Global Energy Advisory – 11th September 2015

Politics, Geopolitics & Conflict

• The Islamic State is has reportedly captured the last remaining oil field that was under the control of the Syrian regime. The oil field in question is Jazal, in the Homs province, which was the flashpoint of intense clashes between IS forces and regime forces over the past weekend. Since then, reports are unclear and the battle continues, with the regime denying it has lost control but also contradicting this information with statements that parts have been 'retaken.' The field is located northwest of Palmyra, and is close to Syria's natural gas fields and energy facilities. IS has been closing in on this field since May, when it captured Palmyra. In June, the regime had secured the oil field's perimeter, but it was only a matter of time before IS broke this down. The oil industry had been key to the Syrian economy, with an output of about 380,000 barrels of oil per day (bopd), until fighting began three years ago. The Jazal field produced 2,500 bopd until fighting began three years ago. As of 2008, Croatian INA was producing in this field.

• Nigeria is gearing up to deploy armed forces to guard oil and fuel pipelines to curb oil theft. The country loses an estimated $6 billion in revenue annually due to theft. According to government figures, crude oil left last year amounted to more than 250,000 barrels per day on average-or one-fifth of Nigeria's total production. Guarding the pipelines from theft is a daunting task as the country has more than 5,000 kilometers of pipelines, much of it in areas that are difficult to secure.

• Indonesia is rejoining OPEC after seven years, with an eye on spurring investment and jump-starting production. OPEC said that Indonesia's request to reactivate its full membership would be included for its next meeting scheduled for early December. Indonesia left OPEC in January 2009, when its membership expired. This exit was prompted by growing domestic demand for energy, declining output, and limited investment. Today, Indonesia finds itself importing crude and refined oil products to meet growing demand.

Discovery & Development

• Taiwanese Formosa is considering a $9.4-billion ethane cracking and petrochemical complex along on the west bank of the Mississippi River. Right now, the company is evaluating the prospect, and few details are available, but a final investment decision is expected by mid-next year. If it goes forward, the first phase of the project would be to build an ethylene cracker and associated plants. Those installations would be doubled in the subsequent phase. This wouldn't be Formosa's first foray into Louisiana, where it has had operations since the early 80s and currently owns three plastics manufacturing plants. If the project is green-lighted, it would be Louisiana's second large-scale ethylene production plant to be built in the state by foreign operators. Earlier this year, Japanese Shintech announced plans to invest $1.4 billion in a 500,000 ton/year ethylene plant in Plaquemine. American petrochemical giants are also increasingly eyeing Louisiana because of new natural gas resources. Dow Chemical, ExxonMobil Chemical and ChevronPhillips have already announced major expansions in the region, with new projects expected to come online in 2017.

Deals, Mergers & Acquisitions

• Ajax Resources has agreed to acquire Houston-based W&T Offshore's interest in Yellow Rose field for $376 million. This interest includes 25,800 net acres in Andrews, Martin, Gaines, and Dawson counties in West Texas. Net production from the field in July averaged 3,000 boe/d. Ajax Resources is a newly formed exploration and production company backed by private equity firm Kelso & Co. W&T reserved a one to four percent sliding scale overriding royalty interest in the field. The transaction is expected to close during the third quarter of this year.

• Dallas-based Holly Energy Partners has acquired Canadian Enbridge's 50% stake in Frontier Pipeline Company. Holly Energy is expected to pay Frontier cash consideration of approximately $62.0 million. The crude oil pipeline has a capacity of 72,000 barrels per day and supplies Canadian and Rocky Mountain crude to Salt Lake City refiners through a connection to the SLC Pipeline. Houston-based Plains All American owns the remaining 50% in this pipeline. Holly Energy Partners owns infrastructure across several states, including Texas, Washington, Utah and Kansas.

• The European Commission has unconditionally approved the planned $70-billion merger of Royal Dutch Shell and BG Group, which we have discussed in earlier briefings. The Commission's investigation focused on the markets where the activities of the two companies overlap in exploration for oil and gas reserves and in the supply of natural gas and liquefaction and supply of LNG. The EC concluded that the merger will not give Shell 'market power' in oil and gas exploration, LNG liquefaction or LNG wholesale supply. The merged company will also be unlikely to stop competitors using its infrastructure, because "significant additional liquefaction capability" is being built and will be available in the near future, and "significant" spare capacity already exists, the Commission said. Including clearance in Brazil, two of the five preconditions to the combination have now been satisfied. Three months ago, the U.S. Federal Trade Commission granted early termination for the U.S. antitrust waiting period. Australia and China are the two regulatory hurdles yet to be cleared. The Australian Competition & Consumer Commission was scheduled to announce its decision on the deal earlier this week, but the date had been pushed back to 17 September in order to allow additional time to consider the proposal.

Regulations & Litigation

• Chevron has reached a settlement agreement prompting California-based H5 (e-discovery and litigation services) to withdraw support from litigation against Chevron in Ecuador by assigning its 1.25 percent interest in the $9.5-billion Ecuadorian judgment to Chevron. Last year, Chevron obtained court-ordered discovery from H5 for the company's role in supporting and advancing the lawsuit. H5 became involved in the case in 2009.

• Kurdistan has authorized the first of a series of payments to oil companies operating in the region, releasing $75 million to western companies that have been languishing under unpaid arrears. Operators of the Taq Taq oil field, including Genel Energy, will receive $30 million, while the same amount will go to Tawke field operator DNO, which had launched a lawsuit against the Kurdistan Regional Government (KRG) for nonpayment. Gulf Keystone said it would receive $12 million of the $15 million allocated for the Shaikan field, with the remainder going to its partners, Mol Group and Texas Keystone. Exports from these key companies in Kurdistan began in late 2013, but only $100 million has been paid since them. Kurdistan had increased its independent sales since mid-June while cutting allocations to Iraq's state oil firm SOMO as the conflict between the Kurds and Baghdad continued over the Kurds' unilateral exports and the Iraqi central government's foot-dragging in issuing federal budget payments.