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Global Energy Advisory – 23rd October 2015

Politics, Geopolitics & Conflict

• The situation in Kurdistan is worsening after the ruling party reportedly fired on protesters and violent clashes in two major cities have left five dead and 200 wounded. And while this type of violence may be par for the course in the rest of Iraq, Iraqi Kurdistan is not prone to mass protests or violence on this level so much more can be read into this situation in terms of internal stability. The main violence happened on the 10th of October, and since then the ruing Kurdistan Democratic Party (KDP) has closed all opposition media outlets and barred opposition Gorran parliamentarians from their offices—fanning the flames of the situation. The protests began in the city of Sulaimaniyah and then spread fairly quickly, turning violent in Kaladize. President Massoud Barzani’s KDP offices were set on fire. Clashes lasted for seven days, with sources on the ground saying that the bulk of the protesters were supporters of the Gorran Movement for Change, which saw four of its ministers removed from the Cabinet.

In the meantime, though not directly related to the recent violence, Genel Energy—a key producer here—has cut its revenue and output forecasts for this year, citing payment problems and low oil prices that have led to a reduction of spending on operations.

Genel has reduced its output forecast for this year and will not invest in increasing production until the Kurdistan Regional Government (KRG)—which owes Genel $400 million— starts making regular payments for exports. Genel downgraded its output guidance to between 85,000 and 90,000 barrels of oil equivalent per day from 90,000 to 100,000. It also trimmed its revenue guidance, to between $350 million and $375 million, from $350 million to $400 million. The KRG did resume payments in September, and Taq Taq partners—of which Genel is one—received gross $30 million for exports (Genel’s share was $16.5 million).

Deals, Mergers & Acquisitions

• Dallas-based Kosmos Energy—of Ghana Jubilee oil discovery fame—has acquired the rights to U.S. company ERHC Energy’s Block 11 of the Exclusive Economic Zone of São Tomé and Príncipe. Kosmos has now become the operator of this block with an 85% interest, while the National Oil Agency holds the remaining 15%. This block has an average depth of 2,900 meters, covering 8,941 square kilometers.

• Kosmos is also reportedly gearing up to bid on two oil blocks in Liberia, for which sources say it has been preparing for years. African media claims that Kosmos has reviewed Liberia’s technical data and deepened its understanding of the opportunities offshore, including a new model suggesting that blocks LB6 and LB7 may be different from earlier blocks that failed.

• Total will sell a 15% stake in the Gina Krog field in Norway as it moves to divest assets to improve cash flow amid the oil price slump. Tellus Petroleum, subsidiary of Sequa Petroleum paid $170 million for the shares. Total sold an 8% stake in the same field in 2014. The field is operated by Statoil ASA with 58.7% interest. Partners are Total SA (30%), PGNiG (8%), and Det Norske Oljeselskap ASA (3.3%). Production is expected to start in mid-2017, ramping up to a plateau of 10,000 boe/d. Total will retain a 15% interest. Oil from the field will be transported to a floating storage vessel for offloading to shuttle tankers. Rich gas will be transported to Sleipner for processing and onto Gassled for export. Condensate and NGL will be exported via Sleipner to Karsto in Norway.

• Canadian Oil Sands is calling on shareholders to reject the $3.3 billion offer made earlier this month by Suncor Energy to acquire all outstanding COS shares. According to the COS Board of Directors, the offer is inadequate, opportunistic, and exploitive and undervalues the company’s 36.74% ownership in the Syncrude oil sands joint venture. Suncor is Canada’s dominant oil sands player and already has a 12% interest in COS. The COS board also says that Suncor is taking advantage of political and regulatory turmoil as well as the oil price slump. The board said Suncor’s ownership stake in the mine gave it access to information not yet disclosed to shareholders, with it says has given Suncor an unfair advantage. There is also speculation that a counteroffer for COS is in the works. Imperial Oil Ltd., which owns 25% of Syncrude, is one of the rumored rivals here.

• Russian billionaire, Mikhail Fridman, has sold all offshore oil and gas assets held in the British sector of the North Sea, and now he is planning to buy assets in the Norwegian North Sea. Fridman earlier acquired RWE and—along with that—DEA, the company’s exploration unit, through the billionaire’s LetterOne investment arm. The British government forced him to sell these North Sea assets because of new western sanctions against Russia. The March 2014 deal saw Fridman acquire RWE DEA for $5.8 billion. DEA’s UK North Sea assets included the Breagh, Clipper South, Cavendish, Windermere and Topaz fields—accounting for 8% of all UK gas production. He was given until 20 October 2015 to sell all energy assets held within the UK. Earlier this month, LetterOne agreed to sell DEA to Swiss chemicals company Ineos. Now he’s planning to buy E.ON’s oil and gas assets in Norway’s North Sea for $1.6 billion. The new deal for E.ON still requires the approval of Norwegian authorities and the European Commission. If approval is granted the deal should close by the end of this year.

Exits ….

Exits in the oil and gas space are mounting as prices continue in the slump, while we have already gone over Fridman’s exit (which was geopolitical rather than market-related), here is a list of other recent exits that grabbed our attention:

• The fourth-largest producer in the US, Occidental Petroleum Corp., is selling all of its North Dakota (Bakken) shale oil acreage and assets to private equity fund Lime Rock Resources. This deal is believed to be worth around $500 million. Here we’re looking at Oxy’s roughly 300,000 acres.

