Global Energy Advisory – 25th April 2014

Alaska Endorses Gas Pipeline Plans

Last weekend, the Alaska Legislature approved gas pipeline plans to spend some US$100 million in the short-term to join four energy companies to build infrastructure to transport North Slope gas along an 800-mile pipeline to an LNG export plant. Both the House and the Senate have approved the plan, which has now been sent back to Governor Sean Parnell to sign off on. This is Parnell’s plan to begin with, so signing off is a foregone conclusion. Under the deal the State of Alaska will collect future taxes from the pipeline in the form of a share of the natural cash, rather than cash. Effectively, this means the state will be partnering with pipeline giant TransCanada and oil and gas companies (Exxon Mobil, BP, Conoco Phillips).

Opponents of the deal argue that Alaska will make unacceptably low revenues on this project, while proponents say it’s a fair deal and the only way to start getting the gas out of the ground and to the market. Proponents are talking about the potential for around US$4 billion in revenues annually. However, this assumes that project costs aren’t high and gas prices aren’t low, and opponents point out that actual state revenues could end up being 10% of this.

The project’s goal is to market 35 trillion cubic feet of North Slope gas through the 800-mile pipeline connecting to an LNG export facility. The project will cost an estimated $45 billion to $65 billion for the pipeline and the LNG facility. If everything goes as proponents plan, North Slope gas could start hitting the markets (domestic and foreign) in the 2020s.

Angola Update

•    France’s Total SA and its joint venture partners have made a final investment decision (FID) on their ultra-deep-water Kaombo project offshore Angola, cutting capital expenditure from $20 billion to $16 billion. The project is scheduled to be pumping 230,000 barrels per day beginning in 2017.  The Kaombo project, of which the Total venture owns Block 32, is seen as the litmus test for Angola’s oil industry expansion. This is the project to watch here, and the reduction in capital expenditure is a good start. The costs were a major concern that had led to repeated delays. Angola needs Kaombo in order to replace older fields. The 230,000 bpd capacity target for 2017 is also up from earlier projections of 200,000 bpd. The cost reductions were arrived at by a change in plans, which included the scrapping of plans to build two 115,000 bpd floating production, storage and offloading units and instead making altering two existing large crude carriers (VLCCs). That move alone saves $2 billion. Total is the largest operator in Angola, producing 600,000 bpd.

•    Total also picked awarded two major contracts to European firms and joint ventures this week to carry out underwater engineering related to the Kaombo project. A $3.5 billion underwater engineering contract wen to France’s Technip in partnership with Dutch company Heerema Marine Contractors. Another $2.4 billion project for underwater pipeline fittings and vertical well equipment went to Norway’s Aker Solutions.

•    Angola’s state-run Sonangol announced on Monday it would auction off 10 new onshore oil blocks in the Kwanza and Lower Congo basins. The auction is scheduled for 30 May and expressions of interest should be in by 30 April. These 10 blocks could easily account for half of Angola’s’ known oil reserves, which the government estimates in excess of 12 billion barrels.

Discoveries

•    France’s Total announced late last week that it had struck oil in the “deep offshore” area of Ivory Coast—the first discovery in the country’s San Pedro Basin. The significance of this discovery is that it is in the West, not the East, where most of the offshore investment has been to date. Major discoveries have been along Ivory Coast’s eastern maritime border with Ghana, close to the supergiant Jubilee and TEN oil and gas fields operated by Tullow Oil. In this area, Total announced a discovery in April last year, but now they’re looking in the west, and last week’s discovery opens up another potential windfall along Ivory Coast’s border with Liberia.

•    Royal Dutch Shell announced late last week that it had made an exploration discovery offshore Malaysia at the Rosmari-1 well in Block SK318. The well was drilled to a total depth of 2,123 meters, encountering more than 450 meters of gas column, with further exploration planned. Shell operates the block with an 85% interesting, with the remaining 15% held by Malaysia’s Petronas.  

•    Junior player Central Petroleum and partner Santos announced a new gas discovery in Australia’s Northern Territory from the Mt Kitty-1 exploration wells in the Amadeus Basin. The well intersected 109 meters of gas-bearing formation, which is higher than the original target of 65 meters. Santos operates the block, with a 70% stake. A rigging accident at the same time, however, has delayed full analysis of the exploration results.

Politics & Geopolitics

•    Turkey has intimated that it will soon be forced to sell off crude oil from Iraqi Kurdistan, which is currently being stored in its Ceyhan port, where storage tanks are almost full. Turkey made the announcement as advance warning to Baghdad, which views the unilateral export of Kurdish oil, bypassing the Iraqi central government, as illegal. In an attempt to repair relations with Baghdad, Turkey has accepted the Kurdish oil exports at Ceyhan but has refrained from exporting them to further markets. However, Turkey is now warning that its storage tanks are nearing full capacity and it will have no choice but to sell the Kurdish crude on the international market. Turkey has allocated three storage tanks at the Ceyhan export outlet with a total capacity of 2.5 million barrels for oil coming from the KRG pipeline, where oil started to flow last December. Baghdad’s latest threat was to sue traders dealing in “illegal”’ Kurdish crude.

•    As tensions in Ukraine’s eastern regions continue and Russia nearly doubles prices of gas for Ukraine in the standoff, Germany’s RWE has begun deliveries of natural gas to Ukraine. Deliveries began on Tuesday via Poland, in line with an agreement between Ukraine’s Naftogaz and RWE for up to 10 billion cubic meters of gas per year. Prices are based on European wholesale prices plus delivery costs. The gas originates from the EU, Norway and Russia. More gas from RWE would be forthcoming if Ukraine and Slovakia could work out conditions for the reserve flow of natural gas, to which end the two countries are holding talks.

•    In South Sudan, gunmen disguised as peaceful protesters killed at least 58 people in an attack on a UN compound in Bor, Jonglei state, including two Indian peacekeepers earlier this week. The attack was thought to be a retaliation against displaced Nuer people after predominantly Nuer rebels loyal to former Vice President Riek Machar killed hundreds of civilians upon capturing the oil town of Bentiu on 15 April. Machar, South Sudan's sacked vice president turned rebel leader, has denied that his men had carried out the attack, and blamed forces loyal to the president, Salva Kiir. We expect a significant increase in ethnic violence in the coming weeks, which will further stymie oil development in the region. Rebels are vying for control of the Paloch oil installations in the Upper Nile State, and as we mentioned in an earlier advisory, an attack here—the only oil-producing zone right now--is imminent.