Global Energy Advisory 10th February 2017

Tickers: Politics, Geopolitics & Conflict

• Libya is the country to keep an eye on in the oil patch in the coming days, weeks and months. There is little chance right now of the country increasing production, and even maintaining the advances it has made recently is questionable. Alliances are shifting rapidly, bringing together rivals to face new militias sprouting up with crazy momentum. Misrata militia are descending on Tripoli with a new 'army' in the form of the "Libyan National Guard". This new army threatens the Government of National Accord (GNA), which is unable to assert its power and has been struggling for power against the Libyan National Army (LNA) led by General Haftar. The spectre of the new army in Tripoli, however, has forced the GNA to turn to its rival, Haftar, to survive. The shifting alliances-which are all about controlling oil production and exports-means that there is no way to predict advancement in the oil industry at this point. From production to getting product to market to controlling the revenues-this is all clan business that is still undergoing an immense power struggle. Libya is no threat to OPEC production cuts at this time.

• The International Court of Justice will hear a case brought by Somalia against neighboring Kenya over the maritime border and oil exploration. Somalia is seeking to redraw the map but this would take away from Kenya at least three offshore oil and gas blocks. The argument is simple enough: Mogadishu wants the maritime border to follow the line of the land border between the two countries. Nairobi insists that the maritime border line is straight, which would give it more offshore territory. The disputed area spans 40,000 sq miles and is believed to hold substantial oil and gas reserves, some of which Kenya has already earmarked for Italy's Eni. No specific estimates have been made for the reserves.

• Political tensions are rising in Algeria, after the government introduced long overdue reforms last year aiming to boost state revenues and reduce spending. These reforms, including the introduction of taxes on things like power and fuels, sparked riots, highlighting the false sense of stability in the oil- and gas-rich country. The rule of the president, the army, and the intelligence services, DRS, has become shaky, and the cracks are very likely to continue to deepen, threatening the future of this triumvirate, especially in the context of President Abdulaziz Bouteflika's advanced age and poor health that has kept him from public appearances for the last three years, sparking suspicions that the power has effectively passed to his brother. Algeria, an OPEC member, produces 1.16 million barrels of crude daily and now has plans to expand its gas production industry targeting the European market.

• Relations between Russia and Belarus are souring due to unpaid gas bills. Moscow says that Minsk owes it $340 million for gas deliveries. Minsk refuses to pay and Moscow has taken things one step further, reducing oil supplies to its neighbor, prompting Belarusian President Alexandr Lukashenko to state that the country can do without Russian oil. Belarus remained a loyal vassal to Russia after the collapse of the Soviet Union and this is the first time bilateral relations have suffered from an energy dispute. In addition, Russia has announced plans to install border zones along the border, which has also raised Lukashenko's hackles. There are currently no border controls between Belarus and Russia, and the former is clearly uncomfortable with the introduction of anything resembling such controls, even though Moscow has specified these zones will serve the purpose of tracking migration.

Deals, Mergers & Acquisitions

• BHP Billiton has approved a $2.2-billion investment in BP's Mad Dog oil field in the Gulf of Mexico. The investment will fund the construction of a floating production facility with a daily capacity of 140,000 barrels of crude. Extraction in the Green Canyon area of the field is scheduled to start in 2021.

• Independent energy firm Parsley Energy has closed an asset buy of 71,000 acres in the Permian for $2.8 billion. The seller is Double Eagle Energy. The acquisition has turned Parsley into the second-largest public exploration and production company in the prolific Midland Basin, with a footprint of 227,000 acres.

Tenders, Auctions & Contracts

• Egypt has paid Italy's Eni $650 million for the development of the giant offshore Zohr gas field. The sum is part of a delayed payment of $3.5 billion to several foreign companies. The delay was caused by a shortage of foreign currency reserves, which although recovering, are still $10 billion shy of pre-revolution levels. The country also signed a gas delivery contract worth $1 billion with Rosneft, Engie, and Oman's OTI. The deal is for 45 shipments.

Company News

• The leak detection market in the oil and gas industry is estimated to reach a size of $3.38 billion by 2022, according to a report from MarketsandMarkets. This represents a compound annual growth rate of 6.9 percent for the period 2016 to 2022. The drivers behind this growth are the increased incidence of leaks in pipelines and storage facilities, as well as the expansion of the global pipeline network in line with growing demand for oil and gas.

• BP reported its lowest annual profit for the last ten years, at $2.59 billion, down by almost 50 percent from the $5.9 billion reported for the previous year. At the same time, the fourth-quarter earnings figure was an improvement on the year, at $400 million thanks to lower costs and higher oil prices. Still, the result missed analyst expectations for a profit of $560 million.

• France's Total reported stronger than expected financial results for the last quarter of 2016, returning into the black, with a profit of $548 million, after booking a loss of $1.63 billion for the prior-year period. The company is upbeat about the future, planning as many as 10 new projects for the next 18 months.

Discovery & Development

• Latin American oil and gas explorer GeoPark has announced an independent assessment of its reserves that put them at 19.4 million barrels of oil equivalent for net proven and developed reserves. This means GeoPark had a reserve replacement ratio of 126 percent at the end of 2016. Proven reserves were estimated at 78.3 million barrels of oil equivalent. Proven and probable reserves were estimated at 142.8 million boe. GeoPark has operations across the continent, in Colombia, Chile, Brazil, Argentina, and Peru. The reserves assessment was conducted by DeGolyer and MacNaughton.

• Statoil plans to continue with its offshore drilling operations in the Atlantic shelf of the U.S. and also in Russia, in the Barents Sea. The Norwegian company reported a surprise net loss for the fourth quarter of 2016 on the back of an impairment loss of $2.3 billion related to the long-term assumptions about oil prices.

Regulatory Updates

• Both houses of the U.S. government have approved the repeal of a rule that obliged oil and gas companies listed in the country to disclose their payments to governments overseas. The rule, part of the Dodd-Frank Act devised and approved after the 2008 financial crisis, aimed to ensure transparency in these companies' international dealings. From Big Oil's perspective, however, the rule put them at a disadvantage to their foreign competitors, although some of these - the European ones - are, too, obliged to disclose this information under EU law. Reactions to the repeal are conflicting, as was to be expected, with Republican legislators arguing the rule was harmful and led to the loss of millions of dollars for Big Oil. Transparency activists, however, commented that now that the rule is no longer enforced, Big Oil will practically be able to bribe governments without being held accountable. This raises ethical questions, such as the possibility of Big Oil funding anti-democratic governments, and also practical questions such as the possibility for tax evasion.

• The U.S. Army has agreed to grant a permit for the construction of the Dakota Access pipeline, after the White House removed the suspension placed on it by the Obama administration after months of protests by the Standing Rock Sioux tribe, other Native American communities, and environmentalists. This permit is the last hurdle that the DAPL needed to clear and construction may start later this year.

• The chief executive of Eni, along with Royal Dutch Shell, are facing a court trial if Italian prosecutors get a judge to give the go-ahead to a request, charging the executive and the Anglo-Dutch company with corruption. The charges, which also extend to another ten individuals, are related to the acquisition of a huge offshore oil and gas field in Nigeria for over $1 billion. According to the prosecutors, the price paid for the field was actually a bribe for Nigeria's then Oil Minister Dan Etete: the money, as soon as it was paid by Eni, was transferred to bank accounts held by Etete and from there into a number of companies with links in the Nigerian government.