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Oil Stabilizes On Small Crude Draw

Global Energy Advisory - 16th September 2016

Libya Refinery

Politics, Geopolitics & Conflict

• Libyan oil has been liberated for all intents and purposes. Despite what Western forces would have one think, General Haftar of the Libyan National Army (LNA) took over the country’s key ports and other oil and strategic facilities without much of a fight. This was a massive, well-coordinated military operation that included the infiltration of and confiscation of tribal loyalty from the Petroleum Facilities Guard (PFG), which had largely been holding Libyan oil exports hostage for over two years. Haftar and the LNA were linked to the eastern government in Tobruk/Benghazi, while the PFG was a militia force that had just recently struck a lucrative (and dubious) deal with the UN-backed Government of National Accord (GNA) in Tripoli. Haftar takes issue with the GNA because it encompasses radical Islamist forces that he’s been fighting for years. Let’s try some straight talk here because you’re not going to get it from the media. The West wanted the GNA because it could control it amid the eternal chaos of Libya; and this combination was good for oil deals. In one fell swoop, General Haftar has weakened the GNA beyond the point of any return. But he’s also handed over the oil ports to the legitimate National Oil Company (NOC) of Libya. That the NOC has recognized and accepted Haftar’s move to take over the ports means it will be very difficult to try to make any legitimate-seeming move to retake these ports. After all, they are now in the hands of the legitimate authorities, and they are already loading up for export. The GNA was a mistake, whether a purposeful one or not. But it’s already irrelevant. For the markets, it means that if all goes as planned (and so far it seems it will), we’ll get another 400,000 bpd of oil supplies flooding the market within four weeks, ramping up to 900,000-950,000 bpd by the end of the year. Our intelligence on the ground indicates that, at present at least, there are no indications that anyone is positioned to make a move against Haftar or the legitimate NOC.

• The Syrian armed forces claimed earlier this week that they have downed an Israeli F-16 fighter plane and an unmanned aerial vehicle in the Golan Heights. The Israeli Defense Force promptly denied the statement. The Syrians indeed launched two missiles against Israeli territory – both sides have confirmed this information. According to the Syrians, their actions came in response to Israeli activities in support of opposition groups. According to the IDF, the missile attack was unprovoked. Israeli warplanes regularly take advantage of the weakening of the Assad government and fly over Syrian airspace and the IDF also often intercepts and destroys arms shipments for the Syrian forces, worried they may be used for attacks against Israel. It was only a matter of time before the Syrian conflict would trickle into the ever-flammable Israeli-Arab conflict. Why should we be worried? Because openly involving the Israelis would be an indication that this conflict is treading on dangerously expansive ground of world war nature.

• The South China Sea is rich in oil and gas, but perhaps more importantly, it is a major trade route between Europe and Asia and a strategic gem for China. If you haven’t been monitoring developments here, you should be because this flashpoint is central to the future balance of global power. Most recently, China extended a verbal olive branch to Vietnam with regard to their territorial dispute in the South China Sea. China’s Prime Minister Li Keqiang spoke with his Vietnamese counterpart Nguyen Xuan Phuc about the issue during a visit of the Vietnamese PM in Beijing. It’s largely for show and to buy time by assuaging Vietnam’s fears. China has no intention of giving up its claims to most of the South China Sea, despite a Hague court ruling against it from earlier this year. Vietnam has been building up its armed forces in an attempt to deter China from using force to enforce its territorial claims. It’s not time yet for China to make its move here, but that time will come when the geopolitical settings are right; namely, when everyone else in engaged in a Middle East conflict so extensively that they have no additional resources to stop China.

Deals, Mergers & Acquisitions

• Total has exercised its pre-emption right to the acquisition of Chesapeake Energy’s assets in the Barnett shale, beating to them a private equity-backed firm, Saddle Resources. The French company will now be the single owner of the assets, after acquiring 25% in them back in 2009. The deal involves taking part in the settlement of Chesapeake’s contract with gas gathering and transportation provider Williams with a payment of $420 million plus another, of $138 million, to get out of three midstream contracts.

• Global Infrastructure Partners, the investment fund, has agreed to buy a 20% stake in Spanish utility Gas Natural from local oil major Repsol and financial conglomerate Criteria Caixa. The size of the deal is around $4.3 billion and will see the three companies manage the utility jointly.

• Qatar Petroleum may join Exxon and Eni in the Italian company’s Mozambique gas operations. Eni is looking to cut a 50% stake in its Mozambique gas operations, which include fields and an LNG export terminal. Exxon has already agreed to buy into the terminal, so Qatar petroleum will probably be looking at the production assets of the Italian company.

