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Global Energy Advisory – 16th January 2015

Deals, Mergers & Acquisitions

• Mexico's state-run Pemex is in talks with the US Commerce Department to import 100,000 barrels per day of light crude to raise Mexico's gasoline production and boost its refineries. In return, Pemex would send its heavy oil to US Gulf Coast refineries. This would represent another step towards subtly easing the US ban on oil exports. Pemex’s proposal could have the benefit of reducing transportation costs and improve refining margins—at the same time maximizing refining potential in both countries.

• Egypt will seal a deal with Russia's Gazprom for the company to supply it with LNG shipments later this month. If successful, the Gazprom deal would be the second LNG import agreement since Egypt finalized a deal for the necessary import infrastructure in November. Egypt signed an agreement with Algeria for six LNG cargoes in late December.

• Venezuelan President Nicolas Maduro is seeking several billion dollars from Qatari lenders to fill a budget gap created by slumping oil prices. This follows similar announcements of deals Venezuela made in recent weeks—most notably, $20 billion in Chinese investment and a deal with Iran to finance housing for the poor.

• Malaysia’s Sona Petroleum Bhd has scrapped plans to buy a stake in two oil and gas blocks from London-listed oil exploration and production firm Salamander Energy Plc in the Gulf of Thailand for $280 million.

Regulations & Litigation

• Brazil’s state-run Petrobras has recently imposed a temporary ban on EPC majors engaged in kickback scandals. In a regulatory filing, Petrobras disclosed a blacklist of 23 companies that includes Brazil’s biggest contractors Odebrecht SA, Camargo Correa SA and Andrade Gutierrez SA. The measure aims to protect the state-run company’s image and finances, according to the Petrobras. OAS, one of the EPC majors in the scheme, has missed bond payments, prompting credit agencies to cut its rating.

• Eight US Senators introduced legislation that would accelerate the approval process for LNG exports to countries that do not have free trade agreements with the US. It specifically requires the Secretary of Energy to make a decision on any LNG export application within 45 days after the environmental review document for the project is published. Three key components of the LNG Permitting Certainty and Transparency Act are: (1) The Secretary of Energy will be required to make a decision on any LNG export application within 45 days from the time FERC or the US Maritime Administration publishes the environmental review document for a project; (2) The bill would provide an applicant with expedited judicial review if the Energy Secretary does not act within 45 days or if the project is challenged on legal grounds; (3) The act would require LNG exporters to disclose the country or countries to which LNG has been exported and mandate that the Energy Secretary make this information publicly available.

• The Indonesian Trade Ministry has issued a new regulation to enforce tighter control of oil and gas imports and exports as part of the government’s program to eliminate so-called mafia practices in the country’s oil and gas business. Under the new regulation, companies involved in oil and gas export and import activities should be registered with the ministry and will be subject to verification by an independent surveyor to be able to obtain export and import permits. The newly established Oil and Gas Management Reform Team recently recommended the government dismantle the authority given to Pertamina Energy Trading Ltd. (Petral) to handle the country’s oil and gas trade. The company is allowed to operate but is no longer allowed to handle oil and gas exports and imports. Petral has been accused of being an instrument of cartel-like operations in the oil and gas sector.

Discovery & Development

• Statoil has won approval from Norway’s Petroleum Safety Authority (PSA) to drill an exploration well named Knappen in the North Sea. The company is the operator for exploration licences PL 072 D in block 16/7 in the Central North Sea. Drilling of well 16/7-11 will begin in February and in the event of a discovery a sidetrack will also be drilled and the well will be production tested. The well will be drilled by the Songa Trym, which had been temporarily suspended by Statoil last year. The company had issued a postponement period for a number of contracts due to higher costs and low profitability. However the Norwegian company announced shortly after it would resume operations this month. It had been temporarily out of use at a suspension rate of $279,000 per day.

• Serbia’s NIS oil company (majority owned by Gazprom) will invest $384 million this year in new projects, including refinery modernization. NIS has two refineries in Serbia and produces 1.7 million tons of oil equivalent per year, operating fields in Serbia, Angola and Bosnia. Gazprom Neft owns 56.15% of NIS, while 29.88% is owned by the Serbian government.

