Global Energy Advisory June 3rd 2016

Politics, Geopolitics & Conflict

After Turkey's infamous downing of a Russia jet at the height of the Syrian conflict, Russia flooded the news networks with 'evidence' of Turkish complicity in ISIS' illegal oil smuggling. It went further to provide evidence of Erdogan's personal complicity-or at least that of his family. We were all regaled by the satellite images, which we take as evidence point blank, without really examining them. While Erdogan is a loose cannon on the fast path to dictatorship, and while plenty would like to believe he is directly propping up ISIS oil revenues, viewing the group as a pathway (however dangerous) to a revival of the Ottoman Empire days, Russia is great at propaganda, and it's worth considering what is really happening here. What you may or may not know is that the Turkish-Syrian border has long been a favored oil-smuggling route-well before the advent of ISIS. Illegal pipelines are here; illegal tankers go back and forth, and have done so as long as we have been tracking smuggling here on the ground.

When Assad lost power earlier in the conflict, the long-running illegal smuggling changed hands (numerous times) ending up in ISIS' control to some extent, and under control of 'independent' smugglers and the Syrian Kurds to some extent as well. At the same time, there was a marked uptick in smuggled volumes as the conflict intensified (and this is always the case). "ISIS" or other smuggled oil can end up pretty much anywhere at this point-even, we've recently read, in the streets that pave certain American cities. No one has control over it; and certainly Erdogan doesn't. That's not to say that ISIS oil doesn't end up in the black markets in southern Turkey-it does, but the Russians would have us believe that Erdogan is putting it there. Where the Russians really went wrong is when they included the Koc Holdings' Tupras in this mix-suggesting that Tupras and Erdogan were working together to get ISIS oil onto international markets. First, Koc Holding is the largest conglomerate in Turkey-and it is definitely no friend of Erdogan; just the opposite. Secondly, the smuggling routes Russia alleges in this scheme don't pan out logistically-and the facilities shown in Russian satellite imagery don't make sense either logistically or based on who owns what in this area. One route Russia claims is used to this end allegedly smuggles oil from Raqqa to the Turkish port of Iskenderun, for instance, but here there are no facilities for unloading oil tankers. The second pier in the imagery belongs to the French, who can in fact unload these tankers … The Iskenderun port also can't unload oil tankers, and the facilities here are Austrian (OMV). Then, with regard to Russian allegations of illegal oil smuggling going on via the Koc-owned Tupras refinery (it's smallest) in Batman, it's hardly worth entertaining. Koc Holding would gain nothing from this. It's would be exceedingly more risk that its worth for a conglomerate that already props up a significant part of the entire Turkish economy. But beyond that, it's a logistic impossibility. There are no unloading or storage facilities at this small refinery, which largely produces asphalt.

• After the re-taking two strategic towns from ISIS this week by Libya's oil guards (loyal to the UN-backed Government of National Accord), the Libyan army is now moving to set up a special operations room for military operations in the Oil Crescent region of Ajdabiya-Sirte for targeted attacks against ISIS, which controls Sirte and a length of coastline. Reading between the lines of this decision, which says there will be no unauthorized 'paramilitary' operations in this area against ISIS, we are interpreting this as a challenge to the eastern forces under the control of General Haftar who has been fighting ISIS but is also against the GNA and its Islamic members.

Discovery & Development

• Russian Lukoil is looking to increase its oil production in Iraq and is said to be re-negotiating contracts with the Iraqi Oil Ministry.

• French Total SA is withdrawing from its shale gas exploration in Dybvad in Northern Jutland, Denmark. The well was abandoned last summer. A new license may or may not be issued to another explorer, depending on an evaluation by Denmark.

Deals, Mergers & Acquisitions

• Oil services major Schlumberger is acquiring France-based Saltel Industries, which engages in engineering, manufacturing and oil and gas industry services. Most notably, Saltel deploys expandable steel patches for water shut-off applications to restore production in wells. It also deals in expandable open steel packer technology for external casing packers for lowering operational risk and costs. The company has offices in five locations globally with 70 employees.

• French Total has agreed to acquire Gulf Africa Petroleum's assets in Kenya, Uganda, and Tanzania. The amount of the acquisition remains undisclosed amount. In the deal, Total will acquire two logistical terminals in Mombasa, Kenya and Dar es Salaam, Tanzania. It will also get a retail network of some 100 service stations for branding.

• Russian state-run Rosneft and Greek refiner Hellenic Petroleum have inked a deal in which Rosneft will supply crude and other feedstocks to the Greek refinery. The Russian company will also establish its own sales operations for Hellenic-refined products, some of which may go to the bunker market. Hellenic owns three refineries that account for 65% of the country's total refining capacity.

