Global Energy Advisory - 2nd January 2015

Global Incident Report

• Fires last week at three of five Libyan oil-storage tanks at the country's largest oil port, Es Sider, have been extinguished. The tanks had a total capacity of 6.2 million barrels of oil. The government controlled by Prime Minister Abdullah al-Thinni is asking for international help due to possible environmental damage from the fires. The parallel government, controlled by Islamist-backed Omar al-Hassi, had ordered the capture of export terminals in Libya, and the fires were the result of this armed conflict. The fires started on 25 December, and were the result of Islamist rocket fire.

• Earlier this week, Syrian officials claimed that suicide bombers attacked natural gas facilities in the central province of Homs, killing eight people and wounding a dozen others. The suicide bombers detonated their devices before reaching their ultimate targets.

• Local Iraqi officials in the key oil-producing area of Basra are attempting to cancel a $17 billion gas deal with Shell, claiming that the pace of development has been too slow and the province should have more control over the process and the natural resources in Basra. The existing contract is with Shell and Mitsubishi and allows for the capturing of flared gas in three southern oilfields. The contract was signed in late November and at the time of signing was met with strong objections from the Basra local council, which was not included in the deal. In response, the Basra Provincial Council sued the Iraqi Oil Ministry, demanding the cancellation of the agreement. This is a next potential area of conflict for Iraq, with Basra essentially seeking regional autonomy and control over its own natural resources. In Baghdad's weakened state, due to the conflict with the Islamic State (IS) militants, the local authorities in Basra see an opportunity to increase pressure for autonomy.

• In the latest case against Brazil's state-run oil company Petrobras and its executives, a lawsuit filed on 24 December in Manhattan's federal court on behalf of the city of Providence, RI, seeks compensation for $98 billion in securities Petrobras sold since 2010. The lawsuit alleges a kickback and bribery scheme which impacted the city's investment. A judgment is hoped to benefit investors who purchased those securities. The suit alleges that Petrobras made material misstatements about the value of its assets in bond offering documents. Petrobras has already been sued by several U.S. investors who bought American Depositary Receipts sold by the company in New York. So far, 39 people in Brazil have been indicted on charges that include corruption, money laundering and racketeering. They have been accused of forming a cartel to drive up the prices of major Petrobras infrastructure projects and of channeling money into a kickback scheme at Petrobras to pay politicians.

• A fire broke out last weekend at a drilling prospect on Alaska's North Slope operated by Italy's Eni that resulted in no casualties, but led to evacuation of all personnel from the camp. Production has not been disrupted at the Nikaitchuq field facilities here, and so far there have been no reports of oil spillage or environmental damage. The camp has been destroyed. Eni Petroleum is the sole owner of the Nikaitchuq Operations Camp, which serves an offshore oil field less than a half-mile away. The Nikaitchuq field, estimated to hold 200 million barrels of crude oil, started production in early 2011.

Deals, Mergers & Acquisitions

• Southwestern Energy has signed an agreement to acquire an undivided 20% of Norwegian Statoil's ownership in oil and gas assets in West Virginia and southwest Pennsylvania for approximately $394 million. Southwestern previously announced in October 2014 a purchase of Chesapeake Energy Corporation's interest in these and other oil and gas properties. The deal is for some 30,000 net acres and increases the company's overall working interest in the assets by approximately 5.8% to approximately 73%. Statoil's net production from these properties was approximately 29 million cubic feet of gas equivalent per day as of October 2014. When combined with the acreage acquired from Chesapeake, Southwestern will end up with around 443,000 net acres. This acquisition from Statoil is expected to close in early 2015.

• Nigerian (London-listed) oil group Seplat is in merger talks with its rival, Afren. Earlier this week, Afren said it had "received a highly preliminary approach" from Seplat "regarding a possible combination". Seplat is currently valued at £730 million, while Afren is valued at around £1.1 billion.

Licenses, Tenders & Auctions

• Mozambique has extended a licensing round for 15 new offshore and onshore blocks for gas and oil exploration and production for three months. Initially, bids were to be accepted until late January. The deadline is now extended until April 30. The blocks on offer include three new areas of the northern Rovuma Basin in the north of the country, where U.S. oil major Anadarko Petroleum Corp and Italy's Eni are already developing multi-billion-dollar LNG export projects. This is the first international tender launched by Mozambique since the discovery of natural gas reserves in the Rovuma basin. Mozambican officials expect more than $30 billion will be invested initially in the natural gas sector to build capacity to produce 20 million tons per year of LNG. Exports are slated for 2018.

• India's Reliance Industries will relinquish its Krishna Godavari basin gas discovery block, KG-D3, due to operational restrictions implemented by the country's Ministry of Defense. The minority partner, UK-based Hardy Oil and Gas has also agreed to relinquish the block. RIL, which had made four consecutive gas discoveries with close to 500 billion cubic feet of in-place reserves in the block. The block is operated by Reliance (60%), with Hardy holding a 10% interest and BP owning a 30% interest.

