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Global Energy Advisory - 28th April, 2017

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Politics, Geopolitics & Conflict

• If you think what is happening right now in Macedonia is not important from a geopolitical perspective—think again. It might not be as sexy as Syria for media headlines, but it is arguably even more significant. This is Europe. The Balkans is like a massive haystack dried out by the sun with a bunch of little boys circling it with matches. Yes, there have been tinderbox incidents that analysts have cried wolf over many times in the post, since the end of the Yugoslav war in the 90s, but this time it is very real. Riots erupted yesterday in Macedonia parliament, and things got bloody. Some 80 people were injured when demonstrators stormed the legislature and attacked lawmakers in protest of the election of a new speaker of parliament at a time when deadlock has been keeping the country from forming a new government for months. This is not an isolated incident that will concern only Macedonia. Greece is on full alert, and its troops are ready. Intelligence sources say that Bulgaria has already deployed thousands of troops across the border, preparing for the worst-case scenario here. If this is a blood bath, it won’t be confined to Macedonia. There is already talk of a ‘greater Albania’, and Bosnia, which has been loosely surviving in a fragile post-conflict status quo, would be sucked into another war faster that it was the first. What happens in Macedonia will divide and conquer Europe.

• A report from the Enough project has revealed corruption and oil, gold, and land appropriation on a massive scale going on in Sudan. The findings of the report describe the Khartoum regime as a “violent cleptocracy” that has enriched a small circle around President Omar al-Bashir and has been instrumental for cementing the power of this circle over the country. South Sudan split from Sudan in 2011 and the border between the two is still disputed. Although Sudan lost most of its oil wealth to the new state, it still has considerable reserves, last estimated at 1.25 billion barrels in 2013.

• Protests in Venezuela are continuing, with the opposition demanding early presidential elections in a bid to oust Nicolas Maduro plus the reinstatement of the National Assembly, which the Supreme Court declared in contempt early in April. So far this month 21 people have been killed in clashes with the police and fights between different opposition groups. Looting incidents have also claimed lives as violence intensifies on the streets. The latest from the government was an announcement that Venezuela will withdraw from the Organization of American States, which it accused of interfering with its internal affairs. The announcement follows a report that OAS foreign ministers will meet to discuss the Venezuelan situation.

Deals, Mergers & Acquisitions

• The value of Aramco, to be partially privatized in 2018, may be $500 billion less than the $2 trillion stated by the Saudi government, according to internal documents and sources close to the company, seen by the Wall Street Journal. That’s despite tax incentives introduced by Riyadh in a bid to sweeten the IPO, under which the state will put up 5% of the company for sale. The 5% stake is valued at around $100 billion at the moment, and three international banks, JP Morgan, Morgan Stanley, and most recently HSBC, have been mandated as advisers on the listing.

• KMG Chemicals announced its pending acquisition of a specialist chemicals maker, Flowchem. The $495-million deal should be finalized by the middle of June. Flowchem produces chemicals that reduce the drag of crude oil in pipelines, improving flow rates.

• Israeli conglomerate Delek Group has received approval from the majority of Canadian Ithaca Energy’s shareholders for its proposed takeover of the company. More than 70% of Ithaca shareholders voted in favor of the deal, which is valued at around $350 million and will give Delek an interest of 76% in Ithaca.

Tenders, Auctions & Contracts

• Gazprom has signed contracts for the funding of its controversial Nord Stream 2 project with its partners, which include Wintershall, Engie, OMV, Shell, and Uniper. The five European companies have pledged to provide funding for half of the costs around the project, calculated at a total $10.4 billion. Each of the companies will provide up to $1 billion in long-term financing. Gazprom will be the sole shareholder of the company set up for the execution of the project. Nord Stream 2 will be a shortcut for Russian gas to Western Europe, capable of pumping 55 billion cu m annually, bypassing Ukraine, which has been vocal in its opposition to the pipeline. Some other Eastern European countries such as Poland have also opposed it, arguing it will strengthen Gazprom’s dominant position on the European gas market.

