Global Energy Advisory – 27th June 2014

Discovery & Development

•    Kenya: Africa Oil Corp. has announced a new gas discovery at its Sala Prospect in Block 9, onshore in Kenya. The Sala-1 drilled an 80-square-kilometer anti-clinal feature along the northern basin bounding fault encountering several sandstone intervals with oil and gas shows. The well was drilled to a total depth of 3,030 meters. An upper gas bearing interval tested dry gas at a maximum rate of 6 mmcf/d from a 25 meter net pay interval. A lower interval tested at low rates of dry gas from a 50m potential net pay interval.  There were also oil shows while drilling and small amounts of oil were recovered during drilling and testing. Africa Oil is the Operator of Block 9 with a 50% working interest. Marathon Oil Kenya Limited B.V. has the remaining 50% interest.

•    Kenya: UK-listed BG Group and partners Pancontinental Petroleum Ltd of Perth and Thailand's PTTEP have announced an oil discovery in the Sunbird-1 well offshore Kenya in the Lamu basin. The well, in permit area L10A, intersected a 14-m gross oil column and a 29.6-m gross gas column in a buried reef reservoir. BG holds 50% interest in L10A, while Thailand's PTTEP has 31.25%, and Pancontinental, 18.75%.

•    Tanzania: Norway's state-owned Statoil has announced another high-impact gas discovery offshore Tanzania in the Piri prospect, Block 2, in partnership with ExxonMobil. According to Statoil, the joint venture partners have discovered an additional 2-3 trillion cubic feet of gas in the Piri-1 well, bringing the total volume up to around 20 trillion cubic feet in Block 2. This is the sixth Block 2 discovery for Statoil and ExxonMobil. The drilling success rate has been 100%.

Deal, Mergers & Acquisitions

•    BP Plc is preparing to sign a $20-billion liquefied natural gas (LNG) deal with China National Offshore Oil Corporation in a 20-year supply contract. BP will likely source LNG from the Freeport LNG project in the US. This deal follows a similar one last year in which BP signed a 20-year contract to supply 4.4 million tons annually of LNG to southeastern China from the in-process LNG plant on Quintana Island, Texas.

•    As of 20 June, US-based Encana Oil & Gas has completed its acquisition of 45,500 net acres in Eagle Ford from Freeport-McMoRan. Encana is eyeing around 400 drilling locations here.

•    In Australia, Seven Group Holdings media group is planning to expand into the oil and gas sector, though its recent attempt to take over Nexus Energy failed. The company is now eyeing other oil and gas targets. The group's bid for Nexus was voted down by shareholders earlier this month due to the low share offer and the perception of a conflict of interest as the Seven CEO was formerly the Nexus chairman.

•    Nigeria's Petroleum Ministry has reportedly approved the acquisition by Calgary-based Oando Energy Resources Inc. of ConocoPhillips' Nigerian Upstream Oil and Gas Business $1.65 billion.

•    Calgary-based Ithaca Energy Inc. has agreed to acquire interests in three non-operated UK producing oil fields from Sumitomo Corporation for $170 million.

Geopolitical Alerts

Iraq

Taking advantage of the militant chaos in Iraq, the Iraqi Kurds have largely annexed the oil-rich province of Kirkuk, which is arguably the last link in the chain for Kurdish independence. The situation, with Sunni-extremists under the umbrella of ISIS, has given the Kurds the ammunition they need to annex Kirkuk under the guise (necessarily) of securing the region and ensuring that the instability does not spread into Kurdish territory in the north. Kirkuk is situated in the disputed zone of territory between central/southern Iraq and the territory governed by the Kurdistan Regional Government (KRG). The Kurds have been pursuing independence through the back door by way of direct oil exports to Turkey, bypassing the central authorities in Baghdad. But without Kirkuk, they would be unlikely to attempt the formation of an independent state. The (unofficial) annexation of Kirkuk was made possible in part because the Iraqi Foreign Minister, Hoshyar Zebari, is a Kurd. Zebari saw the opportunity here to offer the assistance of the Kurdish Peshmerga to keep ISIS out of Kirkuk.

In central/southern Iraq, ISIS fighters have taken control of more towns in Sunni-dominated Anbar province, including the Iraq-Syria border crossing point at Qa'im. This is a significant victory as it will further ease the movement of weapons, supplies and fighters across the border. We should consider that ISIS is now very close to consolidating its presence in this province and others that surround Baghdad.

The civil war is now surging in full force, with Grand Ayatollah Sistani stepping in to start his own Shi'ite militant war against ISIS. At the same time, the Shi'ite paramilitary Badr Corps has been revived, and this outfit has close ties to Iran's Revolutionary Guards. This force in particular will possibly be more than ISIS can fight off. We are also seeing a revival of influential Shi'ite figure Muqtada al-Sadr, who has launched the militant Peace Brigades to fight ISIS. This is a global manifestation that pits Saudi-supported groups against Iranian-supported groups. The US fits into this uncomfortably, supporting Sunnis in Syria but now dealing with the monster they created in Iraq.

Ukraine

On Tuesday, Russian President Vladimir Putin sought a revocation of a parliamentary authorization giving him the power to invade Ukraine as the cat-and-mouse game continues. The same day, a Ukrainian helicopter carrying military cargo was downed by rebel fire in eastern Ukraine, with nine people feared dead. Putin's negotiating tactic comes as Ukraine prepares to sign an association agreement with the European Union on 27 June. We expect this agreement to worsen the situation. On the sidelines of this conflict, key experts on Ukraine are calling for some longer term solutions that focus not on the surface of the "gas war", rather on the root causes that have given Russia the strategic advantage. The most crucial among these solutions is the sale of Ukraine's pipeline system, for which we have indications that the new authorities are supporting. Last week, Ukraine suggested bringing in European and U.S. companies to help operate the strategic pipeline that carries Russian natural gas across the country to Europe.  

Somalia/Kenya

We expect the security situation to worsen exponentially over the coming months in both Kenya and Somalia as Kenyan fighter jets bomb al-Shabaab strongholds in Somalia. So far, some 80 al-Shabaab fighters have been killed in the raids, according to Kenyan and African Union forces. The air raids have targeted two villages in Somalia-Anole and Kuday-and possibly a third, though we do not yet have confirmation of this, and al-Shabaab denies reports that their fighters have been killed. Al-Shabaab is likely to launch reprisal attacks inside Kenya, for which they have recently demonstrated greater capabilities.  

We are also concerned about the implications of efforts by Shell and ExxonMobil to explore offshore in Somalia, on blocks that run over into the autonomous state of Puntland, which does not recognize Somalia's oil legislation. Shell is reportedly in talks with Somalia's government, which is weak at the best of times, and ExxonMobil is reportedly planning to join Shell in the venture. Puntland officials have rejected the deal, claiming they have not been consulted.