Geopolitical, Political & Conflict Updates
• High-level industry sources in Ukraine inform us that talk of extending the new gas tax beyond the end of the year is gaining in momentum, though lobbying by a united group of private gas producers plans to match that momentum. In order to convince Kyiv that it will be hanging itself over Russian gas if it goes through with this doubling of taxes on gas producers past 31 December 2014, we have to convince two political-business elite who are benefitting from the taxes. We have already heard from foreign-run industry sources who say they will count their losses in Ukraine and cease production if the tax law is extended into next year. The alternative asset hunt is already beginning for some. At the same time, no one with energy assets in the east will be making any moves over the next six months, and these assets should be considered on hold for the time being; however, the electricity assets should be considered the most viable once the dust settles in the Donetsk region—assuming we do not head into an all-out war with Russia. Corruption is as big a problem as ever, and oligarchs (or in today’s speak, the political-business elite) are financing the war effort in eastern Ukraine, so we know where the spoils will go.
• Washington finds itself in an interesting position over Iraqi Kurdish oil, the unilateral export of which has suddenly been forgotten in the melee of the conflict in Iraq and the US Air Force’s air strike support for Kurdish forces, whose Peshmerga remain the only real chance of fighting off the Islamic State (IS) in the ‘disputed territories’ in northern Iraq. The territory that IS has laid siege to in the north is not to be confused with the territory of the Kurdistan Regional Government (KRG), or its capital of Erbil, which remains far from the heart of the fighting, as does its key oilfields.
• Presidential elections in Turkey have unsurprisingly solidified the power of Prime Minister Recep Tayyip Erdogan and the ruling Justice and Development Party (AKP). Erdogan ran for president this time around and won a landslide victory on 10 August. What happens next will be moves to strengthen the role of the president, which has been largely ceremonial, but which Erdogan will seek to empower with greater authority than the prime minister at the earliest opportunity. The electoral victory means further stability for the business elite attached to this political circle, and continued immunity from prosecution for corruption.
• We alert investors in companies operating in South Sudan to the fact that South Sudan is in arrears to international oil companies to the tune of $1.6 billion, while requests for advances on these arrears have gone unheeded by the government, which is unsuccessfully trying to fight back a rebel advance which has already halted production for a year in one of the newly independent state’s only two oil-producing regions.
• Asia (largely China and India) increased imports of Iranian oil by 25% in the first half of 2014. China, India, Japan and South Korea imported 1.2 million bpd of Iranian oil during this period, up from 961,236 bpd during the same period of 2013. Much of the increase can be attributed to China, which saw its imports of Iranian oil jump 50 percent to 627,700 bpd in the first six months of this year. The six-month sanctions-easing deal between Iran and the five permanent members of the UN Security Council – the US, Britain, France, Russia and China -- plus Germany came into effect on 20 January 2014, and since then there is a clear interest for oil majors to get back into the Iranian game.
Regulatory & Legal Alerts
• Our partners at Southern Pulse inform us that Honduras’ National Enterprise of Electrical Energy trade union (STENEE) is accusing state authorities of triggering an energy shortage. STENEE president Miguel Aguilar insists that a lack of supply is not physically possible at this point in time and that the government has caused the false shortages, specifically by favoring entrepreneurs that have become millionaires by selling energy to ENEE. Aguilar also asserted that he has information about government plans to buy a new liquid carbon power plant, which will be costly for citizens.
• Also according to Southern Pulse, the Panama Canal Authority (ACP) will limit the draft and cargo weight allowed for ships transiting the canal if the rain deficit in the region continues. The Panama Canal operates a system of locks at different levels to bridge the difference in height between the sea and Lake Gatun, requiring 202,000 cubic meters of water supplied by the lake, whenever a vessel passes through the waterway. Administrator Jorge Quijano noted that on the previous occasion this measure was taken, the price of passage was unchanged; boats paid the same but were less heavy.
• The state of South Carolina has moved to join a lawsuit challenging proposed climate change regulations two months after the Environmental Protection Agency (EPA) proposed new carbon dioxide regulations. Those regulations would force South Carolina to cut its coal-plant emissions dramatically. South Carolina joins a dozen states in the South and Midwest that are suing the EPA, arguing that the rules will drive up costs for major power utilities who will pass it on to consumers. South Carolina feels the new rules are unfair because the state would have to cut its carbon significantly more than other states.
Deals, Acquisitions & Mergers
• Rio Tinto is selling off its Mozambique coal assets for $50 million, and there are concerns that its decision to pull the plug in this country could lead to a reduction in investor confidence across other extractive sectors. (At the same time, we note that Rio Tinto has secured an agreement with the Mongolian government for the construction of a power generation plant to feed a $6.5 billion copper project).
• Finnish power group Fortum has acquired E.ON Ruhrgas International GmbH's shareholding of 33.66% in the Estonian natural gas import, sales and distribution company Eesti Gaas. This effectively increases Fortum's holding in both companies to about 51.4%. The deal should be approved and closed in the third quarter of this year.
• Colorado-based Whiting Petroleum Corporation has agreed to acquire Kodiak Oil & Gas Corporation for $3.8 billion in stock, and assume $2.2 billion of Kodiak’s debt in a deal that unites two exploration and production companies that both have a strong presence in Bakken and Three Forks. The merger will render Whiting and Kodiak the biggest producer in the region, with combined production figures of around 107,000 barrels of oil equivalent per day. The merged company will boast 855,000 net acres, and 3,460 future drilling locations. Whiting shareholders will own 71%.
• Colombian electricity company Celsia SA ESP has announced plans to buy stakes in power-generating facilities in Panama and Costa Rica from France's GDF Suez SA for $840 million.