Global Energy Advisory March 28th 2014

New Prospects & Discoveries

Malaysia: Malaysia’s state-run Petronas and Shell Malaysia last week announced an oil discovery offshore Sabah via the Limbayong-2 well during the appraisal of the Limbayong gas field. Shell, which made the discovery, said the well encountered 136 meters of oil-bearing sands, while plans are afoot to conduct more appraisal work to determine recoverable volume. The drilling consortium consists of Shell Malaysia (35%), Conoco Phillips (35%) and Petronas (30%).

Ecuador: Ecuador’s National Mining Company (ENAMI) on 22 March said it believes there was new mining potential in the reservoir sands in the Tola Norte project located in the coastal province of Esmeraldas, according to our partners at Southern Pulse. ENAMI revealed that an initial geological sample suggested the presence of metals such as iron but further testing at the National Research Institute of Geological Metallurgical Mining is needed. A report released by ENAMI says that environmental licensing would be the next step in the process and could help Ecuador move from a productivity matrix based on agriculture to large-scale industrialization.

Pakistan: A private Pakistani company, Petroleum Exploration (Pvt) Ltd (PEL), has reportedly made a significant discovery in its Badin South IV Concession Block. The Ayasha-1 well was spudded on 31 December 2013 and completed on 14 February 2014 after achieving the target depth of 2400 meters. The company says the well flowed 11.32 MMCFD of good quality natural gas with a heating value of 967 BTU, along with 115 barrels of 57o API condensate per day with a well head pressure of 2000 PSI. The well is being put into production and connected with the main gas distribution system. PEL is the operator with a 47.5% interest, while Frontier Holdings, a subsidiary of Jura Energy (Canada) holds 27.5% and Gulf Petroleum International (Kuwait) holds 25%. (Contact OP Tactical for more information on opportunities and risk in Pakistan.)

China: China’s CNOOC has announced a natural gas discovery in the east Lingshui Sag of the deepwater area in the South China Sea’s Qiongdongnan basin. The Lingshui 17-2-1 discovery well, drilled in 1,450 m of water, was completed at a depth of 3,510 m and encountered the gas reservoir with 55 m of total thickness. CNOOC says the discovery proves the exploration potential in the central Canyon channel of Lingshui Sag and further confirms the exploration prospects in the deepwater areas of the Qiongdongnan Basin.

United Kingdom: The British Geological Survey is preparing to issue a government-commissioned report that shows potentially huge hydrocarbon reserves in large parts of the Weald—covering Kent and parts of Sussex, Hampshire and Surrey. The report is expected to say that the area holds reserves equal to one-third of those under the North Sea. We will be detailing the key findings of the report once it is released to the public.

Botswana: We are now waiting for Rio Tinto to confirm that it has discovered reserves of iron ore in an area that is believed to be an extension of South Africa’s Sishen deposits. This would have enormous significance for Botswana, which is however landlocked and would be in need of a massive infrastructure build-up to realize extraction.
 
Compliance & Disclosure

A new European Union law due to come into force in the UK in 2015 will require EU oil, mining and logging companies to publish their payments to governments on a project-by-project basis. There has been a heavy lobbying effort against this law, from large companies that would prefer to keep their payments to governments secret.

However, on 24 March, British-based Tullow Oil voluntarily published details of its revenue payments to governments broken down by project, worldwide. Tullow is the first company to do this, and the end result will be that it makes the lobbying campaign against the law much more difficult. Tullow made its disclosures in its annual report, showing taxes, royalties, license fees and other public revenues generated by the company’s operations in 21 countries for 2012 and 2013.

What Tullow’s move does, essentially, is allow citizens—especially in Africa—to monitor public revenues and hold governments accountable for how they are using those revenues. While there are many in the industry who will criticize Tullow’s move, in the longer-term such disclosures could serve as ammunition against governments attempting to claim that they are not receiving a fair share of oil revenues and thus seek to change legislation. It also gives the public—which is increasingly convinced that foreign oil companies are fleecing their country’s natural resources—a better understanding of how much their government is actually making and why that wealth is not trickling down.

On the US side, the American Petroleum Institute (which includes the supermajor oil companies as members) is lobbying to weaken the implementing rule of a similar US law that requires US-listed oil and mining companies to publish their payments on a project-by-project basis. This rule is still under review by the US Securities and Exchange Commission (SEC), and Tullow’s move may provide greater impetus for this law to go through with its current implementing mechanisms.

Energy Legislation

•    Mexico: The approval of secondary bills that will allow for the implementation of Mexico’s constitutional oil changes is being delayed and will most likely not be passed by the time the current congressional session ends on 30 April, according to Mexican lawmakers. Lawmakers are now talking about “extra weeks” for passing the secondary laws, which may necessitate an additional session in May. Mexico moved to reform its energy sector in December and to end Pemex’s 75-year state monopoly over exploration and production. Since 1938, Pemex has controlled the entire hydrocarbons production chain in Mexico. In the past decade, however, falling investment and a sharp drop in production from 3.8 million barrels per day in 2004 to 2.6 million barrels in 2013, forced a government rethink that will open doors to international oil companies.

•    A tax cut proposal for oil drilling using carbon dioxide cleared the Michigan Senate last week in a largely partisan 25-13 vote. The legislation would allow oil and gas companies to construct carbon dioxide pipelines and would expand their authority to build them on private property. The measure will now go back to the House, which had originally passed the tax cut in an 85-25 vote. The proposal is intended to increase enhanced oil recovery (EOR) with carbon dioxide, a technique that involves injecting carbon dioxide into oil wells that have already been drilled. Since conventional drilling methods extract only 20-40 percent of the oil in wells, injected carbon dioxide can push “stranded oil” from the bottom of wells. The method can result in oil extraction of 30-60%.