Global Energy Advisory – 13th November 2015

Politics, Geopolitics & Conflict 

Turkey: Energy hub dreams waylaid by violence

About this time last year, everyone was pretty sure that Turkey stood a chance of becoming a major energy hub for the entire world. Its strategic position and its ability to ally itself with all the major oil countries at once, still keeping a fair amount of political distance between them was indeed promising. But now the fallout from the conflict in Syria has spilled across the border into Turkey in more ways than one. Turkey is no longer ready to become that energy hub.

While tensions have been brewing and even last year we were sounding the alarm bells, the past month has been much more tangible in terms of the threat spreading in and around Turkey's southeastern border with Syria-which is also one key area of oil exploration.

That the situation has spiraled out of control was made most evident on 10 October, when 95 people were killed in a terrorist attack (caution: this doesn't necessarily mean it was the PKK or ISIS/IS and it could just as easily have been opposition forces) at a peaceful demonstration at the Ankara Railway Station. That we don't know who was responsible is indicative of the growing civil strife, from which violence can erupt at just about any point. Very important general elections are also just around the corner.

At the end of the day, we should be very concerned about Turkey-surrounded by major oil players and phenomenal game-changing pipeline plans-and its stability. The country is surrounded by as many conflicts and unstable forces as it is pipelines-and the two will not mix easily. If you have oil and gas assets in Ukraine, Russia, Azerbaijan or Iraq-you should be particularly concerned because much of this goes through Turkey, where pipelines are a clear target of attack, most notably by the increasingly emboldened Islamic State and the vengeance-bound Kurdistan Workers Party (PKK). Indeed, the IS has already targeted the pipeline from Kirkuk in northern Iraq to Turkey. Furthermore, the PKK has targeted other pipeline branches transiting Azeri and Iranian gas inside Turkey.

Recent incidents speak volumes, not to mention the fact that the violence has reached the capital, Ankara. Clashes that broke out last Friday in the southeastern province of Sirnak are still ongoing, as unrest feeds more unrest. In the city of Silvan, military tanks and armored vehicles are patrolling the streets, while snipers perch on rooftops and civilians are shut in, according to local reports. This after seven people were killed in the Turkish forces' battle to take control of the area from elements tied to the PKK. On 10 November, 19 soldiers were wounded in a roadside bomb attack blamed on the PKK in the eastern province of Diyarbakir.

We expect further violence and specific targeting of pipeline infrastructure in Turkey in the coming weeks and months.

Iraq: Trouble in oil-rich Basra

Separatist-leaning provincial leaders are threatening to usurp control over oil fields in Basra in order to gain control of oil revenues to use them in what they insist will be a better path to budgetary efficiency and attracting investment. In all, 72 members of Iraqi Parliament have demanded that Basra be given financial independence, and have threatened to export oil unilaterally, bypassing the central authorities, if their demands are not met-just like Iraqi Kurdistan has done. The petition demanded that Basra's quota be guaranteed in the budget in line with the agreed quotas. Basra is home to Iraq's largest oil wells and 59% of its total reserves, while producing 80% of the country's oil, which makes Kurdistan's flirtation with independence insignificant by comparison. Also, earlier this month, the Basra Council (the provincial political authority) announced the formation of Basra Company, charged with boosting the economy through the attraction of foreign direct investment in key sectors, including oil, gas and infrastructure.

Regulatory Updates

• Kern County, California, has approved changes to oil and gas regulations designed to streamline the process for acquiring drilling approval. This is California's largest oil producing county, so the regulations are significant. Until now, the county had no permitting process for drilling operations but was overseen by multiple state agencies. The permitting measure will likely face legal challenge from environmentalists who say the plan does too little to protect local oil and air quality and farmers who own their property's surface rights but not the underlying mineral rights.

• The authorities in Colombia have announced plans to cut taxes for oil companies operating in some offshore leases in the Caribbean, in an attempt to encourage exploration. The contracts for various offshore blocks will receive a 25% discount on income taxes and will be exempt from customs charges and value-added tax. The government is expected to propose a structural tax reform bill to Congress in March 2016. The biggest foreign investor in the country is Canadian Pacific Exploration and Production.

