Global Energy Advisory – 16th October 2015

Politics, Geopolitics & Conflict

• Hungary has reportedly increased oil imports from Iraqi Kurdistan through Croatia, in an attempt to replace some volumes of Russian crude. Hungary's MOL has been using Croatia's state-controlled JANAF pipeline to bring in Kurdish imports to the Adriatic port of Omisalj. The Central European JANAF system runs through Croatia, Bosnia-Herzegovina, Slovenia, Serbia and Hungary. Kurdish imports here offset Russian oil to Central Europe coming through the Druzhba pipeline, which delivers oil via Ukraine to Hungary, Slovakia and the Czech Republic. The main point here is to gain more leverage over price negotiations for Russian product. MOL owns 49.1% of Croatia's INA and two Croatian refineries. In 2014, MOL and JANAF had signed an agreement for MOL to transport 1.30 million tons of oil through Omisalj. This also benefits MOL because it has assets in Iraqi Kurdistan, which went into production last year. MOL has invested around $1 billion in Iraqi Kurdistan to date.

• With that in mind, MOL will not be happy about the current state of affairs in Iraqi Kurdistan. This once stable haven in a chaotic Iraq is now plunging into turmoil, with the fight against the Islamic State (IS) having taken its political toll. United, the Kurds have been a major force with which to be reckoned-divided, they stand to fall along with Iraq. And right now, they are divided, thanks to ruling Kurdistan Democratic Party (KDP) leader Massoud Barzani's attempt to use the IS conflict to extend his presidential term (again), as we noted last week. This week, the situation has further intensified, with increasing unrest after four ministers were removed from the Kurdistan Regional Government (KRG) Cabinet. Force was also used to keep the speaker of parliament from re-entering the Kurdish capital, Erbil. This forebodes the worst, and will severely hinder the Kurds' ability to fight back the Islamic State. For the first time since this crisis started, investors have a real reason to worry. If the Kurds can't hold things together, all of northern Iraq-including the giant Kirkuk oilfields-will fall to the IS.

Deals, Mergers & Acquisitions

• Encana has agreed to sell its Denver Julesburg Basin assets for $900 million to a new entity 95%-owned by Canada Pension Plan Investment Board and 5% owned by The Broe Group. The transaction is expected to close by the end of this year. The Canadian Pension Plan Investment Board will be acquiring all of Encana's DJ Basin acreage-a total of 51,000 net acres. These are assets that produced around 52 million cubic feet per day of natural gas and 14,800 bpd of crude oil and natural gas liquids. Based on Encana's development plan at the end of 2014, estimated proved reserves at its DJ Basin assets were 96.8 million barrels of oil equivalent. Natural gas accounted for over 40% of those reserves.

• Poland's Orlen Upstream has agreed to acquire all outstanding shares of Salt Lake City-based FX Energy for $1.15/ordinary share and $25/preference share which equates to $83 million in equity value. The offer has been approved by FX Energy's board. Orlen Upstream plans to purchase shares tendered by FX Energy shareholders through a subsidiary of Orlen Upstream registered in the US. The total deal value including the assumption of FX Energy net debt will amount to $119 million. FX Energy owns 49% interest in 7 producing fields in Poland with the remainder held by Polish state-owned PGNiG. The net production amounts to 350,000 cu m/day of the nitrogen-rich natural gas. Orlen is on a roll, trying to increase its foothold in Canada's Montney shale. The Polish company has also reached another deal to acquire Kicking Horse Energy of Calgary--subject to shareholder approval-for $356 million, including debt, which is just under $65 million. Kicking Horse produces about 4,000 barrels of oil equivalent per day. More takeovers in this area are likely in the near future.

Discovery & Development

• The governments of Uganda and Tanzania, French Total SA and Total E&P Uganda have signed an MOU for a crude oil pipeline that will run between Hoima, Uganda, and Tanga Port in Tanzania. The agreement aims at finding the most cost-effective route and a framework between the two states and oil companies. Two routes are under broad consideration here in Uganda: One would run to the coastal cities of Mombasa and Lamu in Kenya, and one through Tanzania to Tanga. The pipeline to Kenya's Lamu port would run for about 1,500 kilometers from Uganda's Hoima district through the prized Lokichar basin in northern Kenya. There are, however, some security concerns in northern Kenya. The deal follows an earlier MoU signed between Uganda and international oil companies licensed in the country for the commercialization of the newly discovered petroleum resources. Production has yet to start from any of several oil discoveries made in Uganda since 2006. Total, Tullow Oil and CNOOC have development proposals in various stages of negotiation. The Ugandan government is also considering two export-pipeline routes through Kenya.

• ConocoPhillips Alaska has launched oil production from its Kuparuk drill site on Alaska's North Slope. This new production is expected to add 8,000 bo/d gross at its peak. The project includes 14 development wells, a gravel road, a 24-well drilling pad, power lines, pipelines, and other surface facilities. The drill site is in the southwestern section of Kuparuk field and is a $475 million project. This is the first new drill site at the Kuparuk oil field in more than 12 years. BP, ExxonMobil and Chevron are also owners.

• Israel's Afek Oil and Gas has announced an apparent 'massive' oil discovery in the contentious Golan Heights. A discovery of this nature could be a major boost to Israel's oil industry, but will not be without significant controversy. Afek Oil and Gas is a subsidiary of American company Genie Energy. Three drillings have so far taken place in the southern Golan Heights which have found large reserves of oil. Exploratory drilling began in December 2014. In recent weeks, Afek requested permission to drill an additional 10 wells. While it says the oil find is confirmed, the firm says the quality, more precise measures of quantity and cost-effectiveness of extracting the oil won't be known until the extraction has begun. Environmental groups are strongly opposed to drilling here, and geopolitically this is also a tinderbox.

Tenders & Auctions

• Brazil's 13th licensing round last week saw a disappointing 14% of the onshore and offshore exploratory blocks put up for tender bought. Out of a total of 266 exploratory blocks across Brazil, only 37 received offers--35 onshore and 2 offshore. Petrobras and qualified supermajors Shell, Exxon Mobil and BP, did not bid in this tender but eleven successful bidders were Brazilian companies. No blocks were taken from major offshore basins, such as Campos and Espírito Santo.

• Oman has stepped up efforts to bring on foreign firms in exploring for and developing new oil and gas reserves. In September, Oman awarded an onshore block to a foreign company, and news is that there could be another deal and even a new licensing round by the end of this year.

Regulatory Update

• Authorities in the state of Pennsylvania have signed a bill into law-effective in December-designed to encourage more oil and gas companies to use treated coal-mine wastewater for hydraulic fracturing, rather than freshwater. The Pennsylvania Department of Environmental Protection is fully supporting the legislation. Previously, oil and gas companies were reluctant to use treated mine water to complete wells because of liability concerns with the state's existing Clean Stream Law. However, the new law clarifies the issue, under which a fracking company only assumes responsibility for the water it takes out of the coal mine. Consol Energy operates coal mines in the state and develops and produces natural gas from the Marcellus and Utica shales. Consol has, in the past, successfully used wastewater from its coal mines for fracking.