Global Energy Advisory – 14th August 2015

Geopolitics, Politics & Conflict

• Turkmenistan's state-owned TurkmenGaz will lead a consortium of state-owned companies that have proposed to build, own, and operate the 1,800-kilometer Turkmenistan-Afghanistan-Pakistan-India (TAPI) natural gas pipeline. The consortium's Steering Committee has selected TurkmenGaz to build, finance, own and operate the planned natural gas pipeline. The earlier plan was to look for an international company to fill this role. The pipeline will have a capacity of 90 MMscfd, or 33 billion cubic meters of Turkmen natural gas per year. Construction is expected to begin in December and take around three years. The planned pipeline will extend from Turkmenistan's Galkynysh field through the Afghan cities of Herat and Kandahar to its final point at a settlement on the Pakistani-Indian border. The feasibility study of the project was developed in 2008, at an estimated total cost of $7.6 billion, which has now risen to at least $10 billion.

On a broader level, what we are looking at here is an invigorated race for an Asian natural gas pipeline, and this is in part sparked by the prospect of Iran re-entering the market without the burden of sanctions. Turkmenistan is now prioritizing this project, while Russia is putting up a potential competitor, though some years ago it had expressed an interest in supporting TAPI itself. Earlier in August, Moscow formalized its support for Pakistan's North-South gas pipeline project-a 1,200-kilometer pipeline that would transport gas from Karachi to Lahore, with construction scheduled to begin next year. This pipeline would largely transport Iranian gas and hook up with the long controversial Iran-Pakistan pipeline, which will become less shackled once sanctions against Iran are lifted. This Iran-Pakistan pipeline and the North-South pipeline hook-up will undermine TAPI's market share. With this in mind, one will also note an intensifying dispute between Turkmenistan and Russia, in the form of TurkmenGaz accusing Gazprom of not paying for Turkmen gas this year. The two are now embroiled in international arbitration in Stockholm over contract prices. As a result, Turkmenistan's gas exports to Russia have declined significantly, and we expect these two gas giants to shape the coming great gas game in terms of pipeline delivery over the rest of the decade.

• In a long-awaited move, emerging East African oil giants Kenya and Uganda have agreed on the route of a planned pipeline that would carry crude from Ugandan oilfields to Kenya, where it will have access to sea ports for international markets. This $4.5-billion pipeline will link the newly discovered oilfields in both Uganda and Kenya to the Kenyan coast to ensure smooth exports. Ireland's Tullow Oil-one of our international favorites and the key company behind the game-changing discoveries in Kenya-will benefit immensely from this pipeline, particularly as it has assets in both Kenya and Uganda. Uganda's reserves are estimated at 6.5 billion barrels, while Kenya is believed to have at least 600 million barrels, but exploration has only just begun in earnest. Our latest information is that construction could be completed by 2018 or 2019. However, financing for the project remains a hurdle, as do guarantees of security, particularly the threat from Somalia's al-Shabaab militants.

• We continue to closely watch developments surrounding Exxon Mobil's massive discovery in Guyana and the resultant threats emanating from Venezuela, which has long laid claim to tiny Guyana. Exxon announced its discovery in May, and Venezuela responded by suddenly upping the ante for this tiny nation, which it had largely ignored until the oil find. The find showed game-changing offshore oil and gas deposits, and Venezuela has demanded that drilling be halted. The repercussions for Guyana cannot be ignored. Venezuela has withdrawn its diplomats and also cancelled an important rice-for-oil deal that has been extremely relevant to the small nation's economy. At stake here is approximately 700 million barrels of oil, which would catapult poverty-stricken Guyana, which has never had any oil, into a major player overnight. The oil find is said to be worth around $40 billion. There is a fair amount of concern here that investors will be intimidated and development could be significantly derailed due to Venezuela's real economic threats. So far, Guyana's authorities have shown no sign of backing down-there's simply too much oil at stake; but the question is whether they will be able to hold for the estimated seven years it will take to actually start producing that oil. 