Tenders, Auctions & Contracts

• Gazprom is planning to enter coal in Greece via a joint venture with local Prometheus Gas, according to Russia’s Energy Minister Alexander Novak. Prometheus Gas in turn is a 50/50 joint venture between Gazprom and a Greek company, Copelouzos Group. In addition to this project, for the development of a lignite coal deposit, the Russian state gas giant is also negotiating several other energy projects in the Southern European country.

• The biggest energy company in Papua New Guinea, Oil Search, will buy a 40% stake in two local offshore license blocks from a subsidiary of China’s CNOOC. The two deepwater blocks cover an area of 9,627 sq miles and, according to Oil Search’s managing director, hold substantial reserves of natural gas. Exxon has also stated an intention to buy a 40% stake in them, while CNOOC will retain 20%.

Discovery & Development

• Hurricane Energy may revise up its reserve estimate for the Lancaster offshore field, located to the west of the Shetland Islands, after completing testing and logging at its pilot well there. The maximum daily flow from the well reached 6,600 barrels without lift, and 11,000 barrels with an electrical submersive pump. This implies that the field may hold more than the estimated 200 million barrels.

• Tokyo Gas has shipped the first load of LNG from the giant Gorgon LNG project off the Australian coast. The shipment totaled 70,000 tons of LNG from the Chevron-operated field and is the first delivery in a contract that stipulates Japan’s largest urban gas utility will buy 1.1 million tons of LNG every year from Chevron over a period of 25 years. The shipment comes soon after the restart of operation at Gorgon. The huge, $54-billion project was halted in April due to
• Statoil is drilling a geothermal well in Iceland in partnership with a local company. The purpose is to establish whether high-temperature water from deep underground reservoirs could be used for power generation. For the Norwegian company, geothermal energy is part of its foray into renewables in a bid to secure the long-term sustainability of its business. The well, at Reykjanes, will be the deepest geothermal well in the world, with a depth of 5 km, releasing water heated to between 400 and 500 degrees Celsius.

• Pemex has announced six new oil finds in the Gulf of Mexico, which can together yield some 20,000 barrels of crude daily. The combined reserves at the six fields are estimated at 200 million barrels of oil equivalent.

Company News

• Origin Energy, the Australian oil and gas company, has a new chief executive who has pledged to start his tenure with an attempt to reduce the company’s massive debt load, which to date stands at some 6.8 billion. Frank Calabria took the helm from Grant King after Origin reported a 41% slump in its FY 2015-2016 profits in August. Asset sales will be a big part of the new CEO’s efforts to tackle the debt pile, accumulated during the development of the Australia Pacific LNG project in Queensland.

Regulatory updates

• The $9.5-billion lawsuit brought against Chevron by a group of Ecuadorians will be heard by the Ontario Supreme Court, after the Supreme Court of Canada allowed it to proceed. This is the latest chapter in a decades-long legal battle between the plaintiffs – thousands of villagers claiming that Texaco, later bought by Chevron, contaminated their land and water – and the oil major. According to Chevron, Texaco paid what was due to the villagers years ago, in 1991, but an Ecuador court ruled in favor of the plaintiffs, setting the compensation at $9.5 billion. Since then, the group has been suing Chevron across the world and Canada is the latest stop. The lawyers for the plaintiffs will try to force Chevron to pay the compensation from its assets in Canada, although the company’s legal team insists Chevron’s Canadian business is a separate entity.

• SandRidge Energy has won court approval to exit bankruptcy proceedings after filing for Chapter 11 protection in May this year, suffocated by a debt load of $4.4 billion. According to the company, it should be out of bankruptcy within a month, after eliminating some $3.7 billion in pre-petition debt. After the implementation of the reorganization plan approved by the Houston court, SandRidge will have a value of $1-$1.3 billion.

• Ankara has given Gazprom the first go-ahead for the construction of the first leg of the Turkish Stream gas pipeline, which will pass under the Black Sea. The project was shelved when political tensions between the two countries escalated but now it’s back on track and it is moving fast.

• A U.S. directive aimed at regulating the treatment of cyberattacks has stipulated that companies – including oil and gas companies – that have been hacked are victims and will not be automatically held responsible for whatever wrongdoing the hackers uncover. The directive was signed by the President in July and is now in effect, laying out guidelines for the response of the federal government to cyberattacks.

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