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Global Energy Advisory – 10th April 2015


Geopolitical Update

There is no need at this point for investors to fear a rapprochement with Iran in terms of what it might do to oil prices by adding more supply to the over-supply mix. As you likely are aware by now, a framework agreement was reached last week between Iran and world powers. There’s still a fair amount of road to travel to see sanctions lifted, though Iran wants them lifted immediately upon the implementation of a final deal. Even in that best-case scenario for Iran, it would take some time for the country to rally and ramp up production to the point that it would contribute to the already glutted oil market and further depress oil prices. It is important to reflect on history here: After the 1979 revolution and in the midst of a war with Iraq, Iranian oil production crashed hard, dropping from 6 million barrels per day to 1 million barrels per day. Recovering from this took more than a decade, and even then, the recovery was not complete. If sanctions are lifted immediately, this will not have anything close
to an immediate effect on the global oil market. It would be years before Iran could ramp up production to a level that would have any real effect.

In the meantime, the Saudis may shoot themselves in the foot with their unconstructive air strikes on Houthi targets in Yemen. Not only will air strikes fall short of rooting out the Houthis--who have taken over the capital city and who are being targeted because this is Saudi Arabia’s proxy war with Iran on Yemeni territory—but they will be contributing to another front in this war by Sunni jihadists. What we will see happen here is much like what has happened in Syria. While the Saudis are attacking the Houthis, more and more arms are ending up in the hands of Al-Qaeda in the Arabian Peninsula (AQAP), and the group stands to make considerable gains. They will take over Yemen’s oil-rich Marib Province, and they will then threaten the Saudi border. When this turns into a major sectarian war, they will look to Saudi Arabia’s already restive Shi’ite minority in the Eastern Province, which is also home to the massive Ghawar oil field. 2015 could be yet another year of disastrous Saudi missteps.

We’ve also seen more oil fallout from the conflict in Yemen with Norway’s DNO announcing last week that it had halted operations in the country. That means a halting of production of 1,950 bpd from two of its producing reserves. The halting of operations comes as no real surprise, as DNO declared a force majeure in Yemen in November, and flew its foreign employees to Dubai. DNO has taken a bit of a beating this year, with share prices dropping by 43% since February, not only due to trouble in Yemen, but also due to payment arrears from the government in Kurdistan.

France’s Total SA, on the other hand, is keeping its LNG operations in Yemen running, though it has evacuated foreign staff. The company is still exporting LNG from Balhaf terminal.

Throughout, recall that Yemen is not a significant oil-producing country, but it does have significant strategic value due to the fact that sits at a crucial junction between Africa and the Middle East and links the Mediterranean with the Indian Ocean.

Discovery & Development

• U.K. Oil & Gas Investments claims to have made a massive discovery onshore in south England—near Gatwick airport—suggesting there may be up to 100 billion barrels of oil here. As mainstream media will point out, 100 billion barrels is more than the North Sea has produced for the UK in four decades. The caution here is that while this is great headlining news, even the company will concede that only between 3% and 15% is likely recoverable.

• UK-listed Premier Oil and Falkland Oil and Gas have announced an oil and gas discovery at a Falkland Islands well. At the Zebedee well, the companies discovered 81 feet of net-oil bearing reservoir and 55 feet of net gas-bearing reservoir. Premier has a 36% interest in the project, while Falkland Oil has a 40% interest. A smaller partner, Rockhopper Exploration, owns the remaining 24%. The companies plan to drill five more wells. The three firms are also looking to explore the Elaine/Isobel well in the North Falkland Basin, where they believe there may be further reserves of oil and gas. There is still a fair amount of risk here, due to the ongoing controversy surrounding exploration in the Falkland Islands in the form of a long-running sovereignty dispute between the UK and Argentina. Argentina has threatened to prosecute oil companies operating off the Falklands coast, claiming they are illegally drilling in Argentine territory. At stake is possibly 60 billion barrels of oil around the Falklands basin, while the current profit-sharing agreement would give the Falkland’s government 26% of the revenues. The dispute continues in spite of a 2013 referendum in which the residents of the Falkland Islands voted in favor of remaining a UK overseas territory.

• India’s largest coal-bed methane producer is now officially Essar Oil (part of the Mumbai-based Essar Group), which has ramped up production to more than half a million standard cubic meters per day at its Raniganj asset in West Bengal. This production is expected to further increase in the near future when another 155 wells come online, to add to the nearly 100 already producing. The company has built high quality infrastructure gas conditioning and compression stations, in-field pipelines of 120 kilometers and last mile pipeline connectivity network to end users of approximately 60 kilometers.

• Kuwait Energy and the Egyptian General Petroleum Corporation (EGPC) have announced a discovery in an exploration well in their Abu Sennan concession. This is an onshore concession in Egypt’s Western Desert. Testing flowed daily rates of 3,900 barrels of condensate and 88,000 cubic meters of gas. Kuwait Energy has a 50% interest in the concession and is the operator, while Dover holds a 28% interest and Beach Energy Ltd. holds a 22% interest.

• Japan's Nippon Malaysia subsidiary has announced a deep-water discovery and plans for two additional exploration wells offshore. The discovery was made at the Bestari-1 exploration well in deep-water Block R. Preliminary findings point to an approximate 70m column of oil bearing sands across multiple horizons. The well is the first of three commitment wells in the Block, which is operated by JX Nippon, with a 27.5% interest. Partners include Inpex and Petronas.

Auctions, Deals, Mergers & Acquisitions

• The government of New Zealand will be opening up more offshore waters to deep-sea oil and gas drilling. The new tender will close in late September and permits will be granted in December. Up for auction will be four offshore regions, encompassing the upper west and lower east of the North Island and south and southeast of the South Island, plus three onshore areas. Onshore, we’re looking at the West Coast Basin and Taranaki and around 4,000 square kilometers. Offshore, it will be the Regina-Northland Basin, Taranaki Basin, Pegasus Basin and Great South-Canterbury Basin, with a total of nearly 430,000 square kilometers. For now, all oil exports are coming from Taranaki.

• Royal Dutch Shell is reportedly in talks to buy BG Group. This is a major story, and we haven’t seen anything like this in five years. BG, is worth around $46 billion, and has confirmed that it is in talks with Shell. Shell has a market cap of $202 billion. If this deal goes through, BG’s shareholders will have around 19% of the new group. BG is ripe for takeover. It’s got diverse growth assets from Brazil, East Africa and Australia, to Kazakhstan and Egypt (and the Palestinian territories, though this one isn’t necessary a growth project), but it has also suffered some $3 billion in losses in 2014. A major loss was the $9 billion writedown of its $20-billion LNG plant in Queensland. BG has around $16 billion in net debt right now.

• Houston-based MLP EV Energy (EVEP) has agreed to sell its full 21% stake in Ohio-based energy company Utica East Ohio Midstream, to Utica Gas Services for $575 million. Utica Gas Services already holds a 49% interest in Utica East Ohio Midstream. The deal is scheduled to close in July.

Regulatory Update

• The parliament of the Kurdistan Regional Government (KRG) has passed a law establishing an oil revenue accounting body, which will help provide oversight of future oil revenues. The Oil and Gas Revenue Fund law tasks the regional Parliament with appointing a board of technocrats to provide formal and regular public accounts for the revenue that the KRG accrues from autonomous exports and oil company contract bonuses.

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