Global Energy Advisory – 26th December 2014

Oil & Gas Venues 2015: The Good, Bad & Very Ugly

As 2014 draws to a close and North American oil and gas producers are in trouble over falling oil prices, we take you to some foreign venues to diversify your portfolio-sorting the good from the bad (and the ugly) for 2015.

The Good

• Hands down, Kenya is our number one frontier venue for 2015. Since the massive 2012 discovery that put Kenya on the global oil and gas map, the discoveries have continued and even while E&P companies are cutting costs elsewhere, not so in Kenya, which is set to become the key East African energy hub, with commercial production slated to launch in 2016, and much, much more to explore in its very promising basins. This is a long-term strategic play and there is still time to get in on it. Beyond this, political stability is fairly strong. Compared to many of its neighbors, Kenya is stable, secure and its government is cooperative.

• Kurdistan (the Kurdistan Region of Iraq) remains one of our top venues for 2015, even more so now that the dispute with the Iraqi central authorities in Baghdad has been more or less resolved. We're not talking about a venue the size of Kenya here, but we are talking about easy access to markets, very successful exploration and internal political stability. There are potential security concerns due to the Islamic State's (IS) offensive in Iraq and Syria and the potential for this to spill over into territory controlled by the Kurdish Regional Government (KRG). IS controls a large swathe of territory in Northern Iraq, bordering the KRG, but the militant group does not at present have the power to overtake Kurdistan.

• Angola is another long-term strategic oil play that promises to overtake Nigeria eventually. Angola is the second-largest oil producer in sub-Saharan Africa, becoming an OPEC member in 2007. The country is targeting 2 million barrels/day of oil production in 2015, and is on track to make that happen, while exploration in pre-salt formations is gaining momentum and some massive oil projects are planned over the next couple of years. In February 2015, Angola will export around 1.86 million barrels of oil per day, which represents the highest export volume since January 2010. OPEC member Angola, however, is at risk over tumbling oil prices and there are concerns about ongoing investment in some key projects.

• The United Kingdom, some strongly believe, is where we will see the next shale boom. A lot will depend on who is in power after the next elections, but if the UK stays the current course, this is a venue worth considering in terms of shale development.

The Bad

• Pakistan is forging ahead with new discoveries of oil and gas, but the security situation-long in turmoil-is spiraling downward very quickly and we rate this venue as very high-risk and not worth the reward. Right now, the authorities are gearing up to execute 500 terror convicts, lifting a six-year moratorium on the death penalty, following a Taliban-sponsored massacre at a school in Peshawar, which left some 150 people dead, most of them children. Six militants have already been hanged. The New Year will see the situation in Pakistan worsen exponentially, putting its oil and gas ambitions at prohibitive risk.

• There is a great deal of optimism for exploration and production in Mexico following sweeping energy reforms that open up the market for the first time to foreign investors, breaking the Pemex monopoly. However, 2015 may not be the year for major investment here, with security concerns related to drug cartels making this venue more challenging than the worst venue in Africa.

The Ugly

• The worst venue in 2015 will be South Sudan, where a civil war is raging with no end in sight for the newly independent country whose entire budget depends on oil.

• Somalia will remain one of the worst frontier venues for oil and gas exploration in 2015, with the al-Shabaab militant group reviving attacks at home and across the border in Kenya, and foreign E&P companies jumping the gun on exploration here.

• Libya is a mess, and will continue to be so into 2015, with the security situation there threatening other venues, most notably Algeria. Now a third major port-Mellitah--has been affected by armed conflict between competing 'governments' in Libya. Fighting has led to a drop in gas exports to Italy, most recently. The country's two largest oil export ports-Es Sider and Ras Lanuf-are the front line of clashes and have become more important flashpoints since the self-declared government in Tripoli attempted to seize the terminals. As of now, the two ports are not functioning, when they should be exporting 1.4 million bpd. The gas port of Mellitah has now become the third front in this war. This port is part-operated by Italy's Eni. At this point, only two of Libya's nine export terminals-Brega and Hariga--remained largely non-affected by the conflict.

