Global Energy Advisory 28th February 2014

Somalia, not so fast

Investors contemplating a potential move on Somalia are wise to consider that while this is the first time since a 20-year civil war and state collapse that the playing field is open and opportunities abound, the situation has far from stabilized. The Somali coast shares geological history with some of most promising East African emerging oil and gas venues: most notably Kenya, Tanzania and Mozambique, but there are territorial disputes that complicate matters beyond the ongoing security threat. Here are some recent developments, and a brief look at what every potential investor needs to know:
•    Al-Shabaab militants who were decimated last year but not destroyed have been resurfacing gradually. Last week, al-Shabaab militants attacked the presidential palace in the Somali capital, Mogadishu, in a highly coordinated incident that left 14 people dead. Disguised as presidential guards, the militants gained access to the grounds and triggered a car bomb at the main gate, they then stormed the highly fortified compound.

•    On Thursday, 27 February, al-Shabaab launched another attack-this time a car bombing targeting security forces at a café near the intelligence headquarters in Mogadishu. At least seven people were killed.

•    Prior to these two attacks, al-Shabaab fired mortar rounds into the AMISOM (African Union force) airport complex, which houses some 22,000 personnel including foreign diplomats and aid workers.

•    There is a clear uptick in al-Shabaab activities in recent weeks and months, as the al-Qaeda-linked group attempts to regain lost ground and take on the internationally backed government. For now the attacks are largely targeting government security forces in an attempt to refute claims that the government has the situation under control. The attacks are a message that al-Shabaab has not been defeated and that the government does not have as much control as it portrays.

•    A decisive moment in al-Shabaab's comeback-after being pushed back and severely weakened by Kenyan forces in Somalia-was the attack last year on the Westgate shopping mall in the Kenyan capital, Nairobi. That was al-Shabaab's revival debut-and now they have regrouped and returned to active status in Somalia with a vengeance. Though their original operational bases have been seized, their guerrilla units are still functioning.
 
•    Aside from the threat of instability and the still-looming threat posed by al-Shabaab and a weak government, legislation and general processes governing business on a global marketplace level. Somalia does not belong to any regional economic blocs and trade deals with other nations are virtually non-existent.

•    Above all, operating in Somalia requires connections to key power brokers in a very complex system of clans and sub-clans.

South Sudan-Investor Alert

Clashes erupted last week in the oil-rich Upper Nile area of newly independent South Sudan, and while crude oil output has not yet been directly affected, we are concerned about the eventual direction of events over the past two months. The Oil Ministry claims that the government is in full control of all the oil fields in the Upper Nile, though non-essential staff has been reduced in the area. A week and a half ago, a cease-fire between the government and rebels collapsed, erupting in clashes in the state capital, Malakal, and control of the capital remains uncertain. While the government claims that it maintains control of Malakal, sources on the ground say that rebels have managed to control large areas. The Upper Nile's Unity State is the only oil-producing state in South Sudan, and we do not yet have a clear assessment of the damage done to oil facilities as a result of clashes that have left thousands dead since mid-December. The rebels take their roots from the dismissal of former vice president Riek Machar in July, on accusations of a coup attempt. Local authorities in the state last week had set in motion a plan to shut down oil production and evacuate foreign workers, but the federal authorities have reversed that plan, saying production must not be halted.
The situation has grown more complex in the past two days, with South Sudan President Salva Kiir firing the head of petroleum in Unity state-possibly over his decision to halt oil production for safety reasons. President Kiir has also cancelled plans to establish a state ministry of mining and petroleum.

Nigeria-Investor Alert & Shell Wrong-footed

•    Nigerian President Goodluck Jonathan has dismissed the country's central bank governor following the governor's accusations that billions of dollars in oil revenue had been siphoned off or gone missing. The summary dismissal of Central Bank Governor Lamido Sanusi resounded negatively in financial markets. The Nigerian stock market took a sharp dive, and the bank had to intervene to prop up the local currency, the naira. This is largely because the markets had confidence in Sansui as a viable regulator. Sansui's term would have ended in June otherwise. We expect more reverberations from this dismissal as a parliamentary committee investigates Sanusi's allegations.

•    Shell continues to be plagued by massive oil theft from its pipelines in Nigeria. In the latest incident this week, thieves drilled holes into the Nembe Creek Trunkline pipeline in order to siphon crude off for the black market. Shell was forced to close the pipeline down to repair the holes, while the amount of crude lost already remains unclear. The pipeline transports about 150,000 bpd. Shell had just replaced the pipeline in December 2010 for $1.1 billion and has been forced to close it down temporarily numerous times due to theft-related damages. Shell is counting its losses now in Nigeria, announcing plans late last year to sell the 97-kilometer pipeline.

Other Area Developments

•    Kenya will likely invest in neighboring Uganda's $2.5 billion oil refinery project. Uganda has invited both Kenya and Rwanda to acquire stakes in the project. Kenya is looking at a 3% stake worth around $74 million.

•    Tullow Oil and partner Africa Oil Corp., in partnership with the Kenyan government, should begin field development and export pipeline construction next year, hoping to pump Kenya's first commercial oil at a rate of 50,000 barrels per day in 2020.  
•    The government of Somaliland has resume Phase II talks with UK-based oil trading giant Vitol, according to government sources.
•    Italy's ENI has raised its projections for the highly prospective Area 4 block in the Rovuma Basin, northern Mozambique. Eni says the block is now estimated to contain up to 93 trillion cubic feet of gas, up from earlier estimates of 75 trillion cubic feet.
•    Angola, one of our favorite emerging venues, has experienced a drop for 2013, but the outlook is still good for reaching the production goal of 2 million barrels of oil per day in 2015. For 2013, production averaged 1.72 million bpd, but two new projects are coming online, courtesy of Total and Eni-this year, to boost output for 2014/2015.

Company Spotlight-Africa Oil (CVE:AOI)

This week Canada's Africa Oil is in our spotlight because of its ambitious drilling plans in Kenya and neighboring Ethiopia. The company plans to COMPLETE a record 20 exploration and appraisal wells in the two African countries THIS YEAR. The announcement of this caused Africa Oil to rise 2% in Toronto, reaching another record intraday price.