Global Energy Advisory – 24th April 2015

Deals, Mergers & Acquisitions

• With the flurry of speculation surrounding Shell's designs on BP Plc, BP's chief executive, Bod Dudley, is trying to head off rumors. Dudley has told the Financial Times that big isn't necessarily beautiful. "We've got a good portfolio, I like our portfolio. We will see. I don't see the forces at work for lots of consolidation unless the oil price stays down for some time." BP is apparently concerned about an opportunistic takeover and has increased internal reviews of takeover scenarios and begun drafting defense strategies with advisers. This follows Shell's £47 billion offer for BG Group Plc (LON:BG).

• Despite the chaos in Yemen and the fact that pretty much everyone else is withdrawing, Petsec Energy has struck an agreement with Oil Search Limited to acquire all of its shares in the Oil Search (ROY) Limited subsidiary, which has a 34% participating interest in Block 7 at the Al Barqa Permit in Yemen. ROY is the operator of the block. Block 7 is an onshore exploration permit covering an area of 5,000 square kilometers or (1,235,527 acres located approximately 340-kilometres east of Sana'a, the capital of Yemen. The block contains the Al Meashar oil discovery as well as an inventory of leads and prospects defined by 2D and 3D seismic surveys with significant oil potential.

• On the junior scene, California-based New Western Energy Corp. has signed an LOI to acquire a 100% interest in Osage County Oil & Gas Project, which comprises 2,650 acres with 14 producing wells and 8 salt water disposal wells. Six of these wells are horizontal and 8 are low-cost vertical. The wells are producing from the Mississippi Lime zone, Chattanooga shale, Layton sand and Bartlesville sand formations. Current production at the project is around 82 bbl per day and 200 mcf of gas per day. With the acquisition, the company is hoping to enhance production by cleaning out horizontal laterals, improving maintenance and identifying new offsetting drilling locations.

• Oneok Partners has entered into a 50-50 joint venture with a subsidiary of Fermaca Infrastructure, a Mexico City-based natural gas infrastructure company, to construct the Roadrunner Gas Transmission pipeline to transport natural gas from the Permian Basin in West Texas to Mexico. The cost of the project is estimated at $450-$500 million and will be completed in three phases, with the first phase slated for completion in the first quarter of 2016. First phase transport capacity will be around 170 MMcf/d. The second phase is intended to be completed in the first quarter of 2017, boosting capacity to 570 MMcf/d. The final phase, scheduled to come online in 2019, is targeting a final capacity of 640 MMcf/d. This project targets rising natural gas demand in Mexico.

Geopolitics & Conflict

• Al Qaeda forces (AQAP) are said to have taken control of an oil terminal and major airport in southern Yemen, as Saudi forces continuing an air strike campaign to force the hand of Shi'ite Houthi rebels back to some extent by Iran. Anyone could have predicted this would happen, and now we expect AQAP to gain a much more solid foothold in the south, from which it will move on more oil assets. They have seized southern Mukalla's main sea port, an oil terminal that serves as a major hub for the Hadramout region and exports an average of 120,000 to 140,000 bpd of crude.
• The Kurdish peshmerga (with help from US air strikes) have widened their buffer zone around the oil-rich city of Kirkuk in the disputed territories of Iraq. They have now sealed off an additional 32-square mile zone around Kirkuk to protect it from incursion by the Islamic State (IS). In the meantime, keep your eyes on oil and gas prospects in the territory (not Kirkuk) belonging to the Kurdistan Regional Government (KRG). We expect some good deals coming out of this hot venue while oil prices remain depressed. Watch for consolidations.

Discovery & Development

• Spain's Repsol has made its third gas discovery in the Illizi basin, at the Sud-Est Illizi block, located in southeastern Algeria. Well testing delivered a gas flow rate of 175,000 cubic meters per day and 90 barrels of oil per day. Repsol currently produces approximately 8,000 barrels of oil equivalent per day in the country. Repsol is the operator of the consortium with a 52.5%. Italy's Enel holds a 27.5% and France's GDF-Suez holds a 20%. Algeria's state-run Sonatrach will hold a 51% stake in the development and production phases, with the existing members maintaining their existing proportions in the remaining 49%.