• A group of companies led by Tullow Oil is seeking an extension to an exploration license from the government of Mauritania, concerning an offshore block, located close to Kosmos Energy’s C-8 bloc that has yielded very promising results. The Tullow Oil group is hoping the Mauritania government will waive the requirement for drilling one exploration well before the end of the second phase of development, which is due this November.

• Petrofac has sealed oilfield service deals worth $70 million in Iraq, including engineering, operations, and maintenance activities. The jersey-based company has been present in OPEC’s second-largest exporter since 2010.

Company News

• Schlumberger reported a 5.7% increase in revenues over the first quarter of the year, to $6.89 billion thanks to the pickup in demand for oilfield services amid improving oil prices. At the same time, pretax operating margin declined to 11.3%, from 13.8% in the first quarter of 2016. The company’s U.S. operations were the biggest contributor to the overall revenue increase – revenues from international operations actually fell by 7% in the period.

• North Sea-focused oilfield service provider Amec Foster Wheeler booked a pretax loss of $698.5 million for 2016, up by a staggering 135% from the year before, suffering from payment delays and project cancellations from U.S. clients amid the low oil prices that market much of 2016. Even though activity in its core market, the North Sea, picked up last year, it could not offset the headwinds. The company now expects a slower 2017, as a lot of projects it is working on in the North Sea will soon be completed.

• Bake Hughes reported a net loss per share of $0.04 for the first quarter, substantially below analyst expectations of a negative $0.21 and the Q1 2016 loss of $0.44 per share. Revenues, at $2.26 billion also came in below analyst estimates, though not by so much: the consensus was for revenues of $2.278 billion.

Discovery & Development

• The global enhanced oil recovery market will hit $11.5 billion by 2022, a report from Research and Markets said. Enhanced oil recovery refers to oil extraction from mature fields and is often also called tertiary extraction. Primary and secondary extraction typically get out between 30 and 40% of the oil in a field together, and what’s left can be extracted using enhanced recovery techniques. Given the growing depletion of existing oil fields and the low rate of new discoveries, EOR is likely to become increasingly popular in the coming years.

• Shell has restarted production at the Bonga filed in Nigeria, which yields around 225,000 barrels of crude daily. The field was closed for maintenance on March 4 and this affected Nigeria’s oil exports but these should pick up now that Bonga is back in business.

• Iraq is working on doubling the output capacity of its Halfaya field, in the southern part of the country, to 400,000 bpd by next year. This is the third and last phase of the field’s expansion, part of a wider plan to bring Iraq’s total oil output up to 5 million bpd by 2018. The Halfaya field is operated by PetroChina but is in the portfolio of Iraqi Maysan Oil, whose overall production stands at 600,000 bpd at the moment.

• Valero Energy plans to boost its gasoline production on the back of declining inventories, the refiner said at the announcement of its Q1 2017 financial results. The largest U.S. refiner beat performance expectations thanks to a 40% jump in operating revenues from its core business, to $20.89 billion. Total revenues hit $21.77 billion, up 38.6% on the year.

• Anadarko has shut more than 3,000 vertical wells in northeastern Colorado, after an explosion at a house near one of the wells killed two people. The investigation of the blast is still ongoing and the cause has not yet been identified but the local authorities have determined there is no threat to other homes in the vicinity of the well.

Regulatory Updates

• The Treasury Department has denied Exxon a waiver of sanctions against Russia, so the company could resume its joint operations with Rosneft – one of the state companies that are themselves subjects to sanctions. In a statement issued just two days after Exxon applied for the waiver, Treasury Secretary Steven Mnuchin said the department will not waive the Obama administration sanctions to any U.S. company.

• The Department of Energy has greenlit a joint venture between Exxon and Qatar Petroleum that will see them export LNG from the Golden Pass terminal near Cheniere Energy’s Sabine Pass facility. The partners will ship the equivalent of 2.21 billion cu ft of LNG daily to Non-Free Trade Agreement countries when the liquefaction facility is completed – the final investment decision depended on the DoE approval.

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