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Global Energy Advisory – 9th May 2014

Regulatory Intelligence

Changes in South Africa’s petroleum law give the state a 20% stake in new ventures, prompting US oil and gas explorer Anadarko Petroleum to halt spending on exploration in South Africa until it has more clarity on the law. South Africa's parliament passed the changes to the law in April, sparking controversy among the investment community. The law gives the state 20% free carried interest and allows the government to increase its share of a project by acquiring a greater stake at an agreed price or by production-sharing agreements. The legislation also gives the mines minister sweeping powers to categorize certain minerals as "value-additions", which means a portion would have to be processed domestically instead of exported in raw form. Interestingly, the legislation was pushed through very quickly, clearly with the political aim of affecting May elections. Exploration of South Africa’s proven oil reserves of 15 million barrels in the south and off the west coast near the Namibian border will be affected.

Oil exports from Iraq’s Kurdistan region have resumed at a volume of 100,000 barrels per day through a pipeline to Turkey that bypasses the Iraqi central authorities in Baghdad. This crude will be up for sale on international markets in the coming days. The Kurd’s direct exports to Turkey have been in place since December, while the Turks have been storing the crude at their port in Ceyhan in an attempt to appease Baghdad. However, late last month, Turkey warned that it was running out of storage capacity at Ceyhan and would have to sell the oil onwards. We also caution that Baghdad—running out of options here—has threatened to legally target traders in what it deems as illicit oil from Kurdistan. Baghdad has said that the revenues from the Kurdish oil sales must be controlled by Iraq’s own State Oil Marketing Organization (SOMO); however, the Kurds insisted on controlling sales and revenues, prompting Baghdad to cut off the KRG from the national budget.

Canada’s Transport Ministry has unveiled a plan to phase out tens of thousands of older tank cars used to transport oil and ethanol by rail over the next three years. According to the Ministry, around 5,000 of the most dangerous tank cars will be pulled off the tracks within a month. The move was prompted by last summer's deadly derailment and fire in Lac Megantic. At least five of the tankers exploded, leveling about 30 buildings. Rail carriers will also be required to prepare emergency response assistance plans for shipments of all petroleum products.

Mexican President Enrique Peña Nieto announced on 1 May 2014 that proposed secondary legislation for energy reform would create thousands of new jobs while securing national sovereignty and energy security. He also affirmed that underground hydrocarbons would continue to be the property of the Mexican people. Additional potential benefits from the reform, according to Peña Nieto, include lower energy prices, faster growth, and greater working conditions for energy-sector workers. (From our partners at Southern Pulse).

Security Notes

Vietnam has demanded that China halt oil drilling operations in a disputed patch of the South China Sea after Beijing’s deployment of a deep sea oil rig last weekend. China insists that it is operating in its own territorial waters, in an area close to the Paracel Islands.  These islands are controlled by Beijing, but claimed by Vietnam. The $1 billion rig is owned by China's state-run CNOOC oil company. Vietnam’s authoritarian government really has no choice but to pursue a campaign of heavy-hitting rhetoric against China, which the Vietnamese public views with anger. The situation has intensified since 2012, when CNOOC invited foreign companies to bid on blocks in the South China Sea that Vietnam claimed overlapped with its territorial waters. The Vietnamese authorities will be under public pressure to deal effectively with China, or to at least make it appear that it is doing so.

In Nairobi, Kenya, which jumped onto the stage as East Africa’s emerging oil giant, two separate bomb attacks on buses killed three people and injured over 80 others last week. Other attacks in the port city of Mombasa targeted the city center and the Reef Hotel on Nyali Beach. This is blowback from Kenya’s involvement in undermining al-Shabaab militants in neighboring Somalia. Vice President William Ruto announced that Kenya would maintain its troop presence in Somalia despite the recent increase in terrorist activity. The risk of further attacks remains high on public transport and at hotels, restaurants and busy public areas.

Discoveries

Houston-based Cobalt International Energy said that early results from a program off the coast of Angola show there may be as much as 700 million barrels of oil in the region. The company released results from its Orca-1 pre-salt deepwater exploration well off the coast of Angola. The company said it tested the well at a rate of 3,700 barrels of oil and 16.3 million cubic feet of natural gas per day. According to Cobalt, the results show this may be the largest oil discovery every found in the Kwanza basin off the coast of Angola. The company estimates a resource range of between 400 and 700 million barrels of oil. Cobalt is the operator and holds a 40% stake in block 20/11. Sonangol and BP own 30% each.

Mergers & Acquisitions

Russia’s Lukoil has reportedly sold its 50% stake in Caspian Investment Resources Ltd. (CIRL) to Beijing-based Sinopec for about $1.2 billion. CIRL has interests in four production projects in Kazakhstan. Lukoil’s share in 2013 was 10.2 million boe. Lukoil said it plans to reallocate investments to exploration projects, including those in the Kazakhstan sector of the Caspian Sea. Lukoil will continue to participate in Kazakhstan production projects, including Kumkol, Karachaganak, and Tengiz.

Latin America Energy Update

From our partners at Southern Pulse:

•    On 29 April 2014, Bolivia indicated that it will export electricity before the end of 2014 to Argentina, which has sent several formal letters asking to purchase electricity. The announcement came as four new gas turbines came online at Termoeléctrica del Sur, a new thermoelectric power plant in the Tarija region. Hydrocarbon and Energy Minister Juan José Sosa explained that the additional electricity produced by this plant will contribute to a total output of 1640MW, more than the country’s electrical demand of 1200MW, leaving excess electricity for exportation.

•    Brazilian newspaper Folha illuminated on 6 May 2014 another controversy similar to the Pasadena refinery scandal. According to internal Petrobras documents, Petrobras approved the purchase of the Nansei refinery in Okinawa in 2008, without the board being informed of investment risks. Appraisals showed that the investment would only turn a profit if the refinery was updated to refine heavier Brazilian oil and if it doubled its production. Management never relayed this assessment to the board, and now environmental factors prohibit the refinery’s expansion.

•    On 2 May 2014, the Bolivian government and the British company Rurelec PLC agreed to complete the nationalization process of the electricity provider Guaracachi SA with a US$31.5 million payment. The national government expropriated Guaracachi SA from Rurelec PLC on 1 May 2010, and Rurelec quickly filed suit for damages in the Permanent Court of Arbitration at The Hague. After protracted negotiations, Attorney General Héctor Arce said that this payment from the National Treasury will finally settle the dispute.

•    We also note that opposition leader Juan Carlos Varela won presidential elections in Panama with over 39% of the vote, beating out ruling party candidate Jose Domingo Arias. Vice-President Arias was running with the first lady, though he had attempted to distance himself from incumbent president Ricardo Martinelli who is dogged by corruption allegation. This was an unexpected victory. However, Varela does not have a congressional majority, which means he will have to court opposition support for any reforms.

Next week we will be looking at a number of key elections in frontier energy venues coming up this month. We also remind you that OP Tactical, our intelligence and tactical operations wing, is operating in these countries to provide clients with risk analysis and discreet due diligence. Please contact OP Tactical for more information. For clients with security concerns in Ukraine or the Black Sea region in general, please contact us with any urgent requirements.





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