Discovery & Development

• Norway's state-owned Statoil announced a discovery this week at a wildcat well in the North Sea, estimating between 6.3 and 19 million barrels. The wildcat well is just north of a major 2011 discovery in Osberg South field.

• BG Group is gearing up to deliver its first-ever commercial LNG to China from the new Queensland Curtis LNG project in Australia. The loading vessel is already at the facility. This is a milestone for BG, which has spent $20.4 billion on the Queensland LNG project.

• Hit with a $3.5 billion budget deficit and slumping oil prices, Alaskan Governor Bill Walker is halting new spending on six key energy projects. The suspended projects include a small-diameter gas pipeline from the North Slope, the Kodiak rocket launch complex, the Knik Arm bridge, the Susitna-Watana hydroelectric dam, Juneau access road and the Ambler road. The fate of the projects will be decided during the next legislative session, which begins on 20 January.

• PetroChina's largest explored oilfield, Daqing Oilfield, is gearing up to reduce production beginning in 2015, by 1.5 million tons. The field produces nearly one-fourth of China's total oil output annually, exceeding 40 million tons. By 2020, Daqing's annual production will be further slashed by more than 1.3 million tons annually. The field has limited oil reserves and development is costly, particularly at a time when oil prices are slumping.

• Pakistan Petroleum Limited (PPL) has announced its sixth discovery in the Gambat South Block, where it is the operator with a 65% working interest. Joint venture partners include Government Holdings (Private) Limited (25%) and Asia Resources Oil Limited (10%). The discovery was of gas and condensate at the Faiz X-1 exploration well in District Sanghar, Sindh. The well was spudded in mid-October and reached a final depth of 3,564 meters on December 1. Initial testing flowed 2,100 barrels per day (bbl/d) condensate and 11.05 MMscfd gas at 40/64 inches choke size. This discovery will mean approximately 4,030 bbl/d in oil equivalent.

• Circle Oil Plc (AIM:COP) announced a new gas discovery in its Sebou Permit in Morocco. This is the third find in the zone. The company is describing the preliminary find as "significant". This is an onshore gas well (KSR0-12). The find is said to be the thickest gas sand interval found in Sebou to date. It is the third well of a six well program. The well is approximately 1.2 kilometers south-west of the KSR gas gathering station. The well was drilled to a final depth of 1,980 meters. Net gas pay encountered in the well is 19.5 meters in the main target and 1 meter in the secondary target.

• After cancelling the $45 billion South Steam pipeline project and opting instead for a small pipeline to Turkey, Russia's Gazprom has agreed to by the remaining 50% of South Stream from European companies who stood to lose billions on the cancellation. Gazprom will buy the 50% owned by French, German and Italian companies.

Sanctions Alert

On December 18, US President Barack Obama signed into law the Ukraine Freedom and Support Act of 2014. The Act gives the president authority to implement new sanctions against Russia; however, the new provisions have not yet been implemented, and the strategy is to see what Russia's response will be under this pending threat. Key provisions of the act include (from Reed Smith):

1. Mandated Sanctions. The Act requires the president to impose three or more enumerated sanctions against Rosoboronexport, Russia's state-owned exporter of defense articles. The Act also requires the president to impose three or more enumerated sanctions against any Russian entity that transfers or brokers the transfer to, or knowingly manufactures or sells defense articles transferred to, Syria, or into the territory of a "specified country" without its government's consent. Those that provide financial, material or technological support to such entities are also subject to the sanctions. The Act defines "specified countries" as including Ukraine, Georgia, Moldova, or any other country of significant concern under the Act, such as Poland, Lithuania, Latvia, Estonia, and the Central Asia republics. Lastly, the Act directs the president to impose specified sanctions on Gazprom (Russian-controlled natural gas extractor) if the president finds that it is withholding significant natural gas supplies from North Atlantic Treaty Organization (NATO) member countries, or further withholds significant natural gas supplies from countries such as Ukraine, Georgia, or Moldova.

2. Authorized Sanctions. The Act authorizes, but does not require, the president to impose certain sanctions targeting Russia's energy sector. Under the Act, the president is authorized to impose sanctions on investors in Russian crude oil. The investor must have made a significant investment in a special Russian crude oil project to trigger the sanctions. The president is also authorized to impose additional licensing requirements on the export of items for Russia's energy sector, including equipment used for tertiary oil recovery, as enforced by the Bureau of Industry and Security of the Department of Commerce ("BIS"), or the Office of Foreign Assets Control of the Department of the Treasury ("OFAC").

3. Restrictions on Foreign Financial Institutions. Under the Act, the president is authorized to impose a prohibition on opening, and a prohibition or the imposition of strict conditions on maintaining, in the United States, a correspondent account or a payable-through account by a foreign financial institution that knowingly engages in significant transactions involving sanctioned persons; or with respect to the Ukrainian crisis, facilitated a significant financial transaction on behalf of any Russian person included on the list of specially designated nationals and blocked persons maintained by the OFAC.