Global Energy Advisory February 12th 2016

Politics, Geopolitics & Conflict

• Saudi Arabia continues to reel under the pressure of conflicts on its border and burgeoning geopolitical threats to its stability. Following suicide bombings the week before, earlier this week, seven Education Ministry workers were killed in the Al-Dair governorate of Jazan by a single gunman on a rampage. There is no indication that this is connected in any way to the Islamic State or to the conflict in Yemen, but the governorate is in the north, in the area that borders Yemen, and tensions have been mounting for some time. In October in the city of Jazan, another gunman opened fire in a bank, killed two and wounding two others. Jazan is one location in Saudi Arabia that is being targeted by missiles coming from across the border in Yemen. Earlier this week, the authorities claimed to have shot down a ballistic missile targeting the city.

• Tensions have significantly escalated between North and South Korea since Pyongyang carried out a nuclear test in January and then followed that with a long-range rocket launch last weekend. North Korea has now evicted all South Koreans from a jointly run industrial zone at Kaesong and taken control of all South Korean factory assets there. This was in retribution for South Korea's announcement that it would be closing the complex, which Pyongyang has interpreted as a declaration of war. Kaesong is some six miles inside North Korea, which is now moving to put the area under military control and cut off key communications lines between North and South. From the North's perspective, Seoul's decision to close off the complex signaled a move to shut off communications.

• On the Syrian front, tensions are running high as the Saudis contemplate adding their own ground troops into the U.S. coalition mix, directly threatening Russia, which is conducting air raids backing up Assad's forces around Aleppo-a key Syrian rebel supply route. While mainstream media is keen to headline the news that Russia is "threatening a permanent war" if the Saudis deploy ground troops, the reality is that Russia is warning the coalition that such a move would lead to a permanent war. And it would. That is not to say that this isn't about Russia, but the first on the ground gets to warn the late-comers that joining now would mean World War III. The situation is such that Russian support in the form of airstrikes have allowed the Assad regime to retake territory from Syrian rebels. While there is a second war being fought here against ISIS, the Russians have clearly focused a significant amount of fire power directly on the legitimate rebels who need the Aleppo supply route. These rebels, though, have no chance of doing anything about Assad without ISIS doing its bit to weaken the regime. Aleppo could fall any day to a coalition of Syrian, Russian and Iranian-backed Hezbollah forces.

• Canada is moving to list some sanctions against Iran in order to be able to compete there. Among other things, the Canadian authorities will be lifting the broad ban on imports and exports, as well as on financial services, without with the first two won't get far. The Canadians are calling it a "controlled economic re-engagement". Still, for the time being, export permits will be considered on a case-by-case basis. So far, Ottawa has removed a blanket prohibition on imports from, and exports to, Iran, and lifted wide prohibitions on providing or receiving financial services to or from Iran and making investments inside Iran. Canada is hoping to play a role in rebuilding Iranian energy infrastructure, so it's looking for a way for its oil and gas and minerals companies to get a foothold here.

Discovery & Development

• Magnolia Petroleum-a U.S.-based onshore E&P outfit--has brought on eight new wells to its portfolio, taking its total number of wells in production to 210. The company has an additional nine wells at various stages of development, and has agreed to participate in a 10-well drilling program with operator Continental Resources targeting gas in the South-Central Oklahoma Oil Province (SCOOP).

• Canadian-based Enbridge's Houston outfit has launched operations on its new $100-million deepwater oil pipeline in the Gulf of Mexico. A month early on its deadline for launching operations, the 36-mile pipeline is now transporting crude from the Anadarko-operated Heidelberg field. The pipeline starts some 200 miles southwest of New Orleans in water depths of 5,300 feet. It has a capacity of 120,000 barrels per day. Some 17 percent of total US crude oil production comes of the federal offshore Gulf of Mexico area.

Deals, Mergers & Acquisitions

• Royal Dutch Shell has sold its North Sea oil field to UK independent Nobel Upstream for an undisclosed fee. The UK company will acquire Shell's 7.59 percent stake in the Maclure field; a subsea oil field that ties back to the Maersk operated Gryphon. Maersk Oil is the operator of Maclure with the majority 38.19 percent stake. The Maclure oil field is located approximately 175 miles offshore Aberdeen and currently produces around 8,000 barrels of oil per day.

• Newly formed and Houston-based Terra Energy has agreed to acquire WPX Energy Rocky Mountain, Tulsa, for $910 million. A deal include a 200,000-net-acre position in the Piceance basin of Colorado with recent net production of 500 MMcfd of natural gas equivalent. The assets also include deep rights across 150,000 net acres prospective for the emerging horizontal Mancos-Niobrara play. The deal, which is expected to close in the second quarter of this year, is being backed by an $800 million equity commitment from Kayne Private Energy Income Fund LP and New York-based Warburg Pincus LLC, which are equal partners in the deal. Warburg Pincus' previous equity investments include $500 million in energy startup Independence Resources Management (IRM). The firm closed a $4 billion energy fund in October 2014, which has invested more than $50 billion, placed with more than 720 companies.

• Qatar Petroleum has reached an agreement with Chevron Morocco to acquire a 30 percent interest out of Chevron's 75 percent share in three deep-water leases offshore Morocco. The agreement has already been approved by the Moroccan government. Chevron maintains a 45 percent interest. No financials terms have yet been disclosed. The three offshore leases cover over 11,000 square miles with average water depths ranging from 328 feet to 14,763 feet.

Regulatory Updates

• Only four out of some 500 oil and gas companies operating in Colorado will not be able to meet the 1 April deadline set by the state to meet new safety rules for major floods. Companies had until February 1st to ask for a waiver or extension. Chevron, Extraction Oil & Gas, Peterson Energy Operating and PDC Energy have requested additional time to retrofit more than 200 wells, tanks and other facilities. The rules require such precautions as remote shut-off devices for wells and anchors to keep tanks from falling over if they're within a government-designated flood plain. The Colorado Oil and Gas Conservation Commission imposed the rules after a 2013 flood along the Front Range caused spills of 91,000 gallons of oil and polluted water. The flooding killed 10 people and caused $3 billion in damage, in addition to damaging or destroying some 2,000 homes.

• The American Fuel & Petrochemical Manufacturers (AFPM), which represents oil companies, has filed a lawsuit challenging the U.S. EPA's biofuels policy concerning the 2014-2016 Renewable Fuels Standards. The petition to the U.S. Court of Appeals by AFPM follows a similar move by biofuel and agriculture groups. The AFPM takes issue with the EPA's use of its general waiver authority to lower renewable volume obligations (RVOs) under the renewable fuel standard (RFS) from statutory levels due to distribution issues. This is a highly controversial issue and the mounting pressure could end up sending it back for review. The RFS program pits refiners against biofuels producers, with refiners required to blend specified categories of renewable fuels (mostly ethanol) into the nation's gasoline in prescribed and increasing amounts.

• A $7-billion pipeline deal between Italian oil giant Eni and Ghana is now being challenged by Ghana's top opposition party, the New Patriotic Party (NPP), which says the deal offers Eni terms that are too favorable in proportion to the government's take in the project. At issue is the massive Offshore Cape Three Points (OCTP) integrated oil and gas project.