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Global Energy Advisory 1st July 2016

Putin, Erdogan

Politics, Geopolitics & Conflict

• Anti-Russian sanctions have taken their toll on the U.S. and European economies as well, the U.S. State Department admits. Nonetheless, U.S. Deputy Secretary of State Antony Blinken says that through sanctions on Russia we have “demonstrated that we are willing to inflict some pain on ourselves in order to sustain and advance basic principles …”, largely referring to Ukraine. We will note, however, that while the Russian annexation of Crimea elicited a necessary response in the form of sanctions, Ukraine does enough to destroy itself with a level of corruption that is hard to rival, even in the ‘stans’. At the same time, the sanctions have been fairly unimpressive. Due to the sanctions, the Russian economy contracted by 1 to 1.5 percent more than it would have otherwise done last year. The Russian economy shrank 4 percent in total last year. It’s not exactly a hard blow. Europe probably suffers more, and Putin is punishing them—recently extending an embargo on EU food imports through December next year. It’s a high price to pay for something that doesn’t really work and is only in place to save face.

• Turkey is reeling from yet another bloody terrorist attack in Istanbul—this time at the international airport, where three terrorists (likely ISIS) exploded a bomb first outside in the parking lot and then inside the international terminal and the domestic terminal in a coordinated effort. They also opened fire with AK47s before police responded with fire and they blew themselves up. The death count was over 40 at the time of writing, with over 100 wounded and the death count expected to rise. Erdogan—stronger than ever—will not be able to continue to build his strength if he cannot demonstrate that his security forces can’t actually provide security. The tourists already are of this sentiment—and Turkey relies heavily on its tourism industry. It’s likely no coincidence that this latest attack comes as Turkey is making peace with Israel with energy deals in mind. Istanbul is not safe, and as far back as several months ago we were advising clients to steer clear of the international airport, which has increasingly become a hub between Europe and the U.S.

Discovery & Development

• U.S. explorer Apache Corporation has agreed to a five-year extension of its Khalda-2 drilling license in Egypt’s Western Desert. Apache expects to invest around $40 million in this and will drill 10 new wells. In Egypt, Apache operates through its joint venture with the Egyptian General Petroleum Company—Khalda Petroleum Company.

• Nicaragua’s Sandino Basin is getting a boost with an agreement between its state-run Petronic and Union Oil and Gas (UOGG) for four offshore oil and gas blocks. The deal still requires final government approval. Union has pursued rapid growth in Peru, Paraguay, Uruguay and Bolivia. This is its first foray into Nicaragua. Norway’s Statoil is operating in the same area.

• BP will ship its first LNG cargo through the new, expanded Panama Canal, which just opened its new shipping lane allowing for larger vessels. The BP cargo will launch in late July, coming from Trinidad and Tobago on the 138,000 cubic-meter British Merchant tanker. Destination is unknown.

Deals, Mergers & Acquisitions

• The biggest merger and acquisition news this week is definitely coming out of the United Arab Emirates, where Abu Dhabi has proposed the merger of its two largest sovereign investment funds. This merger, it is believed, would turn the new fund into a force responsible for more oil than Libya. It also adds to a recent spate of opinions by various talking heads that the Gulf states might be better off without OPEC. This would certainly be a step in that direction. Right now, Abu Dhabi controls about 6 percent of global crude oil reserves. The merger would bring together Mubadala Development Co. and the International Petroleum Investment Co—combining some $135 billion in assets.

• French Total SA will invest over $2 billion into the development of the Al-Shaheen oilfield in Qatar—the largest in the Gulf country—after having won a 30 percent stake earlier this week to operate the field. The investment will span five years. Total’s operational control will begin in mid-July next year. State-owned Qatar Petroleum owns the other 70 percent of the project.

• Texas-based Tesoro Corp. has acquired a floundering oil refinery in southwestern North Dakota for $430 million from North Dakota-based MDU Resources and Indianapolis-based Calumet Specialty Products Partners. The refinery—the Dakota Prairie Refinery—just got off the ground selling fuel in 2015 but has lost $7.2 million in the first three months of this year alone, forcing its owners to shut down operational capacity to 70 percent.

