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Global Energy Advisory May 19th 2017

Oil Rig

Politics, Geopolitics & Conflict

• Iran is holding a presidential election today and there seems to be a consensus that the incumbent, Hassan Rouhani, is the likely winner. Rouhani came to power in 2013 as a political moderate who managed to forge a deal with the West to lift economic sanctions that were choking the economy in exchange for curbing Iran’s nuclear power program. The Rouhani government restarted Iran’s energy industry and boosted its production closer to pre-sanction levels. However, the conservatives have gained in popularity over the years, arguing that the nuclear deal was disadvantageous to Iran and mocking Rouhani’s estimates of $50 billion in foreign investment waiting to start flowing into Iran’s economy. Rouhani’s lead has declined but it is still there, according to observers. If he wins, Iran will continue on the reform course, ramping up its energy industry with the help of foreign companies. If conservatives gain the upper hand, it’s very likely that tension with the West will increase, the U.S. won’t grant a sanction waiver to the businesses waiting to return to Iran, and energy industry growth will slow down. Regional tensions with Saudi Arabia will also jump – the bilateral rhetoric is already quite heated and a conservative win could escalate the situation. From an oil perspective, billions of dollars in oil and gas investment are at stake in this election, largely from European and Asian companies, because a conservative win may prompt a reaction (though U.S. foreign policy at this time is at best confused) from Washington that could undo all progress made in getting Iran back into the global market.

• Seven months after the Iraqi army and its U.S. allies launched the operation to retake Mosul from IS, Iraqi military sources said that 90% of the western part of the city has been retaken. A spokesman for the U.S.-led coalition helping Iraq’s military oust the Islamists said that they were completely surrounded and their defeat was imminent. Mosul is the last stronghold of IS in Iraq. The final push, however, is challenging because of the large numbers of civilians left in IS-controlled parts of the city, either unwilling to leave or prevented from doing so by the Islamists. Eastern Mosul is already under Iraqi control. But no gains in Iraq will be solidified as long as the conflict in Syria continues and the battle for control of the border continues.

Deals, Mergers & Acquisitions

• BHP Billiton activity shareholders Elliott management has stepped up the pressure on the mining giant to restructure its business, with a focus on its oil and gas operations. Elliott, which has a 4.1% stake in the Australian major, has long called for it to spin off of the U.S. oil and gas business and abandon its dual listing to boost shareholder value. BHP’s CEO Andrew Mackenzie said at a conference in Spain that he couldn’t say for now whether the company’s shale oil and gas operations will be spun off but hinted that BHP is open to discussions on a possible sale of the assets.

• Petrobras expects proceeds of $8 billion from asset sales this year as part of efforts to reduce is massive debt load, which is still the highest in the global oil industry at more than $100 billion. In 2017 and 2018 Brazil’s state energy giant plans to sell assets in projects worth a combined $21 billion. The state giant also plans to resume dividend payments if it ends 2017 in the black.

Tenders, Auctions & Contracts

• Australia and Indonesia have separately announced fresh bidding rounds for oil and gas deposits, with Australia focusing on offshore conventional fields and Indonesia putting up some shale deposits for tender. The Australian tender concerns 21 areas in 8 offshore basins, at depths ranging from 25 to 4,200 meters, at different stages of geological exploration. Indonesia, for its part, will be offering ten conventional blocks, three coalbed methane deposits, and two shale gas fields. Contracts to be awarded will see each project split at 57% for the government and 43% for the operator, with certain modifications depending on a set of factors such as location, depth, and CO2 content of the hydrocarbons.

• U.S.-based company Pall, a provider of filtration, separation, and purification solutions, will become the first American business to invest in Iran’s oil and gas industry, if Pall confirms the investment plan. Iran’s National Oil Company reported that under the terms of an agreement it had reached with Pall, the U.S. company will export filtration tech for oil refining and also fund a production line for oil equipment. Pall has confirmed its interest in Iran but may be, like other Western companies, waiting for an extension of a U.S. sanctions waiver, so it can start doing business. (Again, this news comes at the same time as the decisive Iranian presidential elections).

• Cheniere Energy is negotiating an increase in its LNG shipments to China with several Chinese companies, and this increase is believed to be substantial following an agreement between Donald Trump and Xi Jinping on expanding U.S. energy exports to China. So far, Cheniere has sent 9 LNG cargoes to China. It is to date the only LNG exporter in the U.S. benefiting from growing LNG demand in China.

Discovery & Development

• Australia’s Santos Energy announced positive results from its exploration well Muruk-1 in Papua New Guinea. According to the company, the well has confirmed the presence of gas in the entire Toro deposit, which Santos is developing in partnership with Exxon and Oil Search. The companies will evaluate the samples of rock extracted at the well and will then proceed with a production test before plugging the well, as per plans.

• Italy’s Eni has begun extracting gas from the Jangkrik deepwater offshore field in Indonesia. The company’s chief executive Claudio Deskalzi said that the project was completed ahead of schedule and that it will help the development of a neighboring project, Merakes, which Eni operates with an 85% stake in partnership with local Pertamina with 15%. There is a floating production unit at Jangkrik, which will be used for Merakes, too, when it starts producing in two years.

• Maersk Oil said at the release of its first-quarter financial results that in the second half of the year it expects to produce some 150,000-160,000 barrels of oil equivalent daily, with overall 2017 production seen at 215,000 to 250,000 boed. The company lost its operations in Qatar earlier this year to Total at a tender and this will affect its production. However, projects nearer to home, in the North Sea, are moving on schedule to add output in the near future. Maersk Oil saw breakeven costs for this year at $40-45 a barrel.

• TransCanada is probing oil producers in North Dakota and Montana on their potential interest in shipping their output via the long-delayed Keystone XL pipeline. The controversial pipe was vetoed by the previous U.S. administration but Trump has given it the go-ahead. However, the oil industry has undergone a significant change over the last few years and the Canadian firm needs to make sure the pipeline can still turn in a profit if built. The pipeline’s route also needs to be approved.

• The U.S. Geological Survey has reassessed its reserve estimates for the Spraberry formation in the Permian shale play, raising them to 4.2 billion barrels thanks to better extraction technology. The USGS is in the process of reassessing all big U.S. oil and gas plays in light of fast-moving improvements in technology, which have made a lot more of the oil and gas reserves contained in these plays recoverable at a profit.

Regulatory Updates

• GulfMark Offshore, a support vessel provider for offshore drillers, will file for bankruptcy protection and will start a restructuring of its business in a bid to reduce its debt load. After agreeing with bondholders to convert the debt they hold into equity, the company will be able to cut some $430 million from its debt pile and creditors will become shareholders with 0.75% in the reorganized company.

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