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Global Energy Advisory – 13th March 2015

Politics, Geopolitics & Conflict

Yemen

Yemen’s oil-rich Marib province is the likely next target for takeover by Houthi militants who have unseated the Yemeni government. Houthi rebels have taken over much of the country’s north, but Marib—east of the capital—will be more of a challenge. This province is dominated by Sunni tribes who will not let it fall to the Houthis without a major showdown (read: civil war). The Sunni tribes protecting this province (along with military units) will necessarily have some links to Al-Qaeda. Thus, the Houthi militants will profess to be protecting the oil province from al-Qaeda, or more specifically Al Qaeda in the Arabian Peninsula (AQAP). Indeed, no one wants this oil-rich province in the hands of AQAP, which would gain an instant, massive fundraising tool much like their Islamic State brethren have in Syria and Iraq. International oil companies have of course already recognized the coming disaster, though no one is quite sure who to be afraid of in this venue. In January, Houston-based Occidental Petroleum Corp. evacuated its staff because Houthi militants raided its compound in the Yemeni capital. Norway’s DNO, is giving up its right to oil blocks that were very lucrative. So are Dove Energy, Group of Dubai and Nexen Inc. Austria’s OMV hasn’t cut and run yet, but it has evacuated a lot of staff and operations have been downsized. The Houthis are fairly savvy geopolitically. They are now courting the Russians to come in and help them develop their newly seized oil assets. More to the point, they are promising Russia lucrative contracts in return for official recognition of the Houthi-led state. They will offer the Russians Marib province, which they are confident they are going to take by force very soon.

• In Libya, the Islamic State has allegedly kidnapped 9 foreign oil workers from the Ghani oilfield, which lies south of the city of Sirte in the country’s central region. The foreign oil workers were from Austria, Bangladesh, the Czech Republic, the Philippines and Ghana. Nine Libyan security guards were also kidnapped in the operation and are believed to have all been beheaded. There is no information on the whereabouts of the kidnapped oil workers. While the kidnappings have been confirmed, we cannot at this time confirm definitively that IS was behind the kidnappings. There are other alternatives that must be considered in the current atmosphere in Libya.

Discovery & Development

• BP and partners are planning to invest around $12 billion in Egypt’s West Nile Delta as the concession deal is finalized for the development of assets containing some 5 trillion cubic feet of gas and 55 million barrels of condensates. Production should launch in 2017 and could reach up to 1.2 billion cubic feet a day—a volume that represents around 25% of Egypt's current gas production. There are two BP concessions in play here, both of them offshore: North Alexandria and West Mediterranean Deepwater. There are also plans for continued exploration, which BP is hoping could add another 5-7 trillion cubic feet to reserves. BP has a 65% interest in the project.

• Scotland-based Cairn Energy is planning this year to launch an exploration campaign offshore Senegal with up to 6 wells. News of the exploration campaign follows a major discovery offshore Senegal last year. Cairn is adding $75 million to its 2015 exploration budget, which now sits at $185 million. Of this, $135 million will be spent on West African projects. Cairn is the operator with a 40% working interest in three offshore blocks. ConocoPhillips has a 35% interest, FAR Ltd. has a 15% interest, and Senegal’s state-run Petrosen has a 10% interest. Last year, at its FAN-1 well, Cairn discovered high quality, light oil in multiple stacked deepwater fans, while high-quality oil was also discovered at the SNE-1 well. We only have preliminary estimates at this time. For SNE-1, the gross contingent resource is P50, 330 MMbbls recoverable. At FAN-1, initial gross estimates are P50, 950 MMbbls.

• Norwegian RAK Petroleum’s subsidiary Foxtrot International LDC has announced an oil and gas discovery offshore Ivory Coast at its Marlin North-1 well. This is an interesting discovery as these intervals had not indicated any hydrocarbons before. This is part of the CI-27 block. A 72-foot perforated section of a gas-baring column in the well’s Turonian interval flowed at 25 million cubic feet per day and 150 barrels of condensate per day. A 36-foot perforated section of an oil-bearing column in the well’s Lower Senonian interval flowed at a rate of 1,525 barrels per day at an oil gravity of 27 degrees API, and 0.6 million cubic feet per day of associated gas. Foxtrot operates block CI-27 with a 27.5% interest, while RAK owns one-third of Foxtrot.

