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Global Energy Advisory August 26th 2016

Houthi Rebels

Politics, Geopolitics & Conflict

• Gazprom is likely to start turning its attention more to the East after the Polish anti-trust authorities slammed the door in the Russian giant’s face regarding its Nord Stream-2 project. Poland threatened its Western European partners, among them Shell and Germany’s Wintershall, along with Austria’s OMV, who all have major presence in the central European country, that if they go forward as a consortium with Gazprom to build Nord Stream, this would increase Gazprom’s influence over the local energy market unduly. The partners are not giving up and will seek ways to participate in the project separately, they said. Meanwhile, Turkish Stream is back on the table after Turkey’s president Erdogan apologized to Moscow for the downing of a Russian plane last year and the two countries are getting close again. Iran is another natural partner for sanction-hit Russia. Europe, however, remains a key market for Gazprom and any about-turn on its part will take considerable time. Until then, it will likely continue to supply a third of the European Union’s gas via existing pipelines, until alternatives such as the Trans-Adriatic pipeline, or TAP, are built.

• The recent jump of crude oil prices will soon be over, according to analysts, as the market gets used to the fact that the September OPEC meeting in Algeria is highly unlikely to result in an agreement to cap production. What’s more, even if such a freeze is agreed on, its use will be non-existent as OPEC’s top producer Saudi Arabia and its biggest regional rival Iran are both pumping crude at historically high rates. Russia is also not standing by watching, setting output records, too. So, the effect of a freeze now will be similar to that of the one that Russia and OPEC failed to agree on this spring: extremely short-lived. Meanwhile, demand remains sluggish and fundamentals are once again coming to the fore, putting pressure on prices.

• The Colombian government has finally sealed a peace deal with FARC, the guerilla group behind fifty years of bloodshed in the South American country. The negotiations that eventually led to the deal took four years and substantial financial assistance from the U.S. Now the militants will disarm and, hopefully, begin their reincorporation into society. This will have a significant impact on Colombia as a destination for oil companies, which have so far been reluctant to invest there thanks in no small part to the guerilla action but they have also been put out by the difficult terrain and limited hydrocarbon resources.

• A purported missile attack by Shi’ite Houthi forces in Yemen against Saudi Aramco oil facilities across the border further indicates how this proxy war with Iran is getting out of control for the Saudis, who are unfortunate enough to share a border with Yemen, while Iran is insulated by geography. The attack has not been confirmed by either the Saudi authorities or Aramco, and for now it is only being claimed by Yemeni reports, eagerly recirculated by Iranian press.

Deals, Mergers & Acquisitions

• Tullow Oil has put up for sale its Norwegian operations as part of a shift towards core business, prompted by consistently low oil prices. The move will result in the loss of 50 jobs, according to local media, but Tullow Oil has not confirmed the figure yet. The company’s core operations are in Africa and South America. Tullow has 34 exploration and development licenses in Norway.

• Woodside, the Australian energy major, has agreed to buy the Senegal oil operations of ConocoPhillips. The value of the deal is $350 million and it includes the acquisition of 100% in ConocoPhillips Senegal BV, which holds a 35% interest in a production sharing contract with the country’s government for the exploration of three offshore blocks. The deal also gives Woodside the rights to the development of the three exploration blocks.

• Continental Resources has agreed to sell $222 million worth of assets in North Dakota and Montana as part of efforts to cut its debt load and prop up its balance sheet. This is the third asset sale of Continental since the start of the year and involves 68,000 net acres in North Dakota and 12,000 net acres in Montana, both considered non-core. The combined output from the two leaseholds is 2,800 bpd.

• Eni’s investments in the huge offshore Zohr gas field in Egypt have reached $3.5-4 billion, the Egyptian minister of petroleum and mineral resources said. Total investments needed for the full-scale development of the field, which also includes a floating storage and processing unit, are estimated at $12 billion. Earlier in August Eni said it was considering offloading a 20% stake in Zohr. Potential buyers include Russia’s Lukoil, Shell, French Total, BP, and ExxonMobil.

