Global Energy Advisory October 14th 2016

Politics, Geopolitics & Conflict

• Russia and Turkey this week signed the contract for the Turkish Stream gas pipeline that will carry Russian gas under the Black Sea to Turkey. The historical deal follows a period of estrangement between the two countries which ended when Turkey apologized for the downing of a Russian military plane last year. A day after the signing of the contract, Russia removed a ban on some Turkish food imports it had imposed after the plane affair. Meanwhile, later in the week, the European Commission signaled that Turkish Stream may become a new gas supply channel for the continent, despite the EU not looking kindly to any pipeline projects proposed by Russia. The EC's Vice President for Energy Union Maros Sefcovic said that buying Russian gas from Turkish Stream is not out of the question. Some energy giants, such as BP, have also joined the choir, with CEO Bob Dudley telling the World Energy Congress in Istanbul that BP would like to join the construction of Turkish Stream. Dudley added that Turkey has a central role in Europe's energy security, reinforcing a message that has been sent repeatedly from Western Europe to Ankara: that Europe is ready to do virtually anything Turkey asks it to do, in exchange for that energy security, even if said security involves Russian gas that doesn't pass through Ukraine.

• As Turkey is heading to a referendum to switch from a parliamentary system to presidential system, most polls show that the majority is still against such a change, despite President Erdogan's years-long insistence. However, although the timetable is not set yet, a source at the ruling AKP says that the "deal will be sweetened." He has explained that the referendum will not be only about the presidential system. "There will be other constitutional amendments that would please large segments of our society." The AKP leaders are currently discussing these elements, trying to find different points by which the amendments can gather support from different groups, particularly Kurds, Islamists and secularists with various articles.

• Libya's eastern parliament has agreed to let revenues from oil exports go to the central bank in the western city of Tripoli, the headquarters of the UN-backed Government of National Accord. The news comes despite tension between the two rival bodies and the fact that the parliament recently passed a no-confidence vote for the GNA, prompting PM Fayez al-Sarraj to name new ministers. On the same day that the parliament announced its decision, the World Bank warned that Libya's economy is nearing collapse due to the continued conflict between rival political factions, which is preventing the country from reaping the benefits of is key export--oil. The collision course seems to have been averted, at least for the time being, after the ports in the Oil Crescent were last month taken by the Libyan National Army, affiliated with the eastern parliament, and after the parliament conceded that revenues from these exports should go into Tripoli. The House of Representatives warned, however, that the income must be distributed fairly by the National Oil Corporation. Currently, Libya produces around 550,000 barrels of crude per day and this is likely to grow, as the country, a member of OPEC, has been exempted from the production cut the cartel's members are negotiating.

• Supporters and opponents of Venezuelan President Nicolas Maduro clashed on Wednesday as the latter took to the streets demanding a referendum to remove the current government. The anti-government protests were organized by the Democratic Unity Roundtable, which has accused the president of plunging the country into an economic crisis. The opposition party needs to collect 4 million signatures in just three days in order for the referendum proposal to pass. The signature drive will begin on October 26 and last until October 28. Venezuela has been experiencing shortages of everything from medicines to food as a result of the prolonged oil price rout, as the country, estimated to hold the largest oil reserves in the world, is overly dependent on revenues from their exploitation.

Deals, Mergers & Acquisitions

• Gazprom and Turkey's gas major Botas are negotiating a discount for Russian gas deliveries for the Turkish state-owned firm. According to Russia's Energy Minister Alexander Novak, the issue remains complicated, since Russia also sells gas to private Turkish providers, but there is a light at the end of the tunnel. The negotiations were frozen together with the bilateral relations that followed the downing of the Russian bomber by Turkish fighters last fall.

• Rosneft has bought a controlling stake in smaller sector player Bashneft, after months of uncertainty and government intervention in the privatization of the company. The $5.3-billion deal for 50.075% in Bashneft was sealed after PM Medvedev issued a special decree on Monday. According to some local economy experts, the acquisition is part of a wider government effort to monopolize the energy market to secure financial flows. It also may serve to make Rosneft itself more attractive to investors, as the company is also up for a partial privatization: 20% in it is expected to be tendered next year.

