Global Energy Advisory – 9th January 2015

Iraq/Syria Monitoring Report

• We have been closely monitoring the situation in Kobani, Syria, on the Turkish border, as we detailed for subscribers in October. Earlier this week, Kurdish forces managed to retake part of this area from IS militants and are now said to hold 80% of the border town. IS had taken the town in mid-September, threatening the Turkish border. Kurdish fighters had international air strike support.

• Last weekend, US and 'coalition' forces launched air strikes on a crude oil pipeline and collection depots held by IS in Syria, near the eastern city of Deir-al-Zour. The objective was to disrupt IS oil supplies and take out makeshift tankers and depots. This is only one avenue of revenue for IS, which is also earning from ransom kidnappings, smuggling of antiquities and other commodities and extortion.

• Iraq's Anbar province is burning after a series of attacks and clashes that have left over 20 people dead earlier this week. There was a suicide bombing at a mosque in al-Jubba that killed 10 people, and an attack on police and army positions that killed another 13. Both attacks took place near a training installation where US forces are training Iraqi military forces. There are some 320 US soldiers and marines at this training camp at the Al Asad air base, which is under continual mortar fire, but so far has resulted in no US casualties. The air base is some 180 kilometers northwest of the capital, Baghdad.

• Militants in Iraq killed three Saudi border guards earlier this week as they were crossing over near Judayyidat Arar. Two assailants were shot dead, while the others detonated explosive belts they were wearing, according to Saudi officials. The Saudis are part of the US-led coalition fighting IS, which both initially helped to arm and empower rebels fighting against Syria's Assad.

• Kirkuk is growing increasingly unstable due to the massive influx of refugees fleeing violence in other parts of Iraq, which will affect the demographic balance. Despite ongoing clashes, however, oil exports from Kirkuk to Ceyhan, Turkey, resumed last week. Clashes continue between Kurdish Peshmerga forces and the IS to recapture locations in south Kirkuk. IS maintains control of some Kurdish villages in the Hamrin area, outside of Kirkuk, but they have not succeeded in getting past security points leading towards Kirkuk.

• Iraq exported around 91.1 million barrels of oil in December, a national record, but with oil at $50 a barrel, it still does not have the budget to effectively fight back IS.

• In Mosul, where IS has complete control, 20 young men have reportedly been executed, along with three female lawyers and four soldiers. Large numbers of people are being treated for water poisoning, as basic public services breaks down and unpurified/unfiltered water is being pumped into households. One should not make the mistake of assuming that IS is completely unwelcome in Mosul, however. Plenty have welcomed them-particularly certain small-time businessmen that view this as an easier way to do business. But this mafia-terrorism economy is not sustainable. Still, it would also be a mistake to underestimate IS' holding power. It has managed to hold on to a significant amount of territory in Iraq and Syria and claims to have a budget for this year of over $2 billion, while some sources say it has even opened up its own "development bank" in Mosul. At the same time, we do not see the same momentum IS had when it initially took major towns and locations in Iraq and Syria, and now it has lost (or is poised to lose) Kobani on the Turkish border, which is strategic only geographically.

• Tensions from this Middle Eastern chaos are spreading inside Turkey, with an 'English-speaking' female suicide bomber blowing herself up inside a police station in Istanbul earlier this week, killing one officer and injuring another. This was in a popular tourist district and will have significant repercussions.

• Further to this, on the border area with Syria, tensions between Turkey and the Kurds are increasing and we expect further escalation as clashes between police and Kurdish protesters led to the death of a 14-year-old boy.

