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Global Energy Advisory - 19th September 2014

Geopolitical & Conflict Updates

Central Asia

We are closely watching the spillover effect of the Russia-Ukraine crisis, as Central Asian states become more disillusioned with Moscow. Russia is also provoking discontent in Central Asia by making vague references to Kazakhstan’s statehood that have not been well-received, while Uzbekistan now has more justification for its long-running skepticism of Moscow’s intentions. We expect continued provocations by Moscow and moves by Kazakhstan, Uzbekistan and Tajikistan to assert their administrations’ control over foreign policy.

Iraq

Reports are emerging that the Islamic State (IS) was earning around $3 million per day in July from oil sales related to 11 oil fields now under its control in Iraq and Syria. Oil is reportedly being sold to Turkey, Iraq and Jordan at $25-$60 per barrel—a minimum of $40 less than world oil prices. However, we do not expect IS to be able to maintain this black market oil business indefinitely. IS is losing control over these assets from a logistics standpoint, particularly as workers are fleeing the scene. Over the past couple of months, IS revenues have dwindled to half that, according to some estimates.

Libya

Producuction has been halted at Libya’s Sharara field—the largest producer—after a rocket attack on the connected Zawiya refinery on 15 September. This represents a 30% cut in production overall for Libya. Sharara was producing around 250,000 barrels per day before operations were halted. As Libya descends further in civil war, we expect increasing challenges to its oil production and exports. Islamist militias continue to expand their influence, having taken over the capital Tripoli in August and forcing the government to relocate to al-Bayda.

Discovery & Development

•    EOG Resources (NYSE:EOG) operating in the Woodbine tight oil play in Texas has announced initial flow rates of more than 500 barrels of oil equivalent per day in the Zeus-1H Lower Woodbine horizontal well. Zeus-1H had flowed back 23,860 barrels of oil prior to achieving the flow rate of 299 barrels oil, 150,000 cubic feet of gas, and 184 barrels of water. The well was completed in mid-June and is located 7 kilometers northeast of another EOG well, Jack Howe-1H, where horizontal drilling began a week ago.  

•    Senex Energy Ltd and Beach Energy Ltd have announced an oil discovery in their Martlet-1 wildcat in South Australia’s Eromanga basin. The find intersected 6 meters of net oil pay at a depth of 1,454 meters. This represents the first oil discovery within this permit and boosts the overall outlook for exploration in the Western Flank of the Cooper-Eromanga basin.  

•    Alberta-based Tuscany Energy (CVE:TUS) has encountered 9 meters of oil pay after drilling a step-out vertical well adjacent to the Dina oil play in Alberta. Tuscany has a 100% working interest in the Macklin property, adjacent to the Dina oil field in the Provost area of Alberta. The 7-33-39-28W3 well was drilled to 3,316 feet as a water disposal well and to test a potential extension of Tuscany’s adjacent Dina oil field developments. The new discovery could establish up to 14 additional development locations for horizontal drilling in the Dina field and expand the Macklin pool north on to Tuscany’s wholly owned and operated assets.

•    China National Offshore Oil Corp. (CNOOC) has announced its first deepwater gas field discovery in the South China Sea. This is a significant discovery, and one that has geopolitical implications. The CNOOC platform that made the discovery was the same that was caught up in a diplomatic dispute with Vietnam, which claims that the waters CNOOC is drilling in are part of Vietnam’s exclusive economic zone. China has named the gas field “Lingshui 17-2”. The field is at a depth of 1,500 meters.

•    Africa Oil Corp. (TSX:AOI)(OMX:AOI) has announced an increase in its resource estimates in Kenya’s promising South Lokichar Basin. Total 2C gross contingent resources increased 67% to 616 million barrels of oil and total 3C gross contingent resources increased 52% to 1.29 billion barrels of oil in the oil fields discovered to date in the South Lokichar basin.

•    Argentina’s state-run YPF has announced an oil and gas discovery in Patagonia, estimating potential production of 200,000 cubic meters of gas and 370 barrels of oil per day. The well was drilled to a depth of 2,770 meters and is located in the province of Santa Cruz, while YPF’s main area of focus here has been shale formations in the Vaca Muerta.

