Global Energy Advisory – 17th July 2015

Iran: Opening the Floodgates

The nuclear deal with Iran will be one of the most geopolitically game-changing events of the decade. Let's just back up a few chapters in the long-running saga, though. First, Iran does not have nuclear weapons but for 12 long years the mere thought of Iran someday having them has been enough to keep this game going. Now we have a massive 159-page deal in the form of the Joint Comprehensive Plan of Action (JCPOA), which will be handed over to the UN Security Council to adopt a resolution by next week. The game has changed-this, at least, the Obama administration has recognized. And if U.S. Congress tries to block the deal, it will be vetoed. It will take at least 5-6 months to implement the terms of the deal, so sanctions wouldn't be lifted until next year sometime.

So let's see where this will take the world in terms of money.

• Russia and Iran will see an increase in trade, but Iran will become a major rival to Russia for market share in Turkey and even in Western Europe.

• Some predict that Iran and Russia will not be heated rivals in terms of oil and gas and that they will actually work together to gain and secure more market share.

• Iran will put oil and gas exports to Asia on the top of its trade list, while also eyeing Europe where it used to have over 40% of the market share.

• In terms of foreign investment, we expect a run on Iran from all quarters as soon as sanctions are lifted, and we expect a lot of people to be heading to Dubai, for which Iran is a key trading partner, to coordinate.

• In terms of oil, Iran has 50 million barrels just waiting to hit the market-already produced and in storage. However, the oil price slump will render this a bit of an anti-climactic starting point. The majority of the oil will go to China most likely.

We will be watching Turkey's reactions closely. Even though Turkey helped Iran get around sanctions through a billion-dollar gold trade, the Turks have plenty to fear, and the two are falling on opposite sides of the Syrian conflict taking place on Turkey's doorstep.

Regulations, Litigation & Licensing

• We've been waiting for some time for Tanzania's new petroleum bill, which has now been passed by the parliament. This bill creates a regulatory and legal framework to manage discoveries and control of natural gas reserves and future discoveries. The bill defines royalty production fees to be paid to the government by over 30 international exploration firms operating in Tanzania. The proposed bill sets royalties at 12.5% for oil and gas production in onshore or shelf areas and at 7.5% for offshore. At the end of the day, the Tanzanian government will take a 60-80% share of profit from onshore gas production, and up to 85% from offshore production. The government's share of profits from any future oil production will be 50-70%. Signature and production bonuses will also be necessary, but we don't know the amounts yet. Opposition lawmakers put up a tough fight for this bill and they may not have given up yet. It could still be sent back for debate if the President decrees such. This is still a key frontier gas venue.

The bill is particularly important for Norway's Statoil, which in April announced a new natural gas discovery offshore Tanzania at its Mdalasini-1 exploration well. Statoil says it has discovered an additional 1-1.8 trillion cubic feet of natural gas in place in the well, bringing total in-place volume up to 22 trillion cubic feet in Block 2. The Mdalasini-1 discovery is located at a 2,296-metre water depth. Statoil oil has 100% interest in the Mdalasini-1 well, while it operates the license on Block 2 with a 65% interest on behalf of the Tanzania Petroleum Development Corporation (TPDC). ExxonMobil Exploration and Production Tanzania Limited hold the remaining 35%. TPDC has the right to a 10% working interest in case of a development phase.

• Brazil is expecting oil companies to invest around $870 million to complete minimum E&P work at concessions the country is planning to tender in auction in October. The auction will include 266 blocks (182 onshore and 84 offshore). So far, 17 companies from eight countries are said to have shown interest.

• West Virginia has formed a Commission on Oil and Natural Gas Industry Safety tasked with reviewing federal and state oil and gas workplace safety regulations and recommending changes by mid-November 2015. The commission includes 14 members coming from the oil and gas industry, labor organizations and the state legislature.

Deals, Mergers & Acquisitions

• Hungarian MOL has completed its acquisition of 100% ownership of Ithaca Petroleum Norge from Ithaca Energy for $60 million plus possible bonuses of up to $30 million if exploration is successful. The acquisition gives MOL Ithaca's 14 exploratory licenses offshore Norway. This is MOL's first acquisition in Norway and the primary significance is that it effectively doubles the size of the state-own Hungarian company's exploration portfolio. We're looking at an additional 600 barrels of net un-risked best-estimate prospective for MOL with this acquisition. Last year, MOL made acquisitions in the UK North Sea.

• Black Hills has agreed to acquire natural-gas utility SourceGas for $1.89 billion from investment funds managed by General Electric and Alinda Capital Partners. SourceGas operates almost 20,000 miles of natural gas distribution, gathering and transmission pipelines as well as storage facilities in Arkansas, Colorado, Nebraska and Wyoming. Black Hills expects that closing to come early next year, at which point the utility will assume $720 million of debt. Black Hills operates 10 utilities in seven states, including seven local natural gas distribution utilities. With the acquisition, Black Hills could end up with around 1.2 million customers across eight Rocky Mountain and Midcontinent states.

• Shell has been granted approval from the Brazilian regulator to acquire BG Group in the planned $70 billion acquisition. The regulator deemed that the acquisition would not undermine competitiveness in Brazil's oil and gas market. Shell announced its acquisition plans in April at a 50% premium. The deal will give Shell LNG assets in Australia and oil and gas fields in Kazakhstan and Brazil.

• Shell has also announced it will acquire Morgan Stanley's European natural gas and power-trading portfolio and its traders, after Morgan Stanley announced it was winding down the business. Some 15 traders are in question here. After a deal with Russia's Rosneft collapsed over sanctions, Morgan Stanley sold its oil trading business to Castleton, while its LNG traders moved over to Glencore. This is part of a wider exodus of big traders from the European power, oil and gas scene.

• Oklahoma-based WPX Energy is about to get access to the sleeping giant Permian Basin in Texas with the acquisition of RKI Exploration & Production for $2.35 billion, including $400 million of debt. The assets WPX is acquiring produce approximately 22,000 boepd-about 53% oil, 16% natural gas liquids and 31% natural gas. WPX plans to increase the rig count in the basin to six from four by the end of 2015. The majority of RKI's leasehold is situated in Loving County, Texas, and Eddy County, New Mexico, where the company currently has four rigs deployed. RKI's Wyoming operations are not part of the deal.

• Russia's Rosneft has entered a preliminary agreement to purchase up to a 49% interest in Essar Energy subsidiary Essar Oil., including its 20 million-tone/year Vadinar refinery in Gujarat, India. Speculation is that Essar Oil will be valued at $7-$8 billion. Rosneft will deliver a total of 100 million tons of crude over a 10-year period to the Vadinar refinery, in accordance with a supply agreement finalized in earlier this month. The refining capacity of the Vadinar refinery is 20 million tons per annum.