• Cairn India is exiting its exploration operations in Sri Lanka by the end of this month after two new discoveries were deemed commercially unviable. Cairn will relinquish the 2,912 sq km block SL-2007-01-001 in the Mannar basin after expiry of exploration period at end of October.

• Australian Woodside Petroleum Ltd has withdrawn from exploration in the Lake Tanganyika South Block in Tanzania’s Great Rift Valley after disappointing commercial analysis. Initial seismic surveys conducted in the block had shown that the block had the potential of up to 200 million barrels of oil, but Woodside balked after technical and commercial analysis. Partner Beach Energy now has 100% interest in the block.

• Canada’s Encana is exiting its second US shale place since this summer, divesting its Denver Julesburg assets for $900 million. It’s also close to selling all of its Haynesville acreage for $850 million.

• London-based Tower Resources and Premier Oil are planning to exit bloc 2B in northern Kenya’s Anza Basin after a first well failed to turn up crude. Premier Oil (55%) and Tower Resources (15%) hold the license for block 2B along with Canada’s Taipan Resources.

Discovery & Development

• Austria’s OMV has announced a new gas discovery in Pakistan’s Sindh province from the Latif South 1 exploration well, opening up new exploration potential in the area, while further appraisal work is necessary to confirm the size of the find. The well flowed 2,500 boed (15 MMscfd; gross) of gas from Lower Goru Intra C Sands. This well is in Pakistan’s Sindh Province, and about 25km south of the Latif gas field, which means that the Latif facilities could be tapped into in terms of infrastructure already in place. OMV (Pakistan) Exploration Gesellschaft m.b.H. holds a 33.4% share in the license, with joint venture partners Pakistan Petroleum Limited (33.3%) and Eni Pakistan (M) Limited (33.3%).

• Russian LukOil, PanAtlantic and Romgaz say they have made a ‘significant’ natural gas field discovery offshore Romania in the Black Sea continental shelf. The discovery was made upon the completion of the drilling of exploratory well LIRA-1X, in the deep waters in Trident block (EX-30). Exploration in this block has been ongoing since 2011. Lukoil Overseas Atash B.V. is the operator with a 72% interest. PanAtlantic has a 18% share and Romgaz (Romania’s largest producer) has a 10% interest. The block covers 1,006 square meters at depths of 300-1,200 meters. The LIRA-1X well is some 170 kilometers from the Romanian coast at a water depth of around 700 meters. The well was drilled to 2700 meters and has since been abandoned for evaluation. LukOil is throwing around seismic data that estimates that reserves here could exceed 30 billion cubic meters—but all of this would have to be determined in an evaluation.

• Testing at the Akeh-1 exploration well onshore Indonesia produced a total of 3.7MMscf of natural gas, 142.2 barrels of condensate and 25 barrels of condensed water. Batu Gajah PSC, Onshore Sumatra Indonesia, has a 77% interest and is the operator of the well, which tested four zones within the primary target, Lower Talang Akar sandstone formation. The next steps will be to hold discussions with the Government of Indonesia in relation to having the Akeh structure "Released from Exploration Status." A successful release would allow the commencement of a "Pre-Plan of Development" study to determine the likelihood of the commerciality of the Akeh-1 discovery, which would be followed (if commerciality is deemed likely) by the compilation and submission of a Plan of Development. Pan Orient in its operations and activities in Indonesia is supervised and directed by SKKMigas.

• A multinational consortium led by Brazil’s state oil producer Petrobras has announced a new hydrocarbon discovery offshore in the Libra subsalt area in the Santos Basin. Libra is believed to contain between 8 million and 12 million barrels of oil and is currently in the exploratory phase. This is the fourth well drilled in the Libra area since exploratory drilling began last August. Petrobras, with its 40% stake, is the operator of the Libra consortium. The consortium also includes Shell, Total, China National Petroleum Corporation (CNPC), China National Offshore Oil Corporation (CNOOC) and Brazilian state firm PPSA.

• Iranian authorities say they will need at least $150 billion to overhaul and modernize the country’s oil sector over the next five years. Iran plans to increase oil production in three phases. Production will increase by 500,000 barrels per day (bpd) during the first phase, 900,000 bpd in the second phase, and 2,000,000 bpd in the third stage. Iran is trying hard to lure investors with lower production costs, good infrastructure and an experienced workforce. By the end of March next year, Iran will start soliciting bids from international companies for rights to develop oil fields. Iran’s new oil contracts will allow international companies to invest for 20 years with the option of extending for an additional five and companies will share in the benefit of an increase in oil prices but must also help bear the risk of a decrease.

Regulatory Updates

• Technology and engineering company Sevan Marine has given Norwegian authorities the results of an internal investigation on potential bribes paid to Petrobras to obtain business. The investigation—according to media reports—indicated irregularities involving contracts awarded between 2005 and 2008. Sevan has since been restructured and has separated it drilling unit, Sevan Drilling, as well as changed its business strategy and brought on a new board of directors and new management.

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