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Global Energy Advisory – 31st July 2019


Eni’s Problems in Nigeria Aren’t As Big As They Seem

Yes, Nigeria’s state oil firm (NNPC) has admitted that it stopped making payments sto Eni three months ago; and yes, the NNPC is planning to let some of Eni’s oil licenses expire and taken them over itself. Should shareholders be concerned?

No, and here’s why, according to our experts on the ground:

The licenses aren’t core, and the spending issues are par for the course for this type of JV set-up.
On July 24, the NNPC’s newly appointed Group Managing Director, Mele Kyari, received a delegation from Eni and its Nigerian unit, Agip, led by Executive Vice Chairman for Sub-Saharan Africa, Brusco Guido. During those discussions, the issue of expired oil-exploration and production licenses held by international energy companies came up, with Eni making a case for renewal. Kyari told the Eni team that there was no immediate plan to renew the licenses.

Nigeria issues two main types of oil licenses: 1) the Oil Prospecting Lease (OPL), usually issued for about five to seven years for exploratory drillings and other activities in the search stage; 2) the Oil Mining Lease (OML) for exploitation (production and export), usually lasting for about 20 years. While it is not clear whether the licenses in question are OPLs or OMLs, they are among more than two dozen licenses that have expired in recent years.

Last year, the Department of Petroleum Resources renewed 25 licenses, earning the government about $2 billion in revenues. Not included in those license awards were OPLs 237 and 244, both operated by Eni with Nigerian company Oanda; and both which expired in 2017.

Another 42 oil licenses are also due to expire this year, most of them in June. OMLs 116 and 117 run by Eni with Nigerian partner, Amni Petroleum, are due to expire in August.

Eni’s licenses are being handed over to NNPC’s exploration and production unit, the Nigerian Petroleum Development Company (NPDC). That means that the fields in question are small, marginal fields that suit NPDC’s own marginal capacity (it currently pumps less than 50,000 bpd).

Most of these marginal fields are not being actively produced by the oil majors because the low volumes are well below their scale. In the past, the petroleum ministry took away licenses for some of these marginal fields from oil majors and reassigned them to smaller companies that fit the scale and can produce them profitably. Therefore, the fields being referred to aren’t Eni’s core producing fields in Nigeria.

Eni has operated in Nigeria for 57 years (since 1962) through its Agip unit and pumps about 110,000 bpd, mostly exported through its Brass terminal.

Its core licenses are OMLs 60, 61, 62 and 63 accounting for about 40% of the company’s Nigerian production. The associated Obiafu-Obrikom gas plant has capacity for 1 billion cubic feet daily.

Eni has interests in the NNPC, Shell, Total joint venture which contributes 33,000 bpd, OML 118 (15,000 bpd), OML 25 (14,000 bpd) OML 43 as well as OML 28. (Eni also holds a 10.4% interest in Nigeria LNG Ltd, which runs the liquefied natural gas plant on Bonny Island.)

The withholding of payments to Eni is also not a big deal. Such issues have arisen before over spending disputes and will resume as soon as that dispute is resolved. These are “cash call” payments. Under the JV operated by Eni through Agip, capital contributions are made to the ratio of ownership (NNPC 60%, Agip 20%, Oando 20%) for the business. Sometimes spending disputes arise, as appears to be the case here, with NNPC saying payments, now withheld for three months, will resume as soon as certain issues are cleared up.

North Korean Missiles Fall Flat

Nuclear talks with North Korea are still in the realm of “potential” only, and it is highly unlikely that we will see any progress to this end whatsoever this year or next. Likewise, North Korea’s warning shots to South Korea should not be taken as a serious threat to security. Late last week, North Korea fired two short-range missiles over South Korea, while Pompeo was visiting Seoul. It was a pot shot, and should not have been entirely unexpected. North Korea has largely lost its ability to cry wolf at this point. Then, on Wednesday, North Korea fired another string of projectives over the sea. This is a public show for Kim Jong Un and does not pose a threat to South Korea, let alone the US.

What should be of more concern is China’s plans to be the world’s superpower by 2049, which has all been enshrined in a new defense white paper that’s just been released. It entails comprehensive, strategic coordination with Russia. It also entails a powerful answer to NATO in the form of the Shanghai Cooperation Organization (SCO). In terms of coverage area, the SCO is bigger than NATO at this point. But it won’t be through open aggression. That is not the Chinese defense strategy at all. It will be through cooperation and soft power. And while that is being continually honed and strengthened, the Chinese military will be reformed extensively to be a world class military by the middle of this century. Soft power wins, every time.

