Global Energy Advisory – 20th June 2014

Regulatory Alerts

Starting next year, the state of California will impose a 6.5-cent fee on every barrel of crude oil transported to the state via rail as part of new safety provisions. The same fee will be applied to every barrel of crude oil piped to refineries from inside the state. The state plans to raise $11 million from these fees during the first year. The funds will be allocated for oil spill prevention and emergency clean-up.

In the state of Oregon, Rep. Peter DeFazio-a senior Democrat on the House Transportation Committee--has unveiled a new proposal to replace the 18.4-cent-per-gallon federal gas tax with a per-barrel levy on oil companies. DeFazio's proposal is to swap an excises tax on gasoline with a more hidden consumption tax. Under the proposal, the per-barrel oil tax, which would be initially set at $6.75, would increase every year to account for inflation and improvements in vehicle mileage. The diesel fee would also be increased.

Kazakhstan-home to three giant oil fields: Tengiz, Karachaganak and Kashagan--has announced that foreign investors outside the oil industry will be exempt from paying land and corporate tax for 10 years should further increase foreign investment in areas such as mining, gas and agriculture, and thus help diversify the economy and reduce its dependence on the oil and gas sector.

Discoveries & Development

Hungary's MOL oil and gas group has announced a significant oil discovery in Pakistan, in the Ghauri X-1 well in the Punjab province. According to MOL, which partly owns the Ghauri Joint Venture (GJV) here, the total test flow rate was 5,000 barrels per day. MOL estimates 22 million barrels of reserves in place here. Production is expected as soon as June/July 2014. The joint venture comprises Mari Petroleum Company with 35% working interest as operator, Pakistan Petroleum Limited (PPL) and MOL with 35% and 30% working interests.

Tanzania's political opposition has refused to take part in a rewrite of the country's constitution that would turn Tanzania into a natural gas exporter. This constitutional revision is necessary for the long-term plans of Royal Dutch Shell, ExxonMobil, Statoil, BG Group, and Ophir. The new legislation continues to be delayed, which also means that these energy giants are withholding planned multimillion-dollar investments for developing Tanzania's hydrocarbons in the Zanzibar archipelago.

Geopolitical Updates & Alerts

Horn of Africa

Somali-based al-Shabaab is threatening security across most of the Horn of Africa, expanding its targets, with a noticeable uptick in attacks in neighboring Kenya. The UK Foreign Office is warning of potential further attacks on otherwise relatively peaceful Djibouti, where French and US military personnel are stationed. In May, two suicide bombers blew themselves up in a restaurant in Djibouti, killing one additional person. Djibouti is home to one of the largest US military bases in Africa. For now, Kenya is bearing the brunt of al-Shabaab's retaliation. Last week, gunmen killed around 50 people in an attack in Lamu county-home of the starting point of one of the largest African oil and gas infrastructure projects (LAPSETT). The attackers, believed to be part of al-Shabaab (but not confirmed), stole firearms from a police station and raided a bank and local hotels. We see an uptick in violence along the coast/port areas as banditry increases in tandem with al-Shabaab attacks. This particular attack may not have been the work of al-Shabaab, but the two situations feed on each other.

At the same time, the breakaway enclave of Somaliland is planning to deploy special forces to protect foreign oil companies, in a move that could have severe implications for the region. Experts from the United Nations have warned the UN Security Council against the deployment of such special forces. Somalia itself may be sitting on up to 110 billion barrels of oil, but the exploration focus is on breakaway Somaliland and Puntland. Somaliland declared independence in 1991. Puntland, which declared itself an autonomous state in 1998, claims parts of Somaliland. About a dozen companies had licenses to explore Somalia before 1991, but since then Somaliland, Puntland and other authorities have granted their own licenses for the same blocks.

Libya

Libya's Supreme Court has ruled that parliament's election of Prime Minister Ahmed Maiteeq was unconstitutional. The decision means that previous caretaker prime minister Abdullah al-Thinni will be reinstated. For the oil industry, it appears to be a significant decision on the surface, as rebels loyal to former military general Khalifa Haftar blocking the ports would not negotiate with Maiteeq. Heavy clashes continue as Haftar's rebels-backed by the country's air force--battle militant Islamists. Elections are scheduled for 25 June, during which time Haftar has pledged to cease his campaign against Islamist militants. We expect a further uptick in violence and chaos as the election date nears and the numerous factions in the country vie for position-including moderates, Haftar's rebels, Islamists and regional interest groups.

Adding to the instability, US authorities have captured what they say is a key figure in the 2012 attack on a US consulate in Benghazi in a covert raid. The individual, Abu Khatallah, is said to be the senior leader of Ansar al-Sharia militant group. The Libyan government has condemned the US raid as an infringement on Libya's sovereignty, and this incident will now be used as a tool in the ongoing power struggle.

Iraq

Iraq should now be considered to have reached its most violent point since 2006, and we expect a further escalation of the situation as Sunni militants have taken over Mosul, Tikrit and a handful of other towns. Their aim is Baghdad, and they will target oil to get there. Already they have managed to surround and choke off the country's largest refinery, geared toward domestic production, with the aim of crippling national energy supply and bringing down the Shi'ite-led government of Prime Minister Nouri al-Maliki. This in return has prompted Shi'ite-who form  the majority and lead the central government in Baghdad-to join militias to fight back Sunnis, setting the stage for an all-out civil war.

For the oil and gas sector, the immediate threat of the Sunni militant take-over of Mosul is negligent. Oil production around central/southern areas, such as Basra, are not affected, nor is production in the northern Kurdish region of Iraq. But make no mistake, the markets are and should be jittery. Maliki's grasp on power is only tentative at best-even without the ISIS militants. Even in the oil-rich south and central Iraq, far from Mosul, ExxonMobil and BP are starting to evacuate workers.

In the end, the Iraqi Kurds and those producing there, are likely to benefit from this turn of events in Iraq, with the situation in Mosul leaving Baghdad out of ammunition with which to fight off the unilateral export of Kurdish oil. Mosul has put Iraq's entire oil expansion plans into question, largely because Baghdad is in no position right now to make any strategic decisions. There could also be interesting developments here between Iran and the US-both of whom share an interest in rooting out the Sunni insurgency in Iraq.

Ukraine

As eastern Ukraine descends into violent chaos and the threat of a Russian cut-off of gas to Ukraine looms daily, Kiev will play host to a very important conference on its energy future. The Adam Smith Energy Conference kicks off on 24 June and runs through 26 June. The conference will feature key notes speakers from Ukraine, Central/Eastern Europe, the European Union and the United States-all of whom are keen to ensure that when the dust settles in the east, Ukraine takes the next critical steps towards energy independence. Oilprice.com will be on the ground in Kiev bringing you full coverage of the conference and special interviews with key note speakers.

Deals, Mergers & Acquisitions

•    Enel, Italy's biggest utility, is planning to sell off assets in Eastern Europe in order to meet debt reduction targets

•    Russian Lukoil is in talks with US-based Hess Corp to buy a stake in its offshore project in Ghana

•    American Energy Partners LP (of former Chesapeake CEO Aubrey McClendon) and private equity manager The Energy & Minerals Group have formed American Energy-Midstream LLC to focus on investing in and developing oil and gas infrastructure in basins across the country. The new company said it will focus on building a portfolio of gathering and processing systems and long-haul pipelines aimed at serving American Energy affiliates in the Appalachian Basin, the Permian Basin and the Midcontinent.