Deals, Mergers & Acquisitions

• Egypt has signed its first contract for natural gas production using hydraulic fracturing. The deal was signed with Houston-based Apache and Shell Egypt and includes up to $40 million in investment. The two companies will drill three wells in the Abu al-Ghardeeq region of the Western Desert, some 200 kilometers from Cairo. Both horizontal drilling and hydraulic fracturing will be employed. Drilling will have to be to depths of around 14,000 feet. This represents Egypt's first unconventional gas production.

• Liberia has ratified a production-sharing contract for the development of offshore Block 16, which it expects to generation $22 million. The PSC will be with Liberty Petroleum Corporation (Liberia), Pillar Oil Limited (Nigeria) and New Millennium Oil and Gas (Liberia). This is the first of four oil block agreements to be ratified by the government.

• Morgan Stanley has scrapped a deal to sell an oil-trading and storage business to Russia's OAO Rosneft, after failing to win US clearance for the move. This means that Rosneft, Russia's largest oil company, will have to find another buyer.

• Italian Eni Angola and Angola's state-run Sonangol will purchase subsea production systems for their deepwater Block 15/06 from US-based FMC Technologies. The block was awarded in 2006 and Eni has since drilled 24 appraisal wells, and is currently producing 45,000 bopd.

Regulatory Alerts

• The US' Noble Energy is in trouble in Israel as competition regulators (antitrust authority) are under political pressure to break up what is perceived as a monopoly over Israel's offshore gas reserves by Noble and Israeli Delek Group. The two companies hold 85% in Israel's giant Leviathan field and controlling stakes in the smaller, producing Tamar field. This means they control over 90% of Israel gas resources. Production at Leviathan is expected to begin by 2018, when initial investment will have reached around $6.5 billion. There was a compromise deal under which Noble and Delek were allowed to maintain their positions here, but that has now been revoked by the Antitrust Authority. This is a crucial time for Leviathan, which is in talks with Jordan's natural electricity company to supply gas, and in talks with BG Group to use Leviathan gas to feed Egypt's LNG export plant. On 24 December, Noble said it would suspend further development of both Leviathan and Tamar over the regulatory ambiguity. "The actions of the Antitrust Authority are another disturbing example of the uncertain regulatory environment in Israel," said Charles Davidson, Noble's chairman and former CEO. "Specifically, this is a matter that we believed was resolved some time ago and follows on recent assurances from the Antitrust Authority that approval was forthcoming. We believe this is a harmful precedent for Israel to set and we will vigorously defend our rights relating to our assets." Shares of Noble have fallen more than 4% in New York since this news broke on Monday.

• Another company, Genie Energy Ltd of the US, has won a temporary victory in Israel this week, as the Supreme Court of Israel rejected a petition challenging Genie's permits for exploratory drilling in the Golan Heights. The Supreme Court's decision led to a lifting of an injunction on the exploratory program over environmental concerns, and the company now plans to spud its first well during the first quarter of the New Year.

• In Crimea, which Russia annexed from Ukraine earlier this year, the European Union has introduced measures to prohibit investment, including measures to postpone European participation in Russia's Black Sea oil and gas exploration and tourism. The measures will prohibit European cruise ships from calling at Crimean ports. There is an overall ban on European investment in Crimea, which means that EU-based companies cannot purchase any Crimean real estate or finance any Crimean companies.

Discovery & Development

• Freeport-McMoRan (NYSE:FCX) says production at its Highlander discovery in Louisiana is expected to begin in 2015, with test production indicating a daily production of around 43 million cubic feet of gas per day, of which 21 million cubic feet will be for Freeport. The well has reached a depth of nearly 30,000 feet and contains approximately 150 feet of net pay. Freeport retains a 49% net revenue interest in the well and is the operator.

• Kuwait Energy has announced that its consortium with Dragon Oil has made a second oil discovery at Block 9 in Iraq in the Yamama formation. The discovery was made at 4,000 meters in the Faihaa-1 well in northern Basra. Preliminary tests resulted in oil flow rates of circa 5,000 and 8,000 barrels of oil per day (BOPD) of 35 API crude on 32"/64" and 64"/64" chokes respectively.