A unified Korea would be a huge economic force for China (and its partner, Russia). This would give China economic and near-total control over Northeast Asia, with extreme benefits for Russia, as well. Right now, North Korea’s trade with China is down nearly 50% because of sanctions. But consider this: The GDP of a unified Korea could exceed that of all the current G7 nations except for the US within 30 to 40 years. That’s a powerhouse that would economically change the balance of power quite dramatically.

Global Oil & Gas Playbook

- Kenyan commercial crude exports won’t be commencing until 2023 at this point. Originally, it was planned for 2022, with up to 80,000 bpd. The earliest final investment decision won’t be in place until the middle of 2020 and the country has just started surveying the route for a $2-billion pipeline that will run from the Lokichar basin to Lamu port. Also delaying the project are slow land acquisitions and environmental and social impact assessments that should be submitted later this year to the National Environmental Management Agency.

- Likewise, we’re waiting on Uganda’s oil from the Albertine Rift basin. The country has over 6 billion barrels of oil near the border with DRC--1.4 billion of which is estimated to be economically recoverable. The licenses for development are held by China’s CNOOC, Tullow Oil and French Total SA. The final investment decision is being delayed here as well, due to infrastructure issues, including the need for a refinery, processing facilities and an export pipeline from Uganda to Tanzania. There has still been no FID for the $3-billion refinery, which would be built by General Electric and Italian Saipem. Still, the Uganda government is optimistic, and it has now emerged that CNOOC will take a stake in the planned pipeline. The government is also planning to tender the rights for new exploration in five more blocks by the end of this year. Last week, the Chinese suspended work on its Albertine Rift projects over the ebola scare coming out of DRC, right across the border. Work has been suspended for a week and there is no indication that it has been resumed. Ebola has killed some 1,700 people in DRC since August last year, and the Albertine Rift Basin is only a few miles from here.

- Chevron has won permission from the US Treasury Department to continue operating in Venezuela until October--for now--despite US sanctions. This three-month extension came at the 11th hour as the sanctions waiver expired. This means that Chevron and four US oil services companies will be able to continue doing business with state-run PDVSA.

- The Belarusian Foreign Ministry has issued a diplomatic protest note to neighbor the authorities in neighboring Lithuania over the latter’s barring of a Belarusian company’s bid (Belarusian Beltruboprovodstroy) on the construction of a gas pipeline, despite the fact that the bid was the lowest. The Lithuanian government intervened and rejected the bid.

- South Korea is preparing to send a naval unit to the Strait of Hormuz to help protect tankers. It will be moving its anti-piracy Cheonghae unit from Somali waters to Hormuz. A second British Royal Navy warship has also been deployed to the Persian Gulf.

- Iraqi security forces say they have repelled an attack by ISIS on an oilfield in Salahaddin province. This was the third attack attempt in two months. The attempted attack targeted the Olas oilfield is located in the Hamrin Heights. ISIS burned this well and others in the area earlier and were forced to withdraw in 2017.

- A US appeals court has ruled that Venezuela’s stake in Citgo could be seized to satisfy a judgment against the country. The ruling allows bankrupt Canadian miner Crystallex to go after PDVSA's shares in Citgo to collect on its $1.2 billion judgment related to Venezuela nationalizing its gold mine. Both Maduro and Guaido had asked the appeals court to overturn the lower court's ruling. Venezuela expropriated a Crystallex gold mining project in 2011, which led to the 2016 arbitration award. Crystallex and the government reached an agreement in 2017, but Venezuela failed to maintain payments.

- Qatar Petroleum has agreed to buy stakes for exploration and production rights in two blocks offshore Guyana from French Total SA. Total currently has 25% in the Orinduik and Kanuku blocks, and according to deal it will sell 10% equity in each to Qatar Petroleum.

