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Breaking News:

Oil Stabilizes On Small Crude Draw

Global Energy Advisory September 23rd 2016


Politics, Geopolitics & Conflict

• The Iraqi-U.S. coalition is advancing on Mosul, the northern Iraqi city that is one of the few remaining strongholds of Islamic State. Before the final advance, the coalition launched an attack on Shirqat, a town they will use as a stepping stone to Mosul. ISIS is preparing for the fight by digging a moat around Mosul, along with channels within its walls and setting up oil-filled tankers around it, to turn into a wall of fire to stop the advance of the coalition, according to local sources. The start of the attack is planned for next month. Should it be successful, it could mark a turning point in the fight against ISIS. Meanwhile, however, foreign oil companies operating in the country are finding it hard to stick to their production expansion plans. They were already forced by the Iraqi government to severely cut their budgets as Baghdad was unable to continue paying them for developing its oilfields. A substantial part of Iraq’s oil revenues were used for the army and the war with ISIS. Against this background, the taking of Mosul could optimistically be seen as the beginning of the end for IS, allowing Iraq to redirect funds to its oil industry, on which the country is heavily dependent. For oil speculators, a victory over ISIS could add to the existing oil supply glut unless OPEC decides not only on a freeze, but a production cut.

• Kenya has been dragged to the UN International Court of Justice by Somalia, which is seeking a redrawing of the maritime border between the two countries that could see Kenya lose three of its 20 offshore oil and gas blocks. According to Somalia, its neighbor has tried to steal oil and gas belonging to it. Somalia insists that the maritime border with its southern neighbor should follow the line of their land border. Kenya, however, sees the maritime border as a straight line, which has given it access to more oil and gas offshore. Kenya, along with other African states where oil was only discovered recently, is eager to develop the reserves it has. Kenya is also arguing that it’s military efforts against Al-Shabaab militants in Somalia should give it carte blanche over this issue.

• Libya’s oil exports are again flowing, and there is every indication that there will be a successful ramp-up of production. General Haftar’s move to secure the country’s ports to the dismay of the now-weakened and most likely irrelevant UN-backed Government of National Accord (GNA). At this point, it appears that Ibrahim Jadran, who controlled the Petroleum Facilities Guard (PFG) is now weakened beyond return and will not be able to push Haftar back, so the oil should continue to flow. We do caution that some attacks intended to thwart the resumption of oil exports could take place, but they are likely to be minor given the power of Haftar compared to Jadran at this point. While Jadran is making an attempt to regroup with a new militia group, so far his attacks have been pushed back and Haftar’s Libyan National Army (LNA) has gained more territory. At the end of the day, it’s going to mean less lucrative oil contracts for international companies who thrive on chaos for deals that would not be approved under the same terms in the absence of chaos.

Deals, Mergers & Acquisitions

• Phillips 66 has finalized the sale of its Whitegate refinery in Ireland to Irving Oil. The buyer will continue the refinery’s operation as before keeping the workforce unchanged. Whitegate is Ireland’s only refinery.

• An adviser to the Japanese Prime Minister said the government has no intention of taking part in the much-publicized partial privatization of Saudi Arabia’s state oil company Aramco. Yasutoshi Nishimura told Reuters, however, that Japan might make some joint investments with the kingdom’s government in business initiatives outside the oil and gas industry.

• Eni has postponed the sale of its Italian retail business because of the political situation in the country. A referendum on constitutional reform is due to take place in November or December. The sale, which is expected to generate $3 billion, was supposed to take place by the end of the year but has now been moved to next year. The referendum has temporarily put on hold all major business deals in financially troubled Italy.

Tenders, Auctions & Contracts

• Egypt is putting up for sale stakes in state-owned oil companies in a bid to fill up a budget deficit gap. The revenues eyed with the privatization initiative are $10 billion, to be generated within the next 3-5 years. Within its first year, the privatization drive, which will take the shape of initial public offerings, will see two or three companies listed on the local stock exchange.

• Azerbaijan’s state oil company SOCAR and Malaysia’s Petronas have teamed up on the exploration of the Goshadash field in the Azeri section of the Caspian Sea. This will be the second Caspian project for Petronas, which bought a 15.5 percent stake in the huge Shah Deniz gas field from Statoil back in 2014.

• Venezuela’s PDVSA has awarded drilling contracts worth $3.2 billion for its oil deposits in the Orinoco belt. The company expects the 480 wells to be drilled there to add 250,000 bpd of crude to its overall production. However, there is controversy around the contracts as some of PDVSA’s foreign partners question the qualifications of some of the winning bidders. These include Schlumberger, Horizontal Well Drillers from Oklahoma, and Venezuelan Y&V.

Discovery & Development

• Shell is preparing to start exploratory drilling off the Tanzanian coast under a $20-million investment program to unlock reserves of an estimated one trillion cubic feet of natural gas. The first phase of the program will see Shell and its local partner Ophir Energy drill two wells in two offshore blocks. The 1-trillion-tcf estimate is conservative, factoring in a 40 percent success rate for the two wells. Shell became the operator of the project after its takeover of BG Group last year.

• France’s Total is prepared to begin the second phase of development at its Incahuasi gas project in Bolivia next year, should the economic environment allow it. The first phase of the project was completed in August, when gas started flowing from three wells. The project is worth $1.2 billion and production is scheduled to reach 7 million cubic meters daily by the end of September, which would represent a tenth of Bolivia’s gas output.

• Gazprom Neft plans to start commercial-scale development at the Arctic oilfield Messoyakha within a few weeks. The field should produce 600,000 tons of crude by the end of the year, targeting output of 3 million tones by the end of 2017 and 5.5 million tons by 2020. This will help Russia maintain its new post-Soviet record of around 11 million bpd, with total annual output for 2016 seen at 547 million tons. Gazprom Neft is expected to book oil and condensate production of 59 million this year, eyeing an increase to 62 million tons in 2017.

• Tullow Oil has struck oil and gas in the Cara block off the Norwegian coast. The local unit of the British company is partnering on the exploration of the Cara block with the Norwegian unit of French Engie, with the latter being the operator. Engie E&P Norge has estimated that the reserves of the deposit are between 25 and 70 million barrels of oil equivalent.

• Lukoil has started preliminary drilling operations at the Filanovsky field in the Russian section of the Caspian Sea. This is the first oil and gas project in Russia’s Caspian waters. The company has slated $13.5 billion for the development of the field until 2045. Filanovsky is estimated to hold recoverable reserves of around 1.1 billion barrels of crude and 1.1 trillion cubic feet of gas.

Company News

• French gas utility Engie plans to lay off 1,150 people as its LNG business booked a loss for full-2016 after falling into the red in the first half. The job cuts will constitute a fifth of Engie’s support functions, including at call centers, sales, IT, and trading.

• Petrobras will cut its budget for the next five years by a quarter and put more effort into its asset sale program as it struggles with the biggest debt pile in the global oil and gas industry. Between 2-17 and 2012 the Brazilian giant will spend $74.1 billion, down from $98.4 billion, invested in the five years to 2016.

Regulatory updates

• Mexico’s finance ministry wants to delay the liberalization of the country’s fuels market until the end of 2018, which will bring it fuel tax revenues of some $15 billion in 2017. The goal of the proposed delay seems to be to make up for lower oil income caused by the international price rout and is just one of several aspects of the comprehensive energy sector reform that aimed to do away with Pemex’s monopoly on the local market and encourage competition to improve returns. It’s election year in Mexico in 2018, which is the most likely reason for the Finance Ministry’s proposed timeframe.

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