership of refineries in Norco and Convent, Louisiana, and 9 distribution terminals.