Discovery & Development

• Saudi Aramco has launched a carbon capture and storage pilot project designed to enhance oil recovery and simultaneously reduce carbon dioxide emissions. The company expects to demonstrate that carbon capture enhanced oil recovery (EOR) will become the more widely employed EOR method, particularly favorable to water flooding. In line with the project, 11.3mn standard cu/m per day of CO2 will be captured at the Hawiyah gas recovery plant and piped 85 kilometers to the Uthmaniyah field, where it will be injected and sequestered, or stored, into flooded oil reservoirs under high pressure to enhance oil recovery. The pilot project is the latest in the company's efforts to inject 800,000 tons/year of CO2 into flooded oil reservoirs.

• Sweden's Lundin Petroleum has announced an oil discovery on the Luno II prospect in the Norwegian North Sea. The well is located on the southwestern flank of the Utsira High, some 15 kilometers south of the Edvard Greig field, also operated by Lundin Petroleum. A production test showed production at a rate of 1,000 barrels of oil per day. The gross contingent resource range for the Luno II North discovery, representing the southern part of the prospect, is estimated to be 12 to 26 million barrels of oil equivalents.

• Canadian-based Canacol Energy Ltd and its JV partners have announced a discovery of 33 feet of net oil pay within its reservoirs in Ecuador. This is a light oil discovery that should complement Canacol's gas assets in neighboring Colombia. The partners completed drilling and testing of the Secoya Oeste-A001 exploration well, which is adjacent to the producing light oil ields, Libertador and Atacapi in Ecuador's Oriente Basin. The assets are held by a consortium, in which Canacol holds a 25% non-operated interest.

Deals, Mergers & Acquisitions

• Despite sanctions, Norway's Statoil is looking to strengthen ties with Russia's Rosneft, exploring the possibility of two wells in Russia's Sea of Okhotsk in 2016 and testing out winter production potential at Russia's North-Komsomolskoye field in the Yamal-Nenets autonomous district. This comes even as sanctions against Russia by the U.S. and EU are set to become more intense. The pilot project in Siberia and the two offshore wells are part of a wider framework agreement signed with Rosneft in 2012. We do mention sanctions, though it is important to understand that these particular projects do not fall under the sanctions. What would fall under the sanctions is joint drilling in the Perseevsky license area in the Russian Barents Sea, located next to similar exploration areas in Norway inside the Arctic Circle.

Tenders, Auctions & Licenses

• Egypt has awarded five oil and gas concessions that the authorities hope will raise investment by $100 million at least. A consortium led by UAE-based Pacific Oil and Malaysia's Hibiscus Petroleum will explore the 68-square-kilometer Southeast Ras el-Ush concession in the Gulf of Suez. Kieron Megawish will explore in the 194 square kilometer North Megawish concession in the Gulf of Suez, with a minimum investment of $23 million. State-owned Ganoub El Wadi Petroleum Holding Co (Ganope) had opened bidding at the end of 2014 on 10 concessions in the Gulf of Suez, Eastern Desert and west and east of the Nile in the areas of al-Naqra and Kom Ombo.

• Exxon Mobil has cemented two agreements for horizontal development rights in 48,000 acres in the core of the Midland Basin in the US. The acreage will be operated by ExxonMobil's subsidiary XTO Energy Inc. The company has executed five agreements in the Midland Basin since January 2014, providing the company with over 135,000 operated net acres.

• Uganda's government has granted approval to 16 companies to bid on exploration rights for six blocks in the nation's prized Albertine Graben region. Tenders for the blocks, estimated to contain more than 6.5 billion bbl of oil resources, were announced in February. The list includes firms from Russia, the US, South Africa and Australia. Ugandan subsidiaries of Tullow, Total and China National Offshore Oil are currently licensed in Albertine Graben. We suggest following Tullow's success here as a barometer.