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Global Energy Advisory – 14th November 2014

Politics, Geopolitics and Conflict

No Respite for Libyan Oil

Last week, gunmen took control of Libya’s major El Sharara oilfield. The field was being guarded by a militia group from Zintan when a rival militia currently largely in control of the capital, Tripoli, seized it in a bloody fight that left at least 13 people dead. Right now in Libya we are looking at two parallel governments supported by a variety of tribal militias, also warring with each other. The seizure forced a shutdown in production at the field, which at its height was pumping 200,000 bpd. The field is operated by the Libyan state-run National Oil Corp (NOC), control over which is tenuous at best, in partnership with Spanish Repsol. On Wednesday this week, there was an attempt to restart production, but this failed due to apparent blockage of the pipeline that feeds El Sharara oil to the port of Zawiya. This port lies in the territory of Zintan, home to the tribe that was guarding the oilfield before its seizure by a rival militia group. The Zintan tribal militia are allied with Prime Minister Abdullah al-Thinni—one of the latest in a series of short-lived prime ministers-whose Cabinet has been forced to relocate to the country’s east as rival militias control Tripoli. Italy’s Eni is also facing major obstacles here as the field it operations, El Feel, next door also remains shutdown entirely.

At the same time, a car bomb exploded outside the Egyptian embassy in Tripoli this week, causing damage to the building but no human casualties. A second, unexploded car bomb was discovered outside the UAE embassy in Tripoli.

We expect a significant uptick in violence in Libya as the power struggle continues between rival militias supporting the Al-Thinni cabinet in the eastern city of Tobruk (the group with backing from the West and its Arab allies, hence the bombings) and those supporting the rival government in Tripoli.

Discovery & Development

Tanzania in Focus

Earlier this month a political dispute over natural gas contracts led to the arrest of two state officials, sending the country’s burgeoning natural gas prospects into chaos—along with billions in foreign investment from major players including ExxonMobil, Statoil, BG Group and Ophir. Tanzanian authorities have arrested two senior officials at the state-owned entity that partners with these gas giants for their refusal to comply with demands from lawmakers to release details of their combined 26 production sharing agreements. The two arrested include James Andelile, acting director general of Tanzania Petroleum Development Corp (TPDC), and TPDC board chairman Michael Mwanda. The two were released hours later, after the move sparked a political row with Chama Cha Mapinduzi (CCM), the ruling party that has controlled the country for 37 years.

At stake is an estimated 50 trillion cubic feet of natural gas offshore, which could generate as much as $6 billion a year for Tanzania over the next couple of decades.

Tanzania stands to become a major gas export giant in Africa, and the public is increasing pressure to ensure that PSAs are in the national interest. The overriding sentiment is that TPDC is too green to be able to effectively negotiate with these large energy companies to the national interest. Thus, the belief is that these companies are taking advantage of Tanzania.

Furthering the tenuous nature of Tanzania’s rich natural gas scene are elections that will take place in 2015. In the current atmosphere, and with the recent arrests, key final investment decisions could be postponed, delaying Tanzania’s emergence on the natural gas scene. There is an immense amount of regional pressure for Tanzania to launch production, particularly with neighbor Mozambique planning to start exports in 2018.

BG (along with Ophir Energy) is at the forefront of exploration in Tanzania. In March, BG announced plans to build a $10 billion LNG terminal with Statoil in Tanzania. However, the country is still finalizing its natural gas policy and the debate continues over safeguards to be put in place here.

In late October, TPDC announced that it was in the final stages of evaluating five bids submitted by CNOOC, RAK Gas, ExxonMobil/Statoil, Mubadala and Gazprom in May and would declare the winners before the end of the year. Only one block is currently competitive with both ExxonMobil/Statoil and CNOCC bidding for Block 4/3A. We are concerned that the arrests could also throw a wrench into this development.

In the meantime, draft Local Content and Petroleum policies crafted earlier this year are expected to be submitted to parliament sometime this month. This Bill will provide cornerstone provisions for the exploitation of natural gas discoveries. A Natural Gas Utilisation Master Plan; Petroleum Bill and legislation to restructure TPDC are expected to follow, increasing the tensions around the arrest and bringing into question the timing.

Other Discovery and Development Alerts

• Chevron's Bangladesh unit has launched natural gas production from the Bibiyana Expansion Project in the country’s northeast. The project included an expansion of the existing gas plant to process greater volumes from the Bibiyana field, additional development wells and an enhanced gas liquids recovery unit. The project could increase Chevron’s Bangladesh production capacity from 300 million cubic feet per day to 1.4 billion cubic feet per day. Natural gas liquid production capacity could also more than double from 4,000 barrels per day to 9,000 barrels per day.

• Mexico’s state-owned Pemex has announced plans for an LNG export terminal on the Pacific coast of Oaxaca and is seeking private funds to that end. The plant will cost an estimated $6 billion and would be the first of its kind in Mexico. The export terminal would be near Salina Cruz and would have access to existing gas fields in the southern part of the Gulf of Mexico. Part of the plan would be to ship five million tons of LNG to Asian markets annually.