Regulations & Litigation

(Note: Noble Energy figures repeatedly in this week's regulatory updates-from the Falkland Islands to Israel)
• Argentina has made good on threats to sue oil and gas companies drilling in the disputed Falkland Islands, launching lawsuits against three UK-based companies and two US-based companies. The five companies being sued are Premier Oil, Noble Energy, Falkland Oil and Gas, Rockhopper and Edison International. Premier Oil and Falklands Oil and Gas just began their 2015 drilling campaign with an announcement earlier this month that they had discovered oil and gas in the first well in its 9-month drilling program. This sparked Argentina to begin legal proceedings. At stake is an estimated 60 billion barrels of oil around the Falklands basin worth $167 billion dollars in royalties and taxes for the Falklands' government. Premier owns 36% of Zebedee (where the discovery was made), while Falkland Oil holds 40% and Rockhopper Exploration the remaining 24%.

• Finally a bit of good news (comparatively) for US-based Noble Energy. The Israeli Finance Ministry has had somewhat of a change of heart over Noble and friends' gas monopoly. The Ministry has announced that it will no longer demand that Noble lower its holding in the massive Leviathan gas field and the smaller, producing Tamar field (both in the prolific Levant Basin) from 36% to 10%. While the Ministry says it's not changing its monopoly-busting policy and still wants to see competition between Leviathan and Tamar, it's relinquishing its demand to lower stakes. The change of heart comes about largely because even if stakes are lowered, Noble will still be the operator of both fields.

• The US government is moving to increase royalties that oil and gas companies are required to pay for hydrocarbons extracted from public lands. The Bureau of Land Management will propose changes after decades to update onshore royalty rates. As it stands, royalty rates are locked in at 12.5% of the value of the extracted oil and gas, while federal offshore leases charge 18.75%. Oil industry leaders said any royalty hikes onshore could further discourage interest in resources on public lands, building on existing concerns about navigating regulatory mandates and permitting delays on the territory.

• A Texas House committee revisited a bill that would limit local governments' ability to regulate oil and gas operations within their jurisdiction. The interesting part of this is that this bill came about originally in response to the vote in the small college town of Denton, Texas, against hydraulic fracturing. The new bill has been amended, with changes adopted last week, inserting some power into city and county entities. All above-ground activity related to oil and gas operations (traffic, noise, lighting, and "commercially reasonable" setback requirements) fall under the city authority.

• Twenty-five major oil companies, oil-producing nations and development institutions agreed to end the practice of routine flaring of natural gas by 2030 at thousands of oil production sites around the world. Every year, an estimated 140 billion cubic meters of associated natural gas is burned off or "flared" at thousands of oil fields across the globe, resulting in more than 300 million tons of CO2 being emitted to the atmosphere - the equivalent to approximately 77 million cars. Oil majors included in the initiative include TOTAL, Statoil, Eni, Shell, Kuwait Oil Company, SNPC, SOCAR, SNH-Carmeroon and BG. Norway, Russia Federation, Cameroon, Kazakhstan, Gabon, Uzbekistan, Republic of Congo, France, Angola have also joined the initiative. Neither the US, nor US companies joined.

• Local Israeli authorities in the port town of Haifa have ordered the closure of plants run by Israel's largest refining and petrochemicals group, Oil Refineries, following a report showing high cancer rates. Oil Refineries said its operating license and that of a number of its subsidiaries had been cancelled in Haifa. The company said it thought the order was illegal and vowed to take legal action. A recent report by the Health Ministry said that data collected over the past decade showed a higher rate of cancer in the Haifa area compared to the national norm, possibly because of bad air pollution.