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Oil's Best & Worst of 2015; The 2016 Geopolitical Disaster

What 2016 has in store for us...

Make no mistake: The West's policy of enlisting and then discarding Sunni Wahhabis and Muslim Brotherhood have more than anything fueled the fire of a war that is no longer pending but here. This policy has given legitimacy to their anger and their beliefs. Syria has given it the pathway, which leads to Iraq and now is fanning it out in every direction.

So how to end this war before it becomes impossible; before ISIS succeeds in creating a large state of its own? That will be difficult at this point because the situation is already out of control. We cannot expect the Middle East to fight ISIS on their own. This would require a uniting of Sunnis who are against ISIS and Shia, which will never happen. At the end of the day, the U.S. alone does not have the resources to fight this war on the ground on all of these fronts. And with Turkey playing its own double game (or triple game), this alliance makes for a very shaky front. Neither will other Sunni countries make for good alliances because it would mean they are de facto promoting Shia ambitions (read: Iran). To think that Sunni Saudi Arabia and Shia Iran would combine forces effectively to fight the ISIS scourge would be naive.

What awaits us in 2016, then, is a Third World War played out in a guerrilla warfare setting without any clear boundaries in terms of front lines or alliances. There is no axis. Terrorist attacks will likely spread through the west, picking up pace first in Europe. European Union visa-free travel will be reviewed and revised in all likelihood, and already tense Balkan borders seething with refugees from the Syrian conflict will await only a small spark to reignite old conflicts. The tensions are already weighing down the air. The refugees will suffer horribly, and terrorists will sneak in with them—as they already have through the Balkans—creating panic and heavy handed policing.

To understand that Europe is in trouble requires in part just looking at the numbers. Of the estimated 20,000 fighters who have joined jihadist groups in Syria, some 4,000 are believed to be from Europe, which represents a doubling of the number of jihadists coming from Europe the previous year. We can break this down further and estimate that some 700 are from France (according to the International Centre for the study of Radicalization and Political Violence, ICSR), with the next largest numbers coming from the UK and Germany. Belgium, Denmark, Austria and the Netherlands also have higher numbers.

Against this backdrop, oil prices may rebound a bit on the spreading panic and the threats to supply, but the bigger picture could see the redrawing of the global oil map. No one assets in the Middle East will be safe, and what investors should be looking at immediately are export routes, which will be the first thing that is redefined and most noticeably through Turkey.

And what of Russia and Ukraine?

The conflicts here—in Crimea and in the provinces of Donetsk and Luhansk—will remain frozen. While Crimea has largely disappeared from media radar since the escalation of the conflict in Syria, an important turn of events in late September should be considered. It was until late September that Crimea continued to receive all critical supplies (including electricity) from Ukraine, and the rest of the world had written it off entirely to Russia. But a group of fairly well organized activists is trying to get it back, and they're banking on the fact that Crimea is still very much dependent on mainland Ukraine and Russia isn't yet in a position to provide its energy resources in terms of infrastructure. This should be a focal point of monitoring going into 2016.

The Best & Worst of 2015

Top Oil Discoveries

• April 2015: UK Oil & Gas Investments announces up to 100 billion barrels of oil at an onshore site in south England, near Gatwick airport. That's more than double the amount of oil pumped from Britain's energy offshore North Sea fields in the past 40 years.

• August 2015: Billed as potentially the largest natural gas discovery in history, Italian energy company Eni said it unearthed a "supergiant" gas field in the Mediterranean Sea covering about 40 square miles. The gas field could hold a potential of 30 trillion cubic feet of natural gas what could be worth $100 billion. In December, following an agreement with the Egyptian authorities, Eni began drilling.

• October 2015: US-based Genie and its Israeli subsidiary, Afek Oil and Gas, discovered a significant oil deposit in the Golan Heights, with enough reserves to last Israel for decades. Until the oil is actually extracted, they won’t be sure of the actual amounts and quality of the oil that has been discovered.

• November 2015: Shell made a major discovery at its Kaikias well in the deepwater Gulf of Mexico that could possibly surpass 100 MMboe. Shell discovered Kaikias in August 2014, and appraisal drilling revealed more than 300ft of net oil pay in August 2015. Kaikias is situated near Shell’s existing deepwater Gulf infrastructure, and builds on the company’s exploration activities in the Mars-Ursa Basin.

• May 2015: ExxonMobil announced that it had encountered oil at its Liza-1 well in the Stabroek Block, about 120 miles off of the coast of Guyana. The company said its discovery could hold as much as 700 million barrels of crude. Although it may be too early to tell if ExxonMobil can ultimately recover that much oil, the discovery could be worth as much as $40 billion. That is the equivalent to more than 12 times Guyana’s entire GDP.

• March 2015: Norway's Statoil discovered an additional one to 1.8 trillion cubic feet (tcf) of natural gas off-shore Tanzania. This brings the total of on-place volumes up to approximately 22 tcf in Block 2 from the Mdalasini-1 exploration well alone.

• May 2015: Italian Eni made a discovery at an exploration prospect off the coast of Libya. This was a natural gas and condensate discovery in Area 3, a reserve area about 85 miles off the Libyan coast. Production tests yielded a preliminary flow rate from the well at 1,340 barrels of oil equivalent per day. Eni estimates the well should be able to produce at least 3,000 boe per day at its peak.