Concessions, Tenders & Awards

• Saudi Aramco has invited 9 companies to submit bids for the engineering, procurement and construction contracts to expand the capacity of its Fadhili gas processing plant. The plant currently has a capacity of 28 million cubic meters per day, while the expansion would boost that capacity to 71 million cubic meters per day. The 9 prequalified companies have until 15 April to submit their proposals. This is a $5-billion project.

• The US Bureau of Ocean Energy Management (BOEM) will offer up more than 21 million acres offshore Texas for oil and gas exploration and development as part of the proposed Western Gulf of Mexico Lease Sale 246. The sale is scheduled to take place in New Orleans in August. Sale 246 will include about 4,000 blocks, covering roughly 21.8 million acres. The blocks are located from 9 to 250 miles offshore, in water depths ranging from 16 to more than 10,975 feet. BOEM estimates the proposed lease sale could result in the production of 116 to 200 million barrels of oil and 538 to 938 billion cubic feet of natural gas.

• Mexico is planning to alter the financial terms of its oil contracts for new blocks that will be auctioned off later this year. Prospective bidders have criticized the existing terms as impossible in the current oil price slump. The changes will raise the threshold at which the government increases its share of total production in a project. The changes also remove a requirement for a fixed level of investment in monetary terms over a specific period of time. The pre-tax profit margin that groups can secure before the adjustment mechanism is triggered is currently 15%, but will be increased to 20% under the new terms. There may be additional adjustments as well, in line with international standards. Later this year, Mexico will hold its first-ever competitive tender for oil blocks—opened up to international companies after an eight-decade monopoly by state-run Pemex. The first auctions will be for exploration of shallow-water blocks in the Gulf of Mexico and nearby oil fields already discovered and with proved reserves.

• The Trans Adriatic Pipeline AG (TAP) has launched two pre-qualification contracts for the construction of the 105-kilometer offshore pipeline section under the Adriatic Sea. This will be part of a natural gas transport system delivering gas from Azerbaijan to Italy. It is part of the Shah Deniz Phase 2 field development in the Caspian Sea. The first pre-qualification comprises engineering, procurement, construction and installation (EPCI) works for the offshore section of the 36-inch pipeline between the coastlines of Albania and southern Italy. Following the selection stage, TAP aims to issue the related Invitations to tender for offshore construction by May 2015.

Regulations & Arbitration

• Germany’s oil and gas industry is growing increasingly anxious about the country’s pending new hydraulic fracturing rules and whether they will hinder domestic production and technological development. The German government is working on a bill would allow commercial shale gas fracking at depths of over 3,000 meters. This is a major turnaround for Germany, which has had a de facto moratorium on fracking in place since 2000. There will be stringent environmental controls, including a drilling ban in water conservation areas. The law is due to be debated by the German cabinet by the end of March. The start of drilling, regardless, would not be before 2019.

• We continue to watch the drama unfold for Italy’s Eni and oil services company Saipem, which has gotten into a great deal of bribery-related legal trouble over both Nigeria and Algeria. Now, Italian prosecutors are seeking the indictment of former Eni CEO Paolo Scaroni on corruption charges, alleging he was involved in a kickback scheme that helped Eni win lucrative contracts in Algeria. Scaroni is accused of tax fraud and involvement in paying off Algerian officials. In January, the investigation was closed into allegations that Saipem paid intermediaries $224 million to win $8.6 billion in contracts with Algerian state-owned Sonatrach. In addition to Scaroni, seven others are named in the requested indictment, including top executives at Saipem and two people alleged to have provided the link between Saipem and the Algerian officials. The prosecutors are also seeking indictments against Eni and Saipem themselves, rather than simply targeting executives.

Finance & The Oil Price Slump

• Canadian giant Encana is planning to raise $1 billion in a share sale, selling off 85.6 million common shares at $11.50 each. The company has granted the underwriters an over-allotment option to buy up to an additional 12.8 million shares at the offering price. The company made $9-billion of acquisitions over the past year, including in Texas’ Eagle Ford shale and the Permian Basin, but the oil price slump has forced a rethink.

• Houston-based Dune Energy is the latest victim of bankruptcy due to falling oil prices. The company has filed for Chapter 11 bankruptcy following the failure of a proposed merger with Eos last week. Dune began looking for a buyer last year. The company said it will request approval of $10 million in debtor-in-possession financing from its pre-bankruptcy lenders. Dune Energy has interests along the Louisiana and Texas Gulf Coast. Dune has 74,000 gross acres across 15 oil and gas fields.




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