• U.S. antitrust regulators have concluded the antitrust review of the pending merger transaction between FMC Technologies Inc. and France’s Technip. The deal is still subject to additional closing conditions, including the shareholder approval and antitrust reviews in other countries. This is a green light, however, from the U.S. antitrust regulators for this $13-billion merger.

• Canadian Vermilion Energy Inc. will acquire interests German production and exploration assets for about $47.9 million. The assets are in the North German Basin and are owned by Engie E&P Deutschland GmbH. The assets include both operated and non-operated interests in five oil- and three gas-producing fields, along with one exploration license and an oil pipeline network. Proved plus probable reserves are estimated at 9.2 MMboe.

• Riverstone Investment Group LLC will acquire 50 percent of the Utopia pipeline in Ohio, in a 50-50 partnership with Kinder Morgan Inc. This pipeline will be 215 miles long and will connect up with a Kinder Morgan pipeline and associated facilities. It will transport ethane and ethane-propane to Canadian petrochemical companies. Riverstone agreed to an up-front cash payment reimbursing KMI for its 50 percent share. It will also fund its share of future capital expenditures.

• Canadian Murphy Oil Corporation has completed the sale of Syncrude Canada Ltd. to Suncor Energy Inc. for US$741 million. In this spinoff, Murphy will divest its 5 percent non-operated stake in the Syncrude oil sands property in Albert, which produced an average of 15,600 barrels of oil equivalent in the first quarter of this year.

• The government of emerging East African oil giant Kenya will acquire a 50 percent stake in Kenya Petroleum Refineries Ltd (KPRL) from Essar Energy Overseas Ltd. Price has not been disclosed. Essar is withdrawing completely from KPRL, so the deal will the give the government full control.

• Israeli Harel Insurance Investments & Finance is in talks to buy up to 4 percent of the Tamar natural-gas field from Texas-based Noble Energy, which must reduce its stake in the field over ‘monopoly’ concerns on Israeli gas. Tamar, in the Mediterranean, was discovered in 2009. The share is expected to be worth up to $400 million.

Auctions & Tenders

• Brazil is said to be gearing up for another auction of its lucrative pre-salt blocks, which were taken off the table in January because of low oil prices. We’ll keep you posted as more information comes in.

• Argentina's YPF is seeking buyers for its interests in six blocks in the southern province of Rio Negro, as the state-run company refocuses on its more profitable assets elsewhere (read: Vaca Muerta shale). YPF is offering the blocks to 30 small and medium-sized companies with operations in Argentina, and expects to close sales by the middle of July. These assets represent only about 1 percent of YPF’s production.

• India will give oilfield services providers $27 billion in new contracts after restarting projects that had been stalled due to low oil prices. In March, the government announced pricing freedom for natural gas from deep-sea fields that just went into production. Work at four offshore oil and gas blocks will restart soon.

• Egyptian Natural Gas Holding Company (EGAS) will unveil a global tender in the coming days for a third gasification vessel with a 750-million-cubic-feet per day capacity.

• Ghana's authorities have initiated processes to enable onshore oil exploration activities to begin in the Volta Basin. Based on the geological survey carried out in the Volta Basin it has showed the potential of oil and gas. The Basin covers 40 percent of the land mass of the country and stretches over five regions - Eastern, Volta, Brong-Ahafo, Ashanti and Northern. The Ghana National Petroleum Corporation (GNPC) has applied for environmental permit for seismic survey be conducted in the area to confirm the presence of oil and gas deposits for commercial drilling.

Money Matters

• Indian Essar Oil has paid $500 million in back debt to Iran for oil during the sanctions period. Essar has a 400,000 bpd refinery that was in the red with Iran for $3 billion that went unpaid because Iran was cut off from banking channels. Indian refiners have been settling oil debts in euros via State Bank of India and Germany-based bank Europaeisch-Iranische Handelsbank AG (EIH).

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