Global Energy Advisory 31st March 2017

Politics, Geopolitics & Conflict

• Brexit could be good for the UK's oil and gas industry, according to some observers. The reason is that unlike the financial industry, which is much more globally interconnected, the oil and gas industry's chief business is extracting commodities from reserves still abundant in the country. According to an expert from oil technology services firm Petrotechnics, Brexit will not be a big headache for UK oil and gas as the industry not only has the resources to develop but also the talent and skilled workforce to enable its development. This could prove to be true especially against the background of last year's central government decision to allow fracking projects to proceed in Lancashire, despite local opposition, effectively pressing the start button of the shale oil and gas industry in the country.

• And Syria goes to … Russia (and Iran, with Turkey scrabbling for scraps in the background). The White House-via U.S. Ambassador to the UN, Nikki Haley-has indicated that pursuing the ouster of Bashar Assad is no longer on the agenda.

• If you think the long running saga of Russian-U.S. relations has dried up and died, it hasn't. It's not always making headlines because it's too complicated for much of the mainstream media, but it's come up again in the U.S. House Intelligence Committee hearing on alleged Russian interference in the U.S. presidential elections. The FBI was questioned about the role of Trump advisor Carter Page in the Rosneft privatization deal. Ousted national security advisor General Michael Flynn-who has apparently been kept in a closet of late-is back in the spotlight as reports emerge that he's seeking immunity from prosecution for secretive talks with Russian diplomats about sanctions, in return for testimony against Trump.

Deals, Mergers & Acquisitions

• Italian gas infrastructure operator Snam plans to invest $2 billion in Ukraine's gas transmission network and also provide gas for it, sources from the country's state oil and gas company were quoted by Ukrainian media as saying. While on the one hand the news is good, providing Ukraine with much needed feed for the network if Gazprom pulls the plug on transit through Ukraine, on the other it has raised concern that Snam could become a Trojan horse for the Russian gas giant, since it also has relations with it.

• Clayton Williams shareholders are challenging an acquisition deal agreed with Noble Energy in court, claiming that the offered price undervalues the stock. Noble struck a deal with Clayton Williams in January to buy it for $2.7 billion in cash and stock. The disgruntled shareholders, led by Alan Sobel, note that Clayton Williams' stock went up from $29.53 to $103.98 in the second half of 2016, which makes Noble's offer "unfair and inadequate."

• The shareholders of Tesoro Corporation and Western Refining have greenlit the $6.4-billion merger between the companies and the deal should wrap up by the end of June. Under the terms of the deal Western Refining shareholders will receive $37.30 per share or 0.435 shares of Tesoro. The tie-up should bring in some $325-425 million in synergies.

• Weatherford and Schlumberger have agreed to form a JV, to deliver products and services to the U.S. and Canadian unconventional oil industry, the two companies announced. Schlumberger will have a 70% share in the venture, which should be competed in the second half of the year. The two will contribute to the venture their relevant fracking businesses and assets. In addition, Schlumberger will make a one-time payment of $535 million to Weatherford.

• BP will continue to sell refineries and has no plans to replace them with new capacity. Instead, it will spend on modernizing the capacity it already has and growing its gas station network, eyeing additional cash flow of $3 billion. Last year, BP's efforts in streamlining its refining and marketing business resulted in free cash flow of $5.6 billion.

• ConocoPhillips has agreed with Cenovus Energy to sell it most of its oil sands and conventional offshore gas assets for $13.3 billion. The deal will allow Conoco to cut its debt to $20 billion and buy back $6 billion worth of shares. The company will retain its interests in one oil sands project, Surmont, as well as some shale acreage in Canada. For Cenovus, the deal means doubling of its daily oil equivalent output, as it will add 298,000 bpd to its current production.

Tenders, Auctions & Contracts

• UK-based oilfield service provider Petrofac has struck a $1.3-billion engineering, procurement and construction deal with Kuwait Oil Company for the development of a gathering center in the Burgan oil field. The center will process crude oil and gas extracted from several neighboring fields. Work under the contract should be completed by 2020.

Company News

• Saudi Aramco has priced a $2-billion debt offering as part of a $10-billion Islamic bond program ahead of its initial public offering, scheduled for 2018. This is the first Sharia-compliant debt offering of the Saudi oil giant, coming on the heels of a Finance Ministry announcement that the tax load for the company will be reduced, in a bid to sweeten the IPO and attract more investors. The company is currently valued at between $1 trillion and $1.4 trillion by analysts.

• After months of protests and lawsuits, the Dakota Access pipeline is finally ready to start carrying crude from the Bakken shale to Illinois, Energy Transfer Partners, the company behind the $3.8-billion project, said. Crude has been collected in a reservoir under Lake Oahe and flow should start in days. Incidentally, Lake Oahe was at the center of local native American communities' opposition, who argued the risk of a spill threatened their drinking water and religious rituals, which require clean water.

• PDVSA's president Eulogio del Pino may leave the company later this year, according to insiders. Del Pino has been at the helm of Venezuela's state oil company for three years, most of these also serving as oil minister. Expectations are that he will be replaced by the current Oil Minister, Nelson Martinez. Del Pino's departure will be the biggest management change at PDVSA for the last few years as the company - and the government - grapples with a severe recession brought about by low oil prices and mismanagement.

Discovery & Development

• UK oil explorer Hurricane Energy has announced a major discovery in the North Sea, which could hold as much as 1 billion barrels of crude. If the reserves are proved, this would turn the discovery, in the Greater Lancaster Area off the coast of the Shetlands, could become the largest untapped deposit in the UK's North Sea Shelf. The news comes on the heels of licensing round for new oil and gas blocks in the North Sea, in the so-called frontier areas, conducted by energy industry regulator the Oil and Gas Authority.

• Nigerian Oranto Petroleum will invest $500 million in the development of an oil block in war-torn South Sudan - the newest African nation, which is sitting on most of the old united Sudan's oil reserves. Despite the ongoing conflict, Oranto seems certain that the war will end and South Sudan will become a lucrative oil investment destination. The country currently pumps around 130,000 bpd, down from 390,000 bpd before the 2013 war broke out.

• Argentina's Tecpetrol has set aside $2.3 billion to invest in the Vaca Muerta shale formation in the next three years. Tecpetrol has a gas interest in the formation and plans to pump14 million cu m daily in 2019, which is half of Argentina's current natural gas imports. Tecpetrol will start drilling in September.

Regulatory Updates

• Trump has struck down the Clean Power Plan adopted during Barrack Obama's second term with the goal of reducing dependence on fossil fuels in a bid to fight climate change. True to his promise to help the energy industry become great again, Trump this week signed an executive order ordering the Environmental Protection Agency to begin a formal review of the steps needed to roll back the regulations stipulated in the Clean Power Plan. Environmental groups were outraged, with several of them planning to challenge the decision in court. Some energy industry insiders and analysts are meanwhile uncertain about the benefits a roll-back of the climate initiative would bring in, such as new jobs, for example. Still, the industry is happy about the relaxation of methane emission reduction rules and the removal of strict environmental requirements tied to drilling permits.