Tenders, Auctions & Contracts

• Russia will own the underwater section of the Turkish Stream pipeline, while the land stretch will be under the control of Turkish companies, Energy Minister Alexander Novak said after the signing of the contract for the construction of the controversial channel. The twin pipelines will carry 15.74 billion cubic meters of Russian gas annually each, to be marketed in Turkey and Eastern Europe.

• Norway's Statoil has expressed interest in building an offshore floating wind farm in Hawaii but has not yet submitted an official application, according to the Bureau of Ocean Energy Management. The BOEM issued a call for commercial nominations of interest but has not yet determined the plots to be tendered, if any, still reviewing their suitability for wind power projects.

• After a day full of tension between Saudi Arabia and Egypt, Aramco started deliveries of refined crude to its neighbor, as agreed in a contract signed by the two countries in April. The $23-billion deal involves Aramco supplying a monthly amount of 700,000 tons of oil products for five years. On October 10, media reported that deliveries were late; however, just a day later Egyptian government sources confirmed shipments had arrived.

Discovery & Development

• Italian Eni is ready to start drilling its sixth and final well in Egypt's giant Zohr field. The total investment in the expansion of production at the field has been estimated at $4 billion. The drilling works will be performed by a Saipem drill ship. Production at Zohr should begin in late 2017, with a scheduled initial output of 1 billion cu ft of gas. This should rise to 2.7 billion cu ft over the next two years.

• ConocoPhillips' Australia Pacific LNG plant has launched its second train, due to begin shipping LNG in the second half of this month. The APLNG is one of three coal seam gas-to-LNG plants operating on Curtis Island, off the east coast of Australia.

• BP has given up its plans to drill for oil in the Great Australian Bight, despite saying earlier the marine reserve could become a second Gulf of Mexico. The shelving of the drilling plans follows strong public opposition and repeated rejections of its environmental safety plans by Australia's energy industry watchdog, the National Offshore Petroleum Safety and Environmental Management Authority.

• The giant Kashagan oil and gas field in the Kazakh sector of the Caspian Sea is set to yield an average daily of 150,000 barrels of crude next year. Production at the field started this week, at an initial rate of 90,000 bpd, after it was suspended three years ago, a month after the first official launch, due to gas leaks that necessitated the replacement of the whole oil and gas transportation system.

Company News

• Spending in onshore oilfield development is starting to recover, led by North American companies, and is estimated to rise by an annual 8% through 2020, a report from Douglas Westwood states. The trend is supported by a decline in offshore spending that is set to continue, reaching $43 billion in 2020, from $67 billion at the moment.

Regulatory updates

• The Circuit Court of Appeals in the District of Columbia has lifted an injunction against the construction of the Dakota Access pipeline that has attracted a lot of public attention recently because of widespread protests from environmentalists and Native American tribes. The injunction was a result of a lawsuit filed against the pipeline by the Standing Rock Sioux tribe. Following the DC court ruling, the project operator, Energy Transfer Partners, said it will restart construction work on the 470,000-bpd pipeline.

• Scotland's government has banned underground coal gasification, an unconventional method of gas production, on which the legislature had placed a moratorium last year due to environmental safety concerns. Now the moratorium has been transformed into a ban, with the Scottish government asking the central government in London to revoke licenses for UCG exploration already issued. According to parliamentarians, the method has been associated with serious pollution, not least because it seems to lack efficient mechanisms for safe storage, such as carbon capture.

• Pennsylvania has approved new fracking regulations, which stipulate that the state's environmental protection department can require fracking companies to restore water supply that has been compromised by their activities. The draft regulation was rejected earlier this year because of strong opposition from the energy industry but after Governor Tom Wolf amended it to differentiate between conventional E&Ps and frackers it went through.