• Rosneft has also announced completion of a deal to sell a 15% stake in Siberian Vankor oilfield to Indian ONGC for US$1.27 billion. Vankor, which supplies Russian oil to China, produces some 440,000 bpd and accounts for 4% of Russia's crude oil production. The field has recoverable reserves of 2.5 billion barrels. The deal will give ONGC 3.3 million tons per annum of oil production. Rosneft has also agreed to sell another 11% stake in Vankor to ONGC, but that sale has not been finalized.

• Canadian Bankers Petroleum has received approval from shareholders for the proposed takeover of the company by Chinese oil and gas group Geo-Jade Petroleum Corp for a price of US$442 million. The deal is expected to close in late June or early July. In late March, the company announced the sale of oil exploration and production rights in Albania to Geo-Jade Petroleum. Bankers Petroleum has been one of Albania's largest foreign investors and had exploit the Albanian oil fields of Patos-Marinze and Kucova in 2004 and since 2014. However, Its income fell by half last year as a result of the reduction of the price of oil and due the fact that Albanian tax authorities asked the company to pay $75 million following a tax reassessment of company expenses in 2011. The company was accused of making unreal expenses in order to avoid profit tax. As a result, the Canadian company filed two complaints with the International Court of Arbitration, which the company later withdrew after reaching a deal with the Albanian government to resolve the issue in an amicable way. For its part Hong Kong-based Geo-Jade produces about 13,500 bpd of heavy oil in Kazakhstan.

• Raging River Exploration Inc. has agreed to acquire Rock Energy Inc. in a move to expands its Viking light oil play in Canada's Saskatchewan province. Rock shareholders will receive 0.082 Raging River common shares for each Rock share held. Total consideration is about C$109 million (US$83.5 million). This includes some 3.9 million shares of Raging River and about C$67 million of net debt. Raging River will acquire 2,550 barrels of oil equivalent per day (boe/d) of production and about 25 net sections of land that has around 200 potential horizontal drilling locations.

• Canada-based Arsenal Energy Inc has sold off all its oil and gas assets for $34 million to an undisclosed company to pay down debt. These asses include Bakken/Three Forks production in the Williston Basin.

• Colorado-based FourPoint Energy is acquiring nearly 3,500 oil and gas wells in western Oklahoma and the Texas Panhandle from Chesapeake Energy for US$385 million. The production mix is about 64% natural gas and 36% oil and NGL. Last week, Chesapeake signed agreements to divest US$700 million in gas fields and other assets. It will also be selling up to $1 billion in additional assets this year. The company has lost nearly $14 billion since 2014.

Regulatory Updates

• A Scottish Conservative MEP is trying to boost North Sea oil and gas by getting rid of a law that makes producers pay for emissions permits for electricity generated offshore. The lawmaker, Ian Duncan, is a key figure here because he is the European Parliament's main main on the Emissions Trading System (ETS). It would save the industry hundreds of millions. Right now, the EU rules mean that electricity providers don't get any free allowances under the ETS because they can pass the carbon price onto consumers. But the offshore oil and gas platforms are connected to the electricity grid themselves so the oil and gas producers don't get to pass their costs onto consumers. The lawmaker is gunning for the oil and gas producers to get the same free allowances when the new law comes into force in 2020.

• Poland is saying that once the country's contract with Gazprom for natural gas supply ends in 2022, it will not be renewed. Polish state-run gas firm PGNiG buys up to 10.2 bcm of gas a year from Russian gas giant Gazprom, accounting for the bulk of Poland's annual consumption of nearly 15 bcm. Poland was Gazprom's fifth-biggest EU customer last year. In February, PGNiG filed a lawsuit against Russia's energy giant Gazprom over gas prices with the Arbitration Institute of the Stockholm Chamber of Commerce (SCC). As of 2013, Poland and other EU countries were importing well over 80 percent of their gas from Russia. It has recently constructed its first LNG import terminal, hoping to increase the import from Australia, Qatar and as of recently US. It is also working on building a pipeline to Norway. Recently, Gazprom showed that it had upped exports to EU countries.

Tenders, Auctions & Contracts

• Thailand will be auctioning off concessions held by Chevron and PTT Exploration and Production, to ensure 'transparency'. Right now, Chevron operations Thailand's Erawan gas field and PTT operates the Bongkot gas field. according to reports, which combined production about 2.2 billion cubic feet per day-or 76% of the Gulf of Thailand's total output. The existing contracts don't expire until 2022/2023. The auction should be completed within a year. If no bidders show up, the contracts with be renegotiated with Chevron and PTT.