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Global Energy Advisory – 17th April 2015

The Geopolitics of Oil

The Iran-Pakistan Pipeline

The Iran-Pakistan pipeline, which has been languishing on the Pakistani side, looks set to get a boost from China, which has apparently agreed to take on the $2 billion Pakistani pipeline segment. If this deal goes through, the Pakistani segment of the pipeline, which is 485 miles, would be funded largely by a Chinese loan and construction would be undertaken by China’s CNPC. Iran has already completed its 560-mile segment of the pipeline. Pakistanis say the deal with China is expected to be signed during a presidential visit to Islamabad this month. That this pipeline is now going ahead, after many delays, speaks volumes about Pakistan’s stance in the latest geopolitical quagmire in the Middle East.

About this time last year, the Saudis “donated” $1.5 billion to Pakistan. The US had long been trying to thwart the Iran-Pakistan pipeline—a $7.5-billion gas pipeline that would feed Iranian gas to desperate Pakistan, which suffers from severe energy shortages and whose economy is crippled at best. This pipeline is of immense importance to Pakistan and to the country’s overall stability. The US was not successful in convincing or blackmailing Pakistan into foregoing the project, and this is where Saudi money came into play. The US needed Pakistan’s help on the Afghan border. The $1.5 billion was a bribe. Right after the “donation” was issued in March 2014, Pakistan suddenly said the pipeline project couldn’t go through due to US and EU sanctions on Iran. The Saudi money was used to boost Pakistan’s foreign exchange reserves. A year later, Pakistan—Saudi money spent—is now once again committed to building its section of the Iran-Pakistan pipeline. All the while a noisy Middle East conflict is brewing in which
the Saudis are surrounded on all sides by old enemies like Iran and new enemies they have created themselves (Islamic State). And Pakistan has refused to come to Saudi Arabia’s military aid on the border area. At the end of the day, the Saudi $1.5 billion bought it a year of Pakistani loyalty and nothing more. Pakistan needs gas more than anything, and the only way it’s going to get what it needs is this pipeline with Iran.

At the end of the day, the pipeline will supply Pakistan with enough gas to fuel 4,500 M of electricity generation.

The US and Saudi Arabia derailed the original version of this pipeline, which was called the “Peace Pipeline” and included an India leg. India backed out in 2009 under pressure (and thanks to nuclear technology gifts) from Washington. The other option for the US and Saudi Arabia is to threaten the security of the Iran-Pakistan pipeline by fomenting separatism in Balochistan—a fiercely restive area populated by the Balochi people in which a section crosses the Iran-Pakistan border; thus, Iran has a Balochistan province as does Pakistan. The pipeline would have to run through this territory and it’s fairly easy for the US and Saudi Arabia (as they have in the past) to stir up trouble among these socially marginalized peoples. Saudi Arabia, however, is a bit busy with a proxy war with Iran in Yemen and, in a different manner, in Syria to be able to take on a third location (Balochistan) with any results.

In other developments …

• Pirates have kidnapped three Nigerians in an attack on an oil industry supply vessel off Nigeria. The boat’s operator is French-based Bourbon. Bourbon’s specialty is using smaller, fast cruisers to transport professionals to and from offshore oil and gas facilities. Between January and September last year the area recorded 33 incidents of piracy and armed robbery in the Gulf of Guinea.

• In Libya, militants have attacked the South Korean embassy in Tripoli, killing two local security guards and wounding a third. In a separate attack in Tripoli, Mahmoud Jibril, the head of the National Forces Alliance (NFA) political bloc and the half-brother of the former prime minister from 2011, was gunned down.

• Recent political developments in Nigeria forebode a shake-up of the oil industry. The party of Nigeria's incoming president won a landslide in elections for powerful state governors. This effectively puts an end to the control of the former ruling party (People’s Democratic Party, PDP) over the government. The All People's Congress won 19 of the 28 positions, and the PDP lost the key northern states of Katsina and Kaduna. That said, the PDP will still control major oil states. This political imbalance could severely affect decision-making on oil issues.

Deals, Mergers & Acquisitions

• Russian Gazprom and French Total SA have been jointly exploring for gas in Bolivia since 2008, and now the two giants are said to be discussing joint upstream operations in Bolivia and potential new exploration projects there. Gazprom and Total are currently exploring gas fields in the Ipati and Aquio blocks, and say that production should begin in 2016. Bolivia has as much as 296 billion cubic meters (10,453 billion cubic feet) of natural gas, the third largest amount in Latin America.