- Yemen’s Ministry of Oil and Minerals is calling on IOCs to restart production and exploration in the country. Oil production has been negligent since 2015. In 2018, Yemen produced about 50,000 bpd of crude, compared to nearly 130,000 bpd in 2014. The government also wants to resume production of LNG, which had been halted as a result of the conflict. The ministry also urged domestic and international oil companies to set up Yemen headquarters in the temporary capital Aden, or move them there. Before the conflict, Total, OMV, Engie, Eni and Schlumberger were all dominant in the industry. Austria’s OMV is the first company to return to this conflict zone. French Total has not made a similar move yet. Is it realistic? Not even close. The Yemenis can’t even take care of an abandoned oil tanker with 1.1 million barrels of oil sitting there without maintenance and threatening an environmental disaster. It’s a political bargaining chip in the proxy war.

- Japan's Itochu and Romanian Transgaz have signed an MOU to develop LNG terminals and gas transportation projects in Europe. This would involve the construction of an LNG terminal near Alexandroupolis, in Greece; a gas pipeline from Georgia to Romania; and an LNG terminal on the Croatian island of Krk. These same companies are involved in the Baltic LNG project.

- Osaka Gas said it is buying 100% of the outstanding shares of US shale gas developer Sabine Oil & Gas for $610 million. This would be the first acquisition of a US shale gas developer by a Japanese company. It’s not Osaka’s first foray into Sabine, though. Last year, it purchased a 35% stake in the eastern half of this east Texas asset. Sabine has a total of 175,000 net acres here, producing around 210 MMcfed of gas in some 1,200 wells.

- Australian Parliament has approved the ratification of a maritime boundary treaty signed with East Timor to delineate offshore oil and gas wealth in the Timor Sea. The treaty was signed in March 2018, but won’t take effect until ratification, which is expected to happen in August, thus ending a decade-long maritime dispute. At stake is the Greater Sunrise natural gas field, which holds around 5.1 trillion cubic feet of gas. The new deal would give East Timor 70% of revenues for gas piped to the island and 80% of revenues for gas piped to Australia for processing.

- BP says it has no plans to allow its vessels to traverse the Strait of Hormuz at this time, given rising tensions and risks. Instead, BP is shipping oil out of the region on chartered tankers. This new process was put in motion on July 10, after Iran attempted to seize a BP vessel.

- Texas-based oilfield services company National Oilwell Varco has reported a nearly $5.4-billion loss for Q2 2019, on $2.13 billion in revenues. That equates to a $14 loss per share. Shares have lost 20% since the beginning of the year.

- Two vessels carrying Iranian LPG involved for China deliveries were detained in Singapore last week, accused of violating US sanctions on Iran. The two vessels belong to Kunlun Shipping, a private Hong Kong company with a fleet of LPG vessels carrying Iranian-sourced cargoes.


Why the US Just Released A High-Profile Turkish Sanctions Buster

A high-profile Turkish figure detained in the US for involvement in Iranian oil sanctions busting has been quietly released and sent home. None of this happened without a deal behind the scenes.

Former Halkbank executive Hakan Atilla returned to Turkey last week after spending more than two years in a US jail for helping evade sanctions on Iran. He was welcomed at the Istanbul airport by Treasury and Finance Minister Berat Albayrak, who is also President Recep Tayyip Erdogan's son-in-law. It was a sign of the significance that the Turkish government attributed to the case.

So what was the quid pro quo?

Turkish officials will say that Atilla committed no crime in his sanctions busting and should never have been in prison. They will say that the US detained him because of a Gulenist-led investigation and because apart from Reza Zarrab, he was the only one they could tap for information. They will also say that his warm welcome back at home in Istanbul means that he didn’t inform on sanctions busters. They will say that he refused pressure from the US to turn against Turkey like Zarrab did. According to our sources in the corridors of power in Turkey, Zarrab now lives in a nice villa in Florida and has become an informant for the US government. By this same logic, the official version in Turkey is that Atilla resisted and is not a traitor. Those same sources suggest that Atilla is likely to be rewarded for his loyalty soon--most likely with a lucrative official positing and an easy public office.

However, we have another well-placed source in Ankara says that there is a quid pro quo here that isn’t public knowledge. This source says there was deal for Atilla’s release that is implied and that is expected to result in the release of American consulate staff arrested in Turkey. It is also playing into Turkey’s desires to buy Russian defense systems. Atilla’s release is expected to be a fig leaf that would convince Turkey to abandon its deal with the Russians and for the US to forego sanctions because of that. The release, then, is about lowering tensions.

Will the Russian defense deal go through? Right now, we know from military sources that the deal has not yet been set-up and no one has instructions to do so.

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