Global Energy Advisory – 12th June 2015

Sudan & South Sudan: A Lifelong Dictator for Khartoum, and More Oil Uncertainty in the South

South Sudan's military said its forces are in control of the oil fields in Unity and Upper Nile States, while rebel forces claim the contrary, saying they have captured the fields. What this really means is that the battle is still raging, and no one is in complete control. The likelihood is that the rebels have made gains here, but the government cannot concede this because this would be the end game. The rebels, likewise, have a need to exaggerate their successes. South Sudan's only revenues come from oil. Whoever controls the oil controls the newly independent country, but at present no one is producing fields in Unity state due to the raging conflict. We also give credence to rumors that Khartoum (the capital of Sudan, which lost all its oil when South Sudan gained independence in 2011) is funding and arming rebels in South Sudan. At the same time, in Sudan, President Omar al-Bashir-a war criminal at the best of times-won elections again last month and is now forming a new government. This, despite the fa
ct that the elections were boycotted by the main opposition parties and voter turnout was very low. Bashir is now 71 and he seized power in an Islamist-backed coup in 1989. His time for reforming the crumbling country, however, is running out. Cracks are showing in his power base, and without the South's oil, he has nothing.

'Oil Soldiers' for Iraq

Iraq authorities are putting together a 27,000-strong army specifically to secure its oil and energy facilities from potential attack by the Islamic State (IS). This is a bit late in the game, but while the rest of the hungry producers have largely shrugged off the IS threat, Baghdad is finally realizing that its oil assets are vulnerable. At present, Iraq is producing almost 4 million barrels of oil per day and is the second largest OPEC producer, after Saudi Arabia.

Discovery & Development

• Argentina's state-run YPF has discovered a new shale gas deposit in the highly prized Vaca Muerta field in the country's south. The discovery was in the Patagonian province of Neuquen, and according to YPF this is an indicator that there is a lot more gas in Vaca Muerta than originally thought. This is the first shale well in the reservoir to average daily production in excess of 43,000 barrels of oil equivalent. The Vaca Muerta field holds 40% of Argentina's shale gas resources and 60% of its tight oil. Argentina is estimated to hold 27 billion barrels of recoverable oil and 802 Tcf of natural gas, most of which is in and around the Neuquen province.

• An independent assessment of the Horse Hill well located near London's Gatwick Airport in West Sussex has estimated there could be about 271 million barrels of oil per square mile. A previous estimate in April had put it at 158 million barrels. But the question remains how much of this is recoverable. UK Oil and Gas (UKOG) said it was planning to drill more exploration wells and was assessing the potential of the reserves in the area. Last year, the British Geological Survey (BGS) estimated that there could be 4.4 billion barrels of shale oil in the Weald Basin but cautioned that it was challenging to determine how much could be commercially extracted. The Horse Hill licenses cover 55 square miles of the Weald Basin in southern England in which UKOG has a 20.36% interest.

• Gazprom is apparently planning to start building a pipeline to Turkey this month, to bypass Ukraine in getting gas to Europe. This comes after Gazprom's December decision to scrap the $40 billion South Stream pipeline project due to problems with the European Union. Moscow's alternative is the 'Turkish Stream' pipeline, which hopes to deliver 63 billion cubic meters of gas per year by 2020. The hub would be at the Turkish-Greek border for transit to Europe, pending Turkish agreement. Turkey is also said to want a new price for the gas it will get via its portion of the Turkish Stream. Ankara secured a 10.25% gas discount in late February for Russian gas but is pushing for a bigger discount and will use the planned pipeline project for leverage. Prepare for another European political battle over this one, pitting Western Europe against Central, Eastern and Southeastern Europe.

• ConocoPhillips is quitting Poland, making it the last major player to give up exploration, after investing $220 million in seven wells since 2009. Exploration did not come up with any commercial volumes of shale gas. Prior to this, in late 2014, Chevron pulled out, right after similar withdrawals by France's Total SA, ExxonMobil and Marathon Oil-all over the last three years. That leaves state-run gas distributor PGNiG and the refiner PKN Orlen on this beleaguered playing field.

• China's CNOOC has made a mid-sized discovery at the Liuhua 20-2 block in the Eastern South China Sea in the Pearl River Mouth Basin. The average water depth is about 1,280 feet. The discovery well LH20-2-1 was drilled and completed at a depth of about 9,744 feet and encountered oil pay zones with a total thickness of 116 feet. The oil production of the well tested around 8,000 barrels per day and the crude oil density is approximately 0.75. This particular area, the Baiyun Sag, is expected to become the new reserves growth area of deepwater exploration of crude oil in South China Sea.

• Norwegian Statoil has announced yet another gas discovery in the Gymir prospect-the third discovery in three months in the Aasta Hansteen area. Well 6706/11-2 proved a gross 70-m gas column in the Nise Formation with good reservoir qualities. Statoil estimates the volumes in Gymir to be in the range of 6-19 MMbbl of recoverable oil equivalent.

Deals, Mergers & Acquisitions

• Following a parliamentary vote in Norway to ratify a decision to limit holdings of companies that produce or burn coal, Norway's $890 billion sovereign wealth fund will be divesting its coal industry holdings. The fund has been ordered to sell stakes in mining and power companies that directly or indirectly base 30% or more of their revenue or their regular activities on coal. This goes into effect next year and will apply to as many as 75 listed companies. Norway's pension fund holds between $4 and $5 billion in those listed companies and invests in 122 companies that would fall under the new divestment criteria.

• Apache Corp. has completed the sale of its Australian subsidiary Apache Energy to a consortium of private equity funds managed by Macquarie Corporate Holdings and Brookfield Asset Management. Total net proceeds are $1.9 billion. The assets produced the equivalent of 49,000 barrels of oil a day. The sale is part of Apache's plan to refocus on North America. Henceforth, around 70% of Apache's production will come from onshore North American assets. Apache also operates in the UK and Egypt.

• It is possible that Royal Dutch Shell will be forced to relinquish BG Group's stake in Kazakhstan's giant Karachaganak gas field when it acquires London-based BG. Reports note that the Kazakh government could claim a right to buy out BG Group's 29.25% stake in the field, though there have been no official disclosures to that effect as of yet. This would not be a small loss for Shell in this deal as BG's $4.4 billion stake in Karachaganak accounted for around 15% of the company's production and 9% of its revenues in 2014. Karachaganak is one of the world's largest gas-condensate fields, with estimated resources in place of 9 billion barrels of condensate and 48 trillion cubic feet of gas. Only 10% has so far been extracted.

• Israel's Delek Group, which partners with US-based Noble Energy in the Levant Basin, is now in talks to acquire an additional 19.9% stake of the offshore Cyprus gas field Aphrodite. The stake would potentially go for around $155 million, but negotiations are still in an early stage. At stake here is Block 12, for which Noble was granted the exploration license in the third quarter of 2008. This block is particularly interesting for the partners because it borders the massive natural gas discovery of the Leviathan field in Israel's exclusive economic zone.