• The board of directors of Petrobras has approved the sale of all assets in the Austral Basin to Compañia General de Combustibles for $ 101 million. The deal involves 26 onshore exploration and production concessions, with average oil and gas output of 15,000 boe/d, along with all the attached distribution, treatment and storage infrastructure. This is first sale in a debt-reducing divestment spree for which Petrobras hopes to earn $13.7 billion by the end of 2016. More sales are expected this year. What will be on the chopping block next? We’re not sure, but keep in mind that Petrobras has a Texas refinery and drilling rights in the Gulf of Mexico, including a 23% stake in a major offshore gas field in the Gulf operated with ExxonMobil and Italian Eni.

• The Iraqi government is paying Russian Gazprom in Kirkuk-grade oil. Gazprom, which operates the Badra field development project in the eastern Iraqi Wasit province, has received the first batch of Kirkuk grade oil from the Iraqi government given to the company in compensation for its investment in the field development. Gazprom received 500,000 barrels of oil from the Iraqi State Oil Marketing at the Turkish port of Ceyhan. Gazprom says it has an Asian buyer for the oil already lined up. This 20-year development project was set up to be reimbursed with either cash or oil. Commercial oil shipments from the field began in August 2014, and preliminary estimates indicate that Badra could be sitting on 3 billion barrels of recoverable oil.

• Apache Corp is withdrawing from its exploration and production business in Australia and selling its units there to a private equity fund consortium managed by Macquarie Capital Group Ltd. and Brookfield Asset Management. The price take on this will be $2.1 billion in cash, and the deal should close mid 2015. The private equity fund consortium will acquire Apache’s interest in operated gas fields of Reindeer, John Brookes and Halyard-Spar, along with non-operated interests in the BHP Billiton-operated Macedon field. The consortium will also acquire Apache’s interest in operated oil fields at Coniston-Novara, Van Gogh and Stag, along with its non-operated interest in the BHP Billiton-operated Pyrenees area. Furthermore, the consortium will acquire Apache’s interests in gas processing facilities and associated infrastructure at Devil Creek, Varanus Island and Macedon, plus all of Apache’s upstream acreage in the Carnavon, Exmouth and Canning basins. Apache has decided to focus more on its North American onshore assets, and as such last year also announced it would quit two LNG projects—one in Australia (Wheatstone) and one in Canada (Kitimat).

Regulatory Updates

• The Bureau of Safety and Environmental Enforcement (BSEE) has proposed a new offshore drilling safety rule in response to the Deepwater Horizon tragedy. Offshore drillers will balk at the new rule, which targets blowout preventers (emergency backups) because its implementation could cost the industry (in total) over $880 million over 10 years. The costs will be related to a requirement to retrofit and update blowout preventers and install real-time monitoring of offshore operations from onshore. While a necessary safety mechanism, because it comes amid a downturn in oil prices, it will hit the industry hard. The proposed rule will now go through a 60-day public comment process.
Technology Updates
• Subsea 7 has won a $200 million contract for two years from Brazil’s Petrobras to install flexible lines for the company’s projects using Subsea 7's construction and flex-lay vessel Seven Seas. The vessel has been operating for Petrobras under a similar day-rate contract since 2013, so this is an extension. The Seven Seas is a vessel that can operate in water depths up to 3,000 meters and is equipped with an advanced flexible pipe-lay system with top tension capacity of 430 tons.

• Siluria Technologies has launched what is said to be the world’s first demonstration plant to directly convert natural gas to ethylene. The plant is located in La Porte, Texas, and is fully owned by Siluria. The company claims the technology will help downstream companies save money on every ton of ethylene they produce. Ethylene typically is produced through a process called cracking that, in the U.S., uses steam to separate it from the natural gas liquid ethane. Siluria claims that its new technology can make ethylene more cheaply from methane using oxidative coupling and a proprietary catalyst. The company says it also has a separate process, which uses another catalyst, to convert the ethylene it produces into gasoline and other transportation fuels. Siluria’s process involves combining methane with oxygen in the presence of the catalyst it developed. The combination yields ethylene and water. How much can it save oil companies? Well, Siluria claims it can save $100 per ton using its technology. This compares to about $300 per ton with the conventional method of naphtha cracking.

• German Siemens and Norwegian Statoil have jointly developed a subsea hydraulic power unit (SHPU) for use in offshore oil and gas fields in order to provide hydraulic power directly at the well site. Designed to supply low pressure and high pressure control fluid to the subsea control modules, the Subsea Hydraulic Power Unit (SHPU) has completed the qualification process, which included function tests under hyperbaric pressure equal to a water depth of 500 meters. Developed to be used as a contingency for an umbilical failure on a field in the North Sea, the unit can be used in the event that the umbilical fails and also as an alternative to the hydraulic lines in the umbilical.

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