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Global Energy Advisory - 19th December 2014

Politics, Geopolitics & Conflict

The Sudans: Where Oil Fits in

A year ago this week, South Sudan became embroiled in a civil war that has so far killed tens of thousands of people and put paid to its embryonic independence from Khartoum. It started when rebel forces targeted South Sudan’s oil fields shortly after fighting broke out in the capital, Juba. At stake is control of some 75% of all of Sudan’s oil production.

The situation in South Sudan was already unsustainable due to the civil war (production had already dropped from 350,000 bpd to 160,000 bpd), and now with oil prices dropping below $65 per barrel, this economy, solely dependent on oil revenues, has collapsed.

Interested parties can claim that Sudan’s woes have always been about irreconcilable tribalism, but this is a convenient argument that has long been used by Khartoum to its own ends. Oil has played a distinctive role in the more horrific of these ‘tribal’ problems. Recall that in 1972, north and south Sudan signed a peace agreement that stipulated equal sharing of the south’s resources (50/50). At this time, it was thought that the only valuable resource in south Sudan was uranium, so when oil was discovered in the south shortly after this peace agreement, Khartoum sought to change the rules of the game: there would be no equal sharing of valuable oil resources. In 1978 Chevron found a key oil field near the north-south border. Several years later, southerners living atop this oil were driven out or massacred by Khartoum and its henchmen. This field was called ‘Unity’, and the irony of its name is lost on no one.

When South Sudan won its independence in 2011 from Khartoum—along with three-quarters of the country’s oil—it still remained hostage to Khartoum because the south was landlocked and the only way it could get its oil to market was through Sudan, whose economy would also heavily depend on these transport fees. Now both economies are in trouble due to the civil war raging in South Sudan and thus hijacking production, in addition to plummeting oil prices. After over a year of disputes between Khartoum and Juba over transit fees that had led to a halt in production, an agreement was finally reached and production was resumed. This was short-lived, as the civil war broke out shortly afterwards.

This is what the situation in Sudan looks like right now: Oil production is down to one-third; 12,500 UN peacekeepers are desperately trying to protect civilians; what little money Sudan has is being spent on weapons; and the Chinese (the largest investors with the most to lose) are providing millions in heavy weaponry to South Sudan’s government.

We also note that Sudan—desperate after having lost three-quarters of its oil in the divorce and now dealing with falling oil prices—has reached out to Russia. Russia has responded by writing off $17 million in Sudanese debt in return for access to Sudanese oil and gas resources. The West will not help Khartoum, but Russia and China are more than willing to, and this is now one of their key Africa strongholds. Now Sudan, with Russia’s help, is hoping to tap into new resources to make up for its losses, and Gazprom is planning to visit soon.

On a geopolitical level, the only saving grace for north and south Sudan is the fact that China has a strong foothold in both and is the only world power that could have a chance of ending hostilities. But it won’t happen in the New Year, and China’s current heavy arming of the South Sudan government may not be the answer. Anything can happen, and what rebel forces are doing is trying to convince other external parties that if they win the civil war they would grant them oil concessions. This is how much larger wars are started. It is a bet on who will win and who will have the power to hand out oil concessions. And who will win is whoever has the most weapons. So if someone wants to wrong-foot the Chinese in South Sudan, they will bet on the rebels.

With oil prices dropping dramatically, however, there is less power behind this gamble. So at the end of the day, low oil prices may help bring peace to South Sudan.

• Tunisia has closed its largest border point with Libya at Ras Gdair following heavy clashes between the forces of retired Libyan General Khalifa Haftar and the Dawn of Libya rebel forces. Workers at Libya's biggest oil port, Es Sider, evacuated the site over the weekend for security reasons. Forces loyal to Libya's recognized government earlier launched air strikes on a rival force advancing towards the port in the east of the country. A force allied to Libya Dawn launched an offensive on 13 December to take the As-Sider and Ras Lanuf export terminals. The internationally recognized House of Representatives (HoR) deployed fighter jets to attack targets in the area and on the town of Zuwara near the border with Tunisia. Libya Dawn still controls the Ras Ajdir crossing.

• Due to increasing insecurity, which includes gang warfare and attacks by Somali-based al-Shabaab militants, Kenya is considering changes to its security law that would curb constitutional freedoms. We are closely watching these developments and would expect a significant public backlash and potential political instability if new laws end up violating constitutional rights.

Discovery & Development

Spotlight Angola

French Total SA—the largest producer in Angola--has inaugurated a major new project offshore Angola, with a capacity of 160,000 bpd. The new project, CLOV, includes four deep-water fields in the Atlantic. The project was launched in 2010 for $8 billion. Angola is the second-largest producer in Africa, with October production coming in at 1.72 million bpd. While oil prices are in a dangerous downward spiral, long-term projects in Africa are keeping pace as companies view these as strategic investments that will survive the current price drops. Total is calculating costs in Angola at a minimum price per barrel of $30, which makes it possible to continue with investments. In the meantime, Angola is shooting for production of 2 million barrels of oil per day between 2015 and 2016.

Angola’s state oil company, Sonangol, will benefit from a new $2 billion line of credit from the Chinese Development Bank to finance new projects. The Chinese foothold in Angola is extremely strong. Since the end of Angola’s civil war in 2002, Beijing has extended a total of $14.5 billion to Angola. Sonangol has also ordered two oil tankers from South Korean Daewoo Shipbuilding & Marine Engineering. The two Suezmax vessels will be 274 meters long, 48 meters wide and 23.7 meters high with a capacity of 156,290 tons each. They will be delivered in 2017 and will cost around $140 million. Sonangol also has two other oil prospecting ships under construction at Daewoo, scheduled for delivery late 2015 or early 2016.

