Global Energy Advisory – 13th June 2014

Geopolitical Developments

The Bulgarian government has announced it will suspend work on Russia's South Stream pipeline amid strong opposition from the EU and the US and the looming threat of US sanctions against Russian firms working on the project as of 28 April. Bulgarian Prime Minister Plamen Oresharski said that the country would seek further consultations with the EU on South Stream before moving forward. Bulgaria will be very hard hit in the event of a cessation of Russian gas supplies. It is the most vulnerable to Russian geoeconomic warfare. Over 85% of Bulgaria's gas needs are met through Gazprom-and that goes through a single route passing through Ukraine. Bulgaria has a single oil refinery run by Russian Lukoil, which supplies over 60% of its refined fuel, with the crude coming through a Ukrainian Black Sea port. Even Bulgaria's nuclear fuel is shipped through Ukraine. The country has a single gas storage facility with two-months in reserves. In case of emergency, it was to use a transit pipeline to Greece for reverse flow natural gas. The ruling coalition in Bulgaria should be largely viewed as pandering to Moscow-a situation that is exacerbated by the fact that about one-third of Bulgaria's economic output is either directly or indirectly controlled by Moscow.  There are also intelligence leaks indicating that Russia is directly influencing legislation in Bulgaria, particularly that related to the South Stream gas pipeline project. Sofia is attempting to sidestep Brussels on this (with help from Gazprom's lawyers) by redefining the Bulgarian part of the pipeline as a simple "gas grid interconnection" rather than a full-fledged pipeline. This move is designed to circumvent EU competition regulations.

Syrian President Bashar al-Assad has won a third term in office in an election that few are taking seriously in the middle of a civil war. What we are most concerned about at this time is the significant start of the return of jihadist fighters from the Syrian theater, where they pose a threat to Europe, Turkey and various African venues, among others.

Regulatory Alerts

The crisis in Ukraine and belated fears about Europe's energy security have prompted European Union lawmakers to propose the scrapping of a mandatory requirement to label oil from tar sands as "dirty". This could be a major coup for Canada's tar sands producers who have been lobbying heavily for this to no avail until the crisis in Ukraine stepped in to re-shape the playing field. The draft EU document, if approved, would bring Canada one step closer to being able to ship more crude oil from tar sands to Europe.  The draft would override planned EU legislation that would have set heavy penalties on transport fuels made from Canada's tar sands crude due to the higher level of carbon dioxide emissions associated with this production. The UK, Poland and Italy are on board, but there will still be a tough road ahead for this draft legislation, which will meet with staunch environmental criticism.

As Mexico prepares to open up its oil and gas sector to private foreign companies, pending Senate committee legislation is calling for stricter local content laws. The proposed legislation calls for producers to use Mexican providers for an average of 35% of their needs, up 10% from the parameters pushed by Mexican President Enrique Pena Nieto. Deep-water projects would be exempt from the new rule. The first round of oil contracts for private investors in Mexico is expected to be awarded in the first half of 2015, assuming that pending secondary laws are approved by the end of this month. During a trip to Portugal on 6 June 2014, President Enrique Peña Nieto signed agreements concerning the economy, tourism, education, technology and business, while also calling for a renegotiation of Mexico's free trade agreement with the European Union. In addition, Peña Nieto signed a memorandum of understanding with Portuguese firm Galp Energy regarding future involvement in Mexico's energy sector, according to our partners at Southern Pulse.

In Kyrgyzstan, Centerra Gold company has threatened to halt the Kumtor gold mine project by the end of this week if the government does not  grant it regulatory approval. Centerra owns 100% of the Kumtor gold mine through its wholly owned subsidiary Kumtor Gold Company. Kumtor is about 350 kilometers southeast of the capital Bishkek and about 60 kilometers north of the border with China. It is the largest gold mine operated in Central Asia by a Western-based company, having produced more than 9.2 million ounces of gold between 1997 and the end of 2013.

The US oil and gas industry has won a significant victory with new legislation signed by Louisiana Governor Bobby Jindal on 6 June. The new legislation will thwart a lawsuit filed by a regional levee board against 97 oil and gas companies, in Jindal's words, to "help stop frivolous lawsuits and create a more fair and predictable legal environment". The levee board was suing the companies to either repair damage caused by dredging canals and pipeline channels, among other things, or pay the authorities to repair the damage themselves. The new law could have grave implications for state and federal claims against BP for the 2010 Gulf of Mexico oil spill.

The countries of the European Union are drafting national laws to require natural resources companies to publish the details of the amounts they pay to governments for natural resource projects. The new laws would take effect in 2016 and are aimed at greater transparency through disclosure.

In the state of California, lobbying from fossil fuels companies has killed a bill in the state assembly aimed at bolstering the supply of low-carbon fuels in line with California's 2007 low-carbon fuel standard which sought to reduce the carbon intensity of transportation fuels 10% by 2020. The legislation, AB2390, would have allowed the California treasury to make long-term commitments to purchase carbon credits at preset prices from biofuels producers.

Piracy Alerts

A Liberian-flagged oil tanker has been reported missing off the coast of Ghana since Wednesday last week. The MT Fair Artemis, owned by Fairdeal Group SA said the ship had made a distress call after being attacked by pirates. The government of Ghana has asserted that the missing Liberian oil tanker did not disappear within the country's territorial waters.

Last week, a third oil tanker was hijacked in nearly as many weeks in the waters between Singapore and Indonesia. The tanker was a Thai oil tanker and the frequency of recent attacks has led maritime authorities to believe that a more organized network of pirates in these waters has emerged.  

In February this year, pirates hijacked a ship off the coast of emerging oil venue Angola, making away with $8 million in fuel.

Nigeria's efforts to thwart piracy have resulted in a shift of attacks further east into the Gulf of Guinea, off the coast of Ghana and Cote d'Ivoire, for instance. Before that, increased security off the Somali coast shifted things to West African coastal venues. The Indian Ocean remains a pirates' playground and their capabilities have metamorphosed along with improvements in security.

Deal, Mergers & Acquisitions

Aubrey McClendon, the once-beleaguered CEO of Chesapeake Energy and now heading up American Energy Partners (AEP), has announced new acquisitions worth $4.25 billion this week. AEP is paying $2.5 billion for Denver-based Enduring Resources and its 63,000 acres in the southern Permian Basin. AEP is also buying $1.75billion in shale assets in Utica and Marcellus.

A deal signed on 4 June 2014 between Petróleos de Venezuela (Pdvsa), the Italian oil company ENI and the Spanish energy firm Repsol calls for a total investment of US$7 billion in the exploitation of liquefied natural gas from the Perla 3X field, located in Falcón. Repsol's President, Antonio Brufau, stated that the development project would bring hydrocarbon production to as high as 1.2 billion cubic feet per day; the highest level in the world.