Libya Monitoring Report

• An air strike on 4 January targeted a Greek-operated oil tanker near an eastern Libya port, killing two sailors. The tanker was struck by a rocket during an air strike at Derna port as a result of the ongoing clashes between parallel Libyan governments attempting to take control of the countries ports and oilfields to solidify power. But what's most worrying here is the tanker was targeted by military aircraft operated by the internationally recognized Libyan government. The tanker was chartered by Libyan state-owned National Oil Corp., and was carrying 12,600 metric tons of oil, according to the Greek Foreign Ministry. The internationally recognized government, which is trying to take control of the port from the rival Islamist government, claiming that it is allied with the Islamic State (IS), claimed it had received no information of the tanker's presence in its territorial waters and as such treated it as a threat to national security. The bombing of the tanker led the only foreign airline still flying to Libya-Turkish Airlines--to suspend all flights indefinitely.

• German Wintershall has suspended its onshore operations in Libya, citing increasing violence affecting oil export facilities. Wintershall's investment in Libya represents more than $2 billion and 150 wells, and at one point it was producing 100,000 bpd.

Discovery & Development

• Chevron has announced a major oil discovery in the Gulf of Mexico at the deepwater Anchor prospect. The new discovery comes right after Chevron announced the start of crude oil production at the Jack/St. Malo project, also a deepwater Gulf of Mexico play.

• China's CNOOC has made a natural gas discovery at Lingshui 25-1 in the deep waters in the Qiongdongnan Basin of the South China Sea. The discovery is being labeled as "mid-to-large". The average water depth is 980 meters, and the well was drilled to 4,000 meters, encountering an oil and gas pay zone with a 73-meter thickness. The well was tested to produce about 35.6 million cubic feet of natural gas and 395 bpd.

• Turkey will finish construction of its first domestic seismic vessel for Black Sea oil exploration in March 2015, with the vessel slated to start operations by the third quarter of this year. The start of Black Sea drilling operations by a joint venture including Turkey's state-owned TPAO and Royal Dutch Shell was inaugurated earlier this week. Also this week, another vessel (not domestic) set sail for the Black Sea where it is expected to begin drilling in a matter of weeks. This is a $300 million drilling project. No concrete reserves have yet been found and earlier exploration efforts by BP, Exxon and Petrobras were abandoned. During the course of 2014, 220 wells were drilling both offshore and onshore Turkey, with 188 wells opened with a 33% accuracy rate.

• ConocoPhillips and partners have launched first oil production at their Eldfisk II project in the PL 018 license, Norwegian North Sea. ConocoPhillips is the operator, while France's Total SA holds a 39.9% interest. Italy's Eni has a 12.5% stake and Norway's Statoil has 7.6%. Production from the field will ramp up over the next three years as more wells are brought online. The first major startup was Ekofisk South on October 25, 2013. Eldfisk II includes plans to drill 40 new production and water injection wells, together with other projects offshore Norway, will add roughly 60,000 boepd to the company's production volumes by 2017. The field's output capacity is 70,000 boepd.

Deals, Mergers & Acquisitions

• Oklahoma-based American Energy Partners, founded only in 2013 by former Chesapeake Energy CO Aubrey McClendon, is planning to merge two of its affiliates in eastern Ohio and northern West Virginia to form one of the biggest companies in Appalachia with more than 300,000 acres in the Utica and Marcellus shales. The new company will be American Energy Appalachia Holdings, wholly owned by the current two affiliate shareholders.

• Houston-based Harvest Natural Resources said that a $275 million agreement to sell its remaining assets in Venezuela has been terminated as the government failed to approve the plan. Venezuela owns a 60% stake in Petroandina, a subsidiary of Harvest. Harvest unveiled plans in December 2013 to sell its stake in Venezuelan Petrodelta SA to Argentine energy company Petroandina Resources for $275 million. Petroandina had already purchased an 11.6% interest in Petrodelta from Harvest for $125 million. The deal was approved by Harvest stockholders in May of last year. The Venezuelan government said that approval would be conditional on unspecified bonus payments and $1.52 billion in financing for Petrodelta. Harvest will now retain its 20.4% interest in Petrodelta. The company said it would instead focus on efforts to explore alternatives, including expanding assets in Gabon.