• October 2015: We'll save the best for last ... It was this month in which Argentina's state-run YPF, in partnerhsip with Chevron, discovered a 'super well' in the country's prized Vaca Muerta shale in Neuguen. The super well, the Loma Campana 992, showed an impressive initial production of 1,630 barrels per day—production figures, says YPF, that are higher than anything ever seen before right off the starting blocks. This is great news for Argentina, which is already slated to become the next venue for a US-style shale boom. But sweetening this deal is a new government that is pro-oil and content on contnuing some policies that are very beneficial to the industy. Conservative pro-business candidate and former Shell executive Mauricio Macri won Argentina’s November run-off elections and he's intent on seeing the shale boom through to its lucrative end. What's important to understand here is that Argentina's wells are competitively productive, but at the same time, oil and gas prices are fixed above international benchmarks. Regulated oil prices are around $75-$77, despite low global prices. And Macri's government wants to continue this, while it was originally set to expire by 31 December. In addition to this, the government’s $11-million-plus incentivized oil program has spurred steady growth. And remember: Argentina is already home to 27 billion barrels of recoverable oil and 802 trillion cubic feet of natural gas and its two shale basins could end up being bigger than the Eagle Ford and Bakken.

A Year of Bankruptcy and Merger

In 2015, 36 North American oil exploration and production companies filed for bankruptcy totaling about $13 billion in secured and unsecured debt. The biggest aws KKR Co.'s Samson Resources with $4.3 billion of secured and unsecured debt. Sixteen of this year’s bankruptcies were filed in Texas, with another six in Canada, four each in Delaware and Colorado and the rest in Louisiana, Alaska, Massachusetts and New York. Since peaking in October 2014, U.S. oil and gas employment has fallen by 70,000 jobs.

• August 2015: Energy Transfer Equity and Williams Cos. Inc agreed to merge in a deal valued at $37.7 billion, including the assumption of debt and other liabilities. Williams previously rejected an unsolicited all-equity acquisition proposal by ETE valued at $53.1 billion. This deal set about to create one of the world's largest energy infrastructure companies, alongside Kinder Morgan Inc. and Enterprise Products Partners.

• April 2015: Royal Dutch Shell announced the acquisition of British oil and gas giant BG Group for a transaction value of $70 billion. In mid-December, Shell received clearance from Chinese authorities, the last step for approval. The company said it was aiming to complete its takeover of smaller rival BG Group on February 15, 2016. BG requires 75% of the total shareholders votes while Shell requires 50%. If the shareholders vote in the favor of this deal, it will be considered the biggest energy deal in a decade. The takeover is intended to strengthen Shell’s position in the LNG market in a context of tough market conditions.

• Schlumberger agreed to buy Cameron International in a deal valued at $14.8 billion. Schlumberger said the acquisition would allow it to bundle its offerings, which range from surveying a site to drilling wells, with ones from Cameron that include pressure valves and blowout preventers, one of which was at BP's Macondo well that exploded in 2010. The acquisition marks a shift in the oilfield service and equipment industries, which have generally stayed at arm’s length from one another.

• November 2015: As falling oil prices threaten development in the politically charged Falkland Islands, Rockhopper and Falkland Oil and Gas agreed to join forces. Rockhopper has agreed to acquire Falkland Oil and Gas for £57 million. The will make for the largest license holder in the North Falkland Basin, where there are thought to be 1 billion barrels of oil recoverable.

The Biggest Policy Moves of the Year

• One of the biggest policy events of the year was Obama's formal rejection of the Keystone XL pipeline on the grounds that it would not serve US national interests, nor would it lower gas prices for American consumers, since the average price of gas has fallen about 77 cents over a year ago, or ensure future energy supplies. TransCanada first sought the required presidential permit for the cross-border section in 2008 but the proposal provoked a wave of environmental activism that turned Keystone XL into a rallying cry to fight climate change. President’s Obama denial of the proposed 1,170 miles pipeline, which would have carries 800,000 barrels a day of carbon-heavy petroleum from the Canadian oil sands to the Gulf Coast, came amid preparations for ambitious climate change plans. But economics was the real motivator here. With Canadian oil sands barely surviving in the depressed oil price atmosphere, particularly given the high cost of producing product, Keystone just doesn't make sense.

• The Obama administration also unveiled a state-by-state effort to combat global warming by slashing carbon pollution in the climate sector. Under the plan, the administration will require states to meet specific carbon emission reduction standards, based on their individual energy consumption. The plan also includes an incentive program for states to get a head start on meeting standards on early deployment of renewable energy and low-income energy efficiency. Even before the rule was announced, many states announced plans to fight it, including some vows to take the administration to court over the new rules. While this will hit the coal industry hard, what everyone should be watching in the New Year is the multi-million dollar market this creates for remediation technologies. Investors should be getting on board this year—sooner rather than later—with companies set to benefit from their sale of new remediation technology. Where there is desperation, there is also vast opportunity.

• Finally, and certainly the biggest policy story of the year ... the move to end the 40-year ban on US oil exports, which has been gradually weakening since oil prices plunged in the summer of 2014. The lifting of the ban was included in the federal omnibus spending bill that passed earlier in December. Now, the first exports are set to leave from Texas in January. We do not, however, expect a flurry of exports to start leaving the US. Prices will still have to come up a bit for that to happen.




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