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Global Energy Advisory 1st August

Regulatory Alerts

A court in the Netherlands has ordered Russia to pay more than $50 billion in damages to the former shareholders of the now-defunct Yukos oil corporation, which was torn apart in a dubious bankruptcy case almost 10 years ago. The Permanent Court of Arbitration in The Hague said it would award GML group just under half of its $114-billion claim to help compensate for losses incurred when the Kremlin expropriated Yukos in 2005. Yukos was slapped with federal tax debts and sold at bankruptcy auctions a year later, while its founder, Mikhail Khodorkovsky,  was sentenced in 2005 to 10 years in prison on charges of tax evasion and fraud. Russia will appeal the Dutch court’s ruling.

In the US, a Pennsylvania appeals court issued a split decision on the state’s oil and gas law, rejecting some challenges to the 2012 update to the drilling rules but affirming the rights of municipalities to regulate the location of oil and gas development. State regulators can be required to notify public water suppliers but not private water well owners of drilling-related spills. It also upheld the law’s limits on what doctors can disclose about proprietary chemicals used in the gas extraction process and its endorsement of public utilities’ ability to use eminent domain to take property for gas storage facilities.

A Texas court ordered US Marshalls to seize $100 million in Kurdish oil cargo from a tanker off the coast of Galveston, Texas. However, the tanker is sitting too far offshore Texas to be in Texas’ jurisdiction. This oil will be sold on the international market elsewhere and is not likely to end up being seized. Washington has always been against the Kurds’ bid for independence through the unilateral export of oil, but it is also not fully committed to stopping the Kurds from achieving this goal. The bottom line is that the Kurds have now taken control of Iraq’s disputed oil-rich province of Kirkuk, which borders the official Iraqi Kurdish territory, and this can only move forward now. The intensifying conflict in Iraq also makes Washington’s concerns about the Kurds less significant at this point. For investors in companies operating in Iraqi Kurdistan, we see some challenges but more opportunity than anything at this point.

Discovery & Development

Shell has made a major oil discovery in the deepwaters of the Gulf of Mexico, approximately 75 miles offshore, predicting that the new find—the Rydberg discovery--holds 100 million barrels of oil equivalent. Rydberg follows to other successful wells for Shell in the Norphlet area, in the eastern Gulf of Mexico: Appomattox and Vicksburg. Combined, and if proven, Shell will now hold more than 700 million barrels of oil equivalent in this area. Shell partnered with Ecopetrol America Inc. of Colombia and Nexen, a Canadian oil and gas company, to drill the Rydberg well.

The British government plans to make more land available for licensing for oil and natural gas exploration in what will be the first expansion since 2008. This could pave the way for fracking across more than half of Britain. Up for grabs will be drilling rights for more than 37,000 square miles.

Canadian explorer Africa Oil Corp. and partner Tullow Oil are rumored to be considering a third partner to help develop oil finds in northern Kenya—specifically in two blocks in the South Lokichar Basin, which contain an estimated combined 600 million barrels. Kenya, Uganda and Rwanda have invited bids for a single consultant to oversee a feasibility study and initial design for the construction of a 1,300-kilometre pipeline to transport crude to the Kenyan coast. Kenya is likely to pass a revised petroleum law in October 2014 that is expected to provide the framework for oil revenue management and could increase the government's take from oil operations and enforce more local content initiatives.

Deals, Mergers & Acquisitions

•    Breitburn Energy Partners said it would acquire QR Energy LP in an equity-and-cash deal valued at nearly $2 billion. The combined company will become the largest, oil-weighted upstream oil and gas master limited partnership, with current average daily production of about 57,300 barrels of oil equivalent a day

•    Venezuela’s state-run energy firm Petróleos de Venezuela (Pdvsa) reported on 25 July 2014 that it would analyze offers from interested parties to buy its United States-based subsidiary Citgo. Reportedly, the government has received offers from Goldman Sachs, JP Morgan, and Deutsche Bank, ranging from $10 to $15 billion. Citgo’s assets include three refineries with a total capacity of 750,000 barrels per day, 48 storage facilities for gas and other derivatives, three wholly owned pipelines and stakes in six other pipelines in the United States

•    India's state-owned Oil & Natural Gas Corp and Oil India Ltd have submitted a joint bid for around $1.5 billion for a stake in Murphy Oil Corp's Malaysian oil and gas assets

•    US-based Apache Corp is planning to sell its interests in two LNG projects—Wheatstone LNG in Australia and Kitimat LNG in Canada, reportedly under pressure from Jana Partners, activist-investor group

•    More broadly, we are looking closely at China, which is likely to invest further in infrastructure and energy assets owned by the Italian and other eurozone governments

Political, Geopolitical & Conflict Updates

In Libya, a massive oil depot caught fire earlier this week as a result of clashes for control of the international airport in the capital city, Tripoli. The clashes involve rival militia groups. This battle has been raging for two weeks now, while the airport has since been nominally under the control of militias from Misrata. The oil depot, which is now ablaze, threatens to ignite nearby liquid gas storages. Clashes between militias and the Libyan armed forces also continue in the eastern city of Benghazi, with around 40 dead as of the time of writing. We recommend full evacuation of Libya, even for essential personnel, though we caution that evacuation options are becoming increasingly limited.

In Argentina, our partners at Southern Pulse caution about the implications of an indefinite strike by energy workers in Neuguen province over the coming months. The government has made efforts to attract investment into the Vaca Muerta shale and gas formation in this area, but strikes are likely to set these efforts back.

While the big geopolitical issue over Ukraine is EU and US sanctions against Russia, what we are looking more closely at is the potential for reforming Ukraine’s gas sector. This will be extremely challenging and can only be done by an external actor at this point due to the collective vested interests of a group of powerful energy stakeholders who will thwart any real reform efforts.

As we have noted before, Bulgaria could very well be the next Ukraine, and we are closely watching upcoming elections and the potential for a renewed political crisis, of which energy and banking issues will play the key roles. The resignation of Bulgarian Prime Minister Plamen Oresharski and his government was expected, but what comes next is not so certain. Parliament will now be formally dissolved on August 6 and President Rosen Plevneliev will appoint a caretaker government to steer Bulgaria until fall elections, which the center-right GERB party is tipped to win.

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