• Cobalt International Energy said it has terminated the sale of a 40% interest in two offshore fields in Angola to the country’s state-owned oil company Sonangol. The deal was worth $1.75 billion but it didn’t get all the necessary approvals from the Angolan government. The deal was proposed last year and the government had 12 months to grant its approval.

• Canadian Alberta Oilsands has inked a deal to acquire local peer Marquee Energy. The all-stock deal will see Marquee shareholders get 1.67 shares in Alberta Oilsands for each share they hold in Marquee, eventually controlling 49% of the new company, which will be named Marquee Energy Ltd. It will be growth-oriented, both organically and through acquisitions, focusing on Canadian oil and gas.

• Apache Energy is eyeing new exploration contracts in Egypt, the company’s chief executive announced. Senior representatives of the company met last week with Egyptian government officials including the country’s prime minister and the minister of petroleum and mineral resources to discuss the U.S. company’s future investments. To date, Apache operates 23 concessions in Egypt, of them 20 in producing regions. The company has so far spent $12 billion on the development of oil and gas fields in Egypt.

Discovery & Development

• Tullow Oil announced the first crude oil from the TEN field offshore Ghana. This comes three years after the field’s development plan was approved by the Ghanaian government. The TEN project, which includes three fields in fact – Tweneboa, Enyenra, and Ntomme – costs $5 billion and it should initially yield a gross 23,000 barrels of oil equivalent daily this year, or 11,000 boepd net.

• Argentina has really taken to developing its tight gas reserves in the Neuquen Basin, in a bid to tackle a decline in conventional gas production. As of the first quarter of this year, tight gas output accounted for a quarter of the total extracted in the Neuquen Basin. The government is supportive of this turn to unconventional gas resources and its support is expressed as incentives for operators in the region. Wood Mackenzie warns, however, in a report on Argentine tight gas, that the performance of tight gas wells is rather uneven and not all of them will prove economically viable over a longer term.

• Russia’s state-owned nuclear power engineering giant Rosatom said it is working on a feasibility study for a new type of nuclear reactors that will reduce financial risks associated with NPP construction and make Russian nuclear projects more competitive internationally. The idea of developing a super-VVER reactor – water-cooled, water-moderated – has been around for a while but it’s only now that Rosatom is starting to look into its feasibility. If all goes well, the new VVERs will start being developed in seven years.

• Rosneft announced it has discovered a new oil field in the eastern Siberian region of Irkutsk, near the giant Verkhnechonskoye field. The reserves at the new field are estimated at 10 million tons of crude, the company said.

• The in-place potential crude oil reserves of the West Orphan Basin, in Canada’s continental shelf, have been estimated at 25.5 billion barrels. Gas reserves could reach 20.6 trillion cu ft. The exploration surveys were conducted by Nalcor Energy and Beicip-Franlab.

Company News

• Cairn Energy reported a net loss of $37.8 million for the first half of 2016, a substantial reduction fro the negative $230.3 million reported for the same period of 2015. The company, whose operations are focused on India and Africa, said its H1 net result was favorably influenced by lower exploration costs and asset charges. Another positive factor was the re-evaluation of its exploration assets offshore Senegal to 473 barrels, which is almost a third higher than previous estimates. Total Cairn reserves in Senegal are calculated at 2.7 billion barrels. Meanwhile, Cairn remains locked in a tax dispute worth $5.6 billion with the Indian government. The dispute concerns the valuation of the company’s Indian assets.

Regulatory updates

• The Ugandan government has decided to set up a special fund for companies with ambitions in the oil and gas industry in a bid to facilitate the development of its newly discovered hydrocarbon reserves. The authorities recognize that lack of access to financing is one of the main hurdles to local companies willing to venture into oil and gas, especially in light of the fact that over 90% of Ugandan enterprises are small and medium companies. Initially, the purpose of the fund will be to enable capacity-building at local enterprises and then it will support their operations. Capacity-building will involve training in relevant professions to supply local energy businesses with the necessary skilled workforce.

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