• Lion Petroleum, a wholly owned Kenyan subsidiary of Canadian Taipan Resources, has begun drilling at its Badada-1 well in Block 2B of Kenya’s Mandera Basin, despite the slump in oil prices. We continue to maintain that Kenya is one of the venues that will withstand the oil price slump and prove to be a highly valuable strategic long-term play for investors.

• Canadian pipeline giant Enbridge will build, own and operate a new crude oil pipeline in the Gulf of Mexico, which will connect the planned Hess-operated Stampede development to an existing third-party pipeline system. The pipeline will cost an estimated $130 million and is scheduled to be online in 2018. The Stampede development, which the pipeline will service, connects the Knotty Head and Pony developments in the US Gulf of Mexico’s Green Canyon area. The pipeline will be approximately 25 kilometers long and it will be approximately 3,500 feet below water. We are still not privy to its potential capacity.

• UK-listed Afren’s shares have slumped after announcing that there are no proven or probably reserves at its Barda Rash oilfield in Iraqi Kurdistan. The company has essentially scratched 190 million barrels of oil of gross proven plus probable reserves from Barda Rash. It also had to cut Barda Rash contingent resources to around 250 mmbbls from 1,243 mmbbls.

Company Updates

• Texas oil firm WBH Energy announced it was filing for bankruptcy last week, and this is likely just the first of other small players to come in response to lower oil prices. WBH Energy cited debt of between $10 and $50 million and a lender who refused to advance the company more money as the principal reasons for its decision. Over 20,000 small and midsize companies drive the oil and gas production boom in the US, producing in excess of 75% of the US's O&G output, according to the Manhattan Institute for Policy Research's February 2014 Power and Growth Initiative Report.

• Vietnamese oil and gas giant PetroVietnam is about to shrink production or even cease exploration at four of its oil fields as their expenses have already surpassed prices. The company announced it will lower or possibly halt exploitation of oil fields where expenses are greater than oil prices to avoid losses. The average extraction cost of PetroVietnam is $30-37 a barrel, whereas at four of its oil fields the figure is now more than $60 a barrel.

Politics, Geopolitics & Conflict

• The situation in eastern Ukraine is set to intensify once again as peace talks between Russia and Ukraine planned for 15 January were suspended. The talks were set to be held with the presidents of Germany and France in Kazakhstan. For the oil and gas industry, the situation is as bleak as it is for all of eastern Ukraine. Right before the New Year, Ukrainian Parliament passed a bill that will be the death of independent gas producers in Ukraine. At the government’s suggestion—and under pressure from Prime Minister Arseniy Yatsenyuk, parliament adopted a tax reform packaged that will keep the double taxation on natural gas extraction for private companies in place permanently.

• Croatian presidential elections turned out to be a nod to the nationalist Croatian Democratic Union (HDZ) with Grabar-Kitarovic winning the vote against the centre-left candidate. Parliamentary elections will be held in the fourth quarter of this year, and the presidential victory for HDZ could herald gains at parliamentary elections at the expense of the ruling centre-left coalition.

• Turkey is standing firm on its quest to explore for oil and gas off Cyprus with its Barbaros research vessel, despite Cyprus’ warnings. The Barbaros has been conducting surveys in a region in the eastern Mediterranean claimed by Cyprus under international conventions. Turkey does not acknowledge Cyprus's jurisdiction in the area. Peace talks have already been suspended over the oil and gas exploration question, and Cyprus is now saying that there will be no resumption of talks until the Barbaros is withdrawn from the area.

• We are closely monitoring key flashpoints in the conflict with IS in Syria and Iraq. Of particular interest are developments in Syria’s Deir Ez Zor city, in the wider district of the same name—a key oil district. IS controls this city; however, tribes from the outlying villages have begun to revolt in earnest, ambushing and otherwise interrupting IS operations. This is significant as IS’ capacity to hold these locations depends on the alliances it creates with tribes who give its smuggling operations safe passage because they depend themselves on the revenues for survival. IS has overstepped its hand with atrocities, however, and the tribes are finally taking action against the beheadings, executions, rapes and kidnappings. A key Deir Ez Zor official of IS (a deputy emir) was found beheaded last week, his body showing signs of torture. This could be the work of tribes seeking to change the balance of power against IS or it could just as easily be IS, which has been purging its own ranks in recent days.

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