• Romanian Prime Minister Victor Ponta has come out publicly to say that it appears that shale reserves do not exist in the country, after significant exploration efforts. The administration has also estimated Romania could potentially hold 51 trillion cubic feet of shale gas, which would cover domestic demand for more than a century. Earlier this year, U.S. energy major Chevron Corp finalised exploration works at a well in the eastern Romanian village of Pungesti, after repeatedly postponing operations because of protests from local residents. Chevron, the first company to begin exploring for shale gas in Romania, has said it was analyzing data collected from Pungesti and that it aimed to drill more wells in the area. It also has rights for three license blocks near the Black Sea. However, we caution readers to note the political undertones of this public statement by Ponta. Right now we are seeing a political battle unfolding in Romania, which pits long-time President Traian Basescu and his oligarchs against Prime Minister Viktor Ponta, and his “local barons”. Ponta, as others before him, attempted to have Basescu impeached last year, only several months into his prime ministerial term. The two are now pitting oligarch against oligarch—most of whom base their financial favors strictly on opportunism rather than on political ideology. Romania’s shale reserves—or potential shale reserves—will be caught up in this battle.

Legislative Updates

• Anglo-Australian BHP Billiton has announced plans to export ultralight oil from the Eagle Ford shale in the US. The company says it has agreed to sell some 650,000 barrels of ultralight sweet oil from Texas to Swiss trader Vitol for around $50 million. This is all being done without permission from Washington and journalists and experts are struggling with determining whether this effectively violates the US ban on crude exports. Again, as we have noted before, such exports are not explicitly banned: they are not raw crude, or unrefined crude, rather lightly processed. This is the loophole. In July, two other Texas-based companies were allowed to export lightly refined oil. These shipments, however, will be used to make the case for lifting the ban on crude exports, and we can expect to see more very light refining of crude to get past the ban.

• Oil drilling company Layne Cristensen Co. will pay $5.1 million to settle allegations from the US Securities and Exchange Commission (SEC) that it handed out more than $1 million in bribes to government officials in five African countries. According to the SEC, the company received about $3.9 million in unlawful benefits between 2005 and 2010, mostly from bribing officials in Mali, Guinea and the Democratic Republic of Congo (DRC) to reduce tax liability and avoid penalties for delinquent payment. The company self-reported potential violations of the Foreign Corrupt Practices Act after an internal investigation.

• The US Chemical Safety Board is calling for substantial changes in the way oil refineries are regulated in California in its final regulatory report on the August 2012 fire at Chevron's refinery there, which caused the hospitalization of 15,000 area residents. The report proposes a more stringently regulated system to regulate the state's oil refineries that would include more proactive inspections and greater involvement of worker safety representatives to reduce the risks faced by refinery workers.

• The UK government has announced plans to create a sovereign wealth fund for shale exploration in the northern Bowland Basin. Britain's upper house of parliament will consider the issue next week. UK Energy Minister Edward Davey said the fund "was part of this government's broader strategy to strengthen our security of supply in a cost-effective way for generations." The fund will be created from revenues produced from the commercial production of shale gas.

Deals, Mergers & Acquisitions

• Plains All American Pipeline (PAA) has entered into an agreement with Occidental Petroleum Corp. for the purchase of Occidental's 50% interest in BridgeTex Pipeline Company LLC for $1.075 billion. The remaining 50% in the pipeline is owned by operator Magellan Midstream Partners, L.P. The BridgeTex pipeline is a new 300,000 barrel-per-day crude oil pipeline system that extends from Colorado City in West Texas to Texas City. This complements PAA's existing West Texas assets. Around 80% of the pipeline's capacity is committed to long-term contracts.

• Spain’s Repsol is eyeing new acquisitions as oil prices slump. The company has $10 billion to spend and foresees a deal in the next 2-3 months, possibly in the US, but potentially in other stable countries for oilfields already in production.

Licenses & Tenders

• The government of the United Kingdom has awarded 134 licenses to drill for oil and gas offshore, covering 252 blocks of seabed. The licenses went to 60 companies, including to BP, Shell, Centrica, BG, GDF Suez, Total and Statoil. The blocks include extensive licensing around mature fields in the central North Sea. A further group of applications will be decided later, after environmental assessments, but this first round is said to be one of the biggest in decades. Still, the industry is pressing the UK Treasury for a more attractive tax regime.

• More than half of the first round of funding associated with the European Union’s flagship energy infrastructure project will go to gas, despite the pressure by some interest groups to focus more strongly on electricity. The first round of funding is worth $1.6 billion, while around $800 million has so far been allocated: $490 million for gas and $318 million for electricity. The decision to boost gas at the expense of electricity highlights the anxiety over Russian gas politics and the Ukraine crisis. As such, most of the bulk of the funding will support gas infrastructure in the Baltics, Central Eastern and South Eastern Europe. The projects include terminals to ship LNG and pipelines designed to connect “energy islands” to EU-wide networks to reduce dependence on Russian gas.

• Calgary-based Touchtone Exploration Inc has signed an onshore exploration and production license with the government of Trinidad and Tobago for the Ortoire block, covering 44,731 gross acres. The license includes a 6-year minimum work program with technical reviews, 85 km of 2D seismic, and four wells. Capital requirements are estimated at $11 million. Touchstone is operator with an 80% interest, while Petroleum Co. of Trinidad & Tobago holds the remaining 20%.





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