•    While things are moving fast in Kenya, Africa Oil Corp. has decided to pull out of two exploration blocks in the Ogaden basin in eastern Ethiopia. This basin straddles both Kenya and Ethiopia. Africa Oil will withdraw from Blocks 7 and 8 in the Somali region of eastern Ethiopia, despite positive exploration results and demonstrated oil and gas flows at the El Kuran-3 wells. The company said there were concerns about overall reservoir quality and commercial viability. Africa Oil has a 30% working interest on Blocks 7 and 8. The British oil firm, New Age (African Global Energy), owns 40%, while and the Dubai based East Exploration Limited (EAX), owns a 30% stake on the block.

•    Small, independent explorer Alvopetro Energy has announced an oil discovery and positive on-going results from the first of three zones to be tested at its 197(1) well, onshore north-eastern Brazil. The well reached a total depth of 3,275 meters, and encountered 43 meters of potential net hydrocarbon pay over several separate intervals, with an average porosity of 9.5%.

Tenders, Auctions & Deals

•    China National Offshore Oil Corp. (CNOOC) has put 33 offshore blocks up for joint development with foreign oil and gas companies. The total area of blocks up for grabs covers about 12.61 million hectares. Of the blocks, 25 are in the South China Sea; four are in the East China Sea and the remainder in the Yellow Sea. Importantly, only one of these blocks is in disputed territorial waters (with Vietnam).  

•    China’s Sinopec has sold a 29.99% stake in its retail unit for $17.4 billion to 25 investors. The retail unit includes more than 30,000 petrol stations and 23,000 convenience stores and represents China’s effort to lure in private capital to make its enterprises more efficient.

•    Statoil has signed an agreement with Nicaraguan Petronic cooperate in oil and gas activities offshore Nicaragua’s Pacific coast. The consortium also has sent a request to the Nicaraguan Ministry of Energy of Mines to start exclusive negotiations for offshore concession contracts. This request is pending approval. Separately, Geoex International has signed a cooperation agreement with Petronic with the intent to conduct a 2-D seismic survey covering an area of 32,000 square kilometers off Nicaragua’s Pacific coast.

•    Some 47 energy firms have applied for oil and gas licenses in mature areas in Norway, focusing on licenses in areas already opened up for exploration but either abandoned or not assigned in the previous auction. It’s fairly cheap to drill in Norway, which offers a 78% percent rebate on exploration costs. Applicants in the 2014 round include Statoil, Shell, Centrica, ConocoPhillips, ExxonMobil, E.ON and GDF. Awards are expected in January.

•    In the first half of 2015 Brazil will hold its 13th round of oil licensing, including in the Eastern Margin offshore region, which most are eyeing as the best prospect here and where there have been some large discoveries recently. This will be the first auction since 2013.

•    Shell is once again planning to auction off its European liquefied petroleum gas business, after failing to sell it four years ago. Credit Suisse will advise on the auction and the assets are tentatively valued at around 1 billion euros.

•    Venezuela’s PDVSA is seeking preliminary offers for Citgo, its U. subsidiary, which it is hoping will net up to $10 billion and help in paying down the country’s debt to China.

Legal & Regulatory Updates

•    Eni SpA chief Claudio Descalzi has been placed under investigation in Milan over alleged corruption relating to the 2011 acquisition of a $1 billion oil license in Nigeria in partnership with Shell. The wider investigation began earlier this year, with Descalzi the latest addition to the prosecutor’s target list. In 2013, British authorities launched an investigation into the same deal, focusing on money-laundering allegations. Eni denies there has been any illegal conduct in relation to this acquisition. If you are considering a deal in Nigeria, take precautions because this investigation has many layers and involves a number of smaller companies as well.

•    Federal prosecutors in Brazil have filed criminal charges against businessman Eike Batista and asked a federal court to freeze up to $640 million in his assets, accusing him of market manipulation and "improper use of privileged information.” Batista’s commodities empire—led by Oleo & Gas Participacoes SA, formerly known as OGX—collapsed last year, filing for bankruptcy protection in October. Prosecutors accused Batista of using privileged information in the sale of OGX stock. Batista has also been accused of insider trading over his sale of shares in the oil company before its collapse.




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