Deals, Mergers & Acquisitions

• TransCanada has entered into an agreement to sell a 49.9% interest in Portland Natural Gas Limited Partnership (PNGTS) to its master limited partnership, TC PipeLines, for a purchase price of US$223 million. The sale is expected to close at the end of this year. The transaction includes US$188 million in cash and the assumption of a proportionate share of PNGTS debt in the amount of US$35 million. TransCanada will continue to hold a direct 11.8% interest in PNGTS. The pipeline connects with the TransQuebec and Maritimes Pipeline at the Canadian border and delivers natural gas to customers in the US northeast.

• Houston-based Enervest has agreed to acquire the Nora field in Virginia from subsidiaries of Range Resources for US$876 million, as well as non-operated interest in the core of the Eagle Ford from an undisclosed seller for US$118 million. The Nora field includes acreage and operated coalbed methane, tight gas, Berea, Big Lime, and Huron shale producing wells in Dickenson, Buchanan, Wise, and Russell counties in Virginia, and Nicholas and Clay counties in West Virginia. The Eagle Ford properties include 1,760 net acres, production of more than 2,200 boe/d, an active drilling program on an ongoing basis, and reserves of 7.8 million boe.

• Marathon Oil has agreed to sell its operated producing properties in the greater Ewing Bank area and non-operated producing interests in Petronius and Neptune fields in the Gulf of Mexico for US$205 million to an undisclosed buyer. This is Marathon's definitive exit from the Gulf of Mexico as the new strategy is to focus on shale drilling projects in Texas and North Dakota. The assets represent a majority of Marathon's operated and non-operated producing properties in the Gulf. However, the company will retain its interests in certain other producing assets and acreage in the Gulf, as well as its interests in the Gunflint development. Previously, Marathon management said they would sell $500 million in non-core assets over coming months and steer that cash to its most lucrative shale drilling projects onshore. Earlier this year, Marathon unloaded oil and gas fields in East Texas, North Louisiana and Oklahoma for $100 million as well as exploratory acreage in Ethiopia and Kenya.

• Danish Maersk Oil has agreed to acquire interest in three onshore exploration licenses in Kenya and two more in Ethiopia from Africa Oil Corp. The value of the deal is split between an upfront farm-in payment of US$365 million, including exploration costs. Additional payments of up to US$485 million will be paid if the fields contain more oil than is estimated and delivery is ahead of schedule. Four of the blocks are operated by Tullow Oil PLC and the remaining by Africa Oil. The exploration areas cover the Turkana region of northern Kenya and southern Ethiopia. The licenses cover 100,000 sq km and include eight recent oil discoveries, with ongoing exploration and appraisal activities. Maersk Oil already has interest in Africa with producing in Algeria and exploring in Angola.

• For US$358 million, Japanese Mitsui has reached an agreement with Santos concerning the acquisition of Santos' 35% working interest in the Kipper gas and condensate field offshore Southern Australia where production is expected to start in 2016. Operator Esso Australia Resources and BHP Billiton Petroleum each own 32.5%. Recoverable gas reserves are estimated at 620 bcf, while condensate and LPG reserves are estimated at 30 million bbl. The latest acquisition will allow Mitsui to expand its gas business in the region, and further helps it to continue improving its reserves, production, and competitiveness.

Discovery & Development

• Israel is hoping to lure in more international oil companies for offshore natural gas exploration, and officials say they've already met with more than 20 energy companies. On that list are Italy's Eni, Shell, Exxon Mobil and Hess. Keep in mind that Noble Energy has had a rough time navigating this new area for Israel with a long-running battle over potential monopoly position with respect to Israeli gas discovered in the Levant Basin. New entrants will want assurances.

• Nigeria is selling up the promise of its northeastern Chad lake area for the next major discovery, pointing to recent seismic 3D data generated from the Chad Basin. We will continue to monitor this.

• In its second major discovery this year, Kosmos Energy has announced that the Marsouin-1 exploration well, located in the northern part of Block C-8 offshore Mauritania, has made a significant, play-extending gas discovery. Marsouin-1 encountered at least 70 meters (230 feet) of net gas pay in Upper and Lower Cenomanian intervals comprised of excellent quality reservoir sands. Located approximately 60 kilometers north of the basin-opening Tortue-1 gas discovery (renamed Ahmeyim), Marsouin-1 was drilled in nearly 2,400 meters of water.