Global Energy Advisory 11th March 2016

Politics, Geopolitics & Conflict

• For the Iraqi Kurds, as we've stated numerous times over the past several years, an independence bid was always really contingent on whether they could get control of oil-rich Kirkuk. Kirkuk lies in the disputed belt between territory controlled by the central Iraqi government and territory controlled by the Kurdistan Regional Government (KRG). Right now, it's a flashpoint in the battle against the Islamic State (ISIS). But the ISIS encroachment on Kirkuk, while it poses a security threat to the KRG right on its border, also is an opportunity for the KRG. Without the Kurdish Peshmerga forces, Baghdad would have lost Kirkuk to the Islamic State long ago. Now the Kurds are taking advantage of the situation in earnest to bring Kirkuk-home to 10 percent of Iraq's oil reserves--into the KRG fold. Earlier this week, KRG authorities came out with a show of support for Kirkuk's plan to create its own oil company, which would be detached from the Iraqi state-run North Oil Company (NOC). Kirkuk and the Kurds are falling back on Iraqi constitution legal ease that apparently allows for the establishment of a separate oil company if local production exceeds 100,000 bpd, and it's already exceeded 150,000 bpd. The local government of Kirkuk wants more control over its own oil, and the Kurds have agreed to deposit $10 million a month into a Kirkuk account in this new deal. The is the Kurds' second step into Kirkuk-the first was the necessity of its forces to hold back ISIS, the second will be through the Kirkuk Oil Co.

• In Iraq, some 60 people have been killed in a suicide fuel tanker bombing at a checkpoint leading into al-Hillah, a bit over 100 kilometers south of Baghdad. Responsibility for the attack has been claimed by ISIS and the attack represents the largest in Babil province in recent years. This foray south is meant to divide Iraqi security forces geographically.

• Russia is facing threats in its North Caucasus region over its airstrikes in Syria in support of Assad. The ISIS branch in the Russian North Caucasus has released a video promising retaliatory attacks in the region.

• It may turn out to be a very short stint in the Ukrainian prime minister's chair for Arseniy Yatsenyuk, who is expected to resign as early as next week. His resignation could result in the release by the International Monetary Fund (IMF) of a $17.5-billion bailout tranche. In the meantime, Turkey is doing its best to further provoke Russia by dipping its toes into Ukraine. Over the past week, Ankara has come out with statements slamming Russia's aggressive activities in both Syria and Ukraine, and on the business front, it's reportedly considering acquiring Ukraine's coal mines. The two countries are also discussing joint projects to deliver Caspian and Iranian gas to Ukraine. As a side note, we also expect a great deal more positive local coverage of Turkish Prime Minister Recep Tayyip Erdogan now that he has forced the state takeover of Turkey's most widely read daily newspaper, Zaman, which had long been a tool controlled by his ally-turned-enemy, the Gulen Movement. This is just the latest in Erdogan's overstepping, and it cannot be sustained forever.

Discovery & Development

• The government of South Africa has said that shale gas exploration will launch in the next 12 months-finally (it's been a very long road here). The Karoo region and the Valley of Desolation near Graaf Reinet in the Eastern Cape have been earmarked for exploration. South Africa's Karoo region, which is a semi-desert area in the Eastern Cape, is believed to hold at least 485 trillion cubic feet of shale gas. Environmental concerns and questions of economic feasibility have stalled development. A recent study commissioned by Shell said extracting 50 trillion cubic feet or 12.8 percent of potential reserves, would add $20 billion to the South African economy annually for the next 25 years.

• Russian Rosneft has begun drilling an exploratory well offshore Vietnam in the Nam Con Son basin. This is the first time it will be the operator in international waters. Rosneft owns 35 percent of the PSC for Block 6.1 here. Last year, the block reached total production of 300 million barrels. This block now provides 12 percent of Vietnam's energy needs. The expected recoverable reserves of natural gas are estimated at 12.6 billion cubic meters with 0.6 million tons of gas condensate.

Regulations & Litigation

• At the same time, Brazilian authorities have approved new stimulus measures to boost oil and gas exploration, hoping to bring in $120 billion in investment. This will include extending the term of concession contracts signed during Round Zero, which would also require companies to make additional investments aimed at boosting production. The bill will also mean that concessions for fields where there has been no production for more than six months (or where operations won't be resumed in the next 12 months) would be relinquished.

• The Kurdistan Regional Government (KRG) has made a payment to UAE-based Dana Gas in line with a UK court order from late last year. The KRG paid Dana and its partners $24 million in arrears. In total, the court has ordered the KRG to pay Dana and its partners $100 million in arrears. Partners include Crescent Petroleum, Austria's OMV, MOL of Hungary and Germany's RWE.

• Malaysia's state-owned Petronas is threatening to withdraw from a major natural gas project in Canada over new climate change rules. Reports say the Petronas has given the Canadian government until the end of March to either approve the project as is or they will pull out. They've already invested some $12 billion and are not keen on any more hurdles. The project was greenlighted in November 2014 and has received a favorable assessment from the Canadian Environmental Assessment Agency last month. However, in January the new federal Liberal government said it was boosting restrictions in the form of tougher environmental reviews said to be in line with new international commitments to reduce greenhouse gas emissions.

• India has approved a new oil and gas exploration policy, with new definitions of pricing norms for both new and existing discoveries in more challenging exploration areas. The new policy will be based on a revenue-sharing model, while the existing policy was based on cost and output norms. The policy is meant to simplify the rules and present price incentives. Companies will have more freedom to set the price of gas from new discoveries and existing finds not yet in production. India's irregular policies have been foreign investors away from the sector traditionally. High taxes and domestic price controls have also de-incentivized plays here.

• Nigerian oil workers nationwide went on strike Wednesday, suspending the strike a day later following government talks with trade unions. This comes on the heels of the government's decision to break up the state-run Nigerian National Petroleum Corporation (NNPC) into multiple separate companies. Unions are miffed that they were not consulting on the company split and what this would mean for the workers, who fear mass layoffs.

Deals, Mergers & Acquisitions

• Algerian state-owned Sonatrach plans to invest $3.2 billion in pipelines and other oil and gas infrastructure over the next four years, giving a major boost to the country's natural gas transport capacity. This should include some 1,650 kilometers of pipeline and six gas compression and pumping stations by 2020. The infrastructure plans go along with Algeria's plans to increase gas production from existing and new fields. By 2018, new production from seven fields is slated to come online.

Tenders & Auctions

• Seven companies have bid on Uganda's six exploration blocks in the Albertine Graben rift basin, near the border with Congo. The winners of the bids should see exploration licenses awarded by the end of June this year. The bidders include: Armour Energy, WalterSmithPetroman Oil, Oranto Petroleum, Niger Delta Petroleum Resources, Rift Energy, Glint Energy and Swala Energy. The six blocks cover about 3,000 square kilometers, and word is that production could feasibly launch by 2018. The blocks are estimated to hold some 6 billion barrels.