• Brazil’s state-run Petrobras requires $44 billion in investment to make good on its 2014-2018 business plan, but its financial capacity has been hit hard by high-profile bribery scandals and current market conditions. The company has delayed the disclosure of its unapproved balance sheet and now faces class-action lawsuits in a New York federal court. Petrobras had planned to obtain $12.5 billion in overseas financing in 2015, and those plans are now in question.

• Norway’s state-run Statoil and partners will develop the Rutil discovery, in the North Sea’s Gullfaks Rimfaks valley. The development is expected to produce some 80 million barrels of oil equivalent, and will extend the lifespan of the Gullfaks A platform. Development investment is expected to reach $610 million, with production slated to begin in early 2017. Gas and condensate will be transported through an existing pipeline for processing in a facility at Kårstø north of Stavanger, and then transport to European markets. The development will include a standard subsea template with two simple gas production wells, and possibilities of connecting two more wells.

• BP says it plans to invest more than $12 billion in Egypt over the coming five years, and to double the amount of gas it supplies to the Egyptian domestic market over the next 10 years. Production from the Mediterranean offshore license, currently three years behind schedule, was expected in mid-2017 with output projected to reach 1.25 Bcf/d by the third quarter of 2018; however, negotiations between BP and the government for the development of this license have been painfully slow.

• Romania’s OMV Petrom and US-based Hunt Oil have discovered a new oil and gas field in Buzau county, in eastern Romania. The new field is 7-12 kilometers away from mature fields operated by OMV Petrom in the area. The estimated production per well in the new field is 1,200 to 2,100 boe per day. The companies have invested about $6.5 million over four years of exploration here.

Regulations & Litigation

• While others are soaring on forward movement in Kurdistan, the UAE’s Dana Gas, part of the Pearl consortium—is still having problems. The consortium, which includes UAE-based Crescent Petroleum, Austrian OMV, Hungarian MOL and Dana, accused the Kurdistan Regional Government (KRG) of breaching multi-billion-dollar contractual commitments in a case filed in 2013 and set to be heard by a London court in April 2015. A London court has already ordered the KRG to pay Dana $100 million by 17 November, which it hasn’t done. Dana claims that the KRG owes it substantial sums of money for production, but the KRG claims it owes nothing, and that if anything, Dana owes the government. According to Pearl Consortium, it has invested more than $1.2 billion in Kurdistan and is producing over 80,000 barrels of oil equivalent per day. The KRG authorities claim that none of this is true, and that in fact, Dana Gas and its subsidiaries owe significant sums to the KRG, though they have never put a figure on this. The KRG also claims that Dana has not fulfilled all of its commitments, specifically noting losses related to the significant delay of completion of the LPG plant. The KRG is seeking immediate compensation from Dana Gas. The KRG is also complaining of interrupted supplies of natural gas from the Khor Mor field, operated by Dana. This squabble is purposefully being made public by Dana gas, but we do not believe it will have a resounding effect on foreign investment. Nor do we believe that Dana Gas will come out on the winning side of this, and this does not necessarily reflect bad policy on the part of the KRG.

• New York has become the first state to enact a ban against fracking even though it sits on rich natural gas deposits. Governor Andrew Cuomo announced the ban on Wednesday, citing unresolved health concerns and questionable economic benefits. Prior to this ban there was a six-month moratorium on fracking in place. New York sits atop the Marcellus shale formation, which stretches 600 miles along the Appalachian Basin.

Deals, Mergers & Acquisitions

• Presumably due to Russia’s cancellation of the South Stream pipeline and falling oil prices, Italy’s Eni has decided to put the sale of its stake in Saipem oil services on hold. Due to the current situation, Saipem has lost nearly half of its market value in the last two months. Earlier this year, Eni announced plans to sell its 43% stake in Saipem to help fund its streamlining transformation. Eni still considers Saipem a non-strategic asset, but market conditions now prevent it from selling its stake, particularly as Saipem has now lost around 1.25 billion euros in 2015 sales due to Russia's scrapping of South Stream. The company also saw two profit warnings last year. Eni needs to raise 6 billion euros under an 11-billion-euro asset sales program to improve its balance sheet. The sale of Saipem would have accounted for a 6 billion euro balancing of accounts.

• Spain’s Repsol next week will discuss a takeover offer for 100% of Canadian Talisman Energy. Last month, Repsol said it had $10 billion cleared to acquire oil and gas assets in OECD countries offering a 7-8% investment return. Talisman is the fifth-largest independent petroleum producer in Canada and could be in a range of between $6 and $8 per Talisman share. Repsol may not be the only company to bid on Talisman, with media noting that the Canada Pension Plan Investment Board (CPPIB) was also considering a move here.

• Australia’s Woodside Petroleum has agreed to acquire two stakes in LNG projects from Apache Corp. for $2.75 billion. The LNG projects include the Wheatstone LNG and Balnaves oil projects in Australia and the Kitimat LNG development in Canada. At the same time, Woodside is delaying approval for its own $35 billion LNG project off the northwest coast of Australia.

Oil Prices & Global Implications

According to Goldman Sachs, the global oil industry will face a loss of $1 trillion as producers will be forced to cancel key projects if oil prices remain below $60. The Goldman report, which does not pertain to US shale, based its research on a $70 oil price and studied 400 oil and gas fields globally. The report extrapolates that these fields--which represent 2.3 M/bd of output by 2020 and are waiting for final investment decisions—are no longer economically feasible. The bank says that if a fall in oil prices leads to projects being cancelled, oil production will fall by 7.5 M/bd over the next 10 years. That's approximately 8% of current global demand. This is how oversupply will be corrected.

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