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Global Energy Advisory – 1st May 2015

Geopolitics

Russian Oil and Gas: The Squeeze Is On—Sort of

European Union regulators have formally charged Gazprom with abusing its dominant market position in Europe—a charge a long time (2.5 years) in the making and a move that will likely increase tensions with Russia. According to the European Commission, Gazprom has significantly hindered competition in Central and Eastern European gas markets, and has infringed on European single-market rules by forbidding the resale of its gas between EU countries, allowing it to charge unfair prices. Furthermore, Gazprom may also have abused its dominant market position by making the supply of natural gas dependent on obtaining unrelated commitments from wholesalers concerning gas transport infrastructure. Gazprom risks fines of up to 10% of the company’s overall sales. Overall, however, we note that the charges the European Commission laid against Gazprom aren’t nearly as hard-hitting as many expected them to be (though we personally weren’t really expecting much). In fact, Gazprom shares at the Moscow stock exchange took a tiny dip and then recovered almost immediately. So much for that.

So what next? Gazprom now has 12 weeks to reply and can also request an oral hearing to present its arguments.

At the same time, the United Kingdom will force Russian billionaire Mikhail Fridman to sell a dozen North Sea gasfields owned by his $10b-billion energy fund, LetterOne (L1) Energy. He has three months to comply or he will lose his operating rights.

L1 Group acquired the 12 fields from RWE’s oil and gas subsidiary DEA in March, however, the UK Department of Energy & Climate Change raised concerns that the new ownership could threaten the UK’s own oil and gas supplies, if stricter sanctions are imposed against Russia.

Fridman, of course, is furious. He’s threatened legal action. After all, the gas fields in question produce between 3% and 5% of the UK’s total supply. UK Energy Secretary Ed Davey is dipping into ministerial authority that no one has dared use before to revoke Fridman’s licenses. But there’s a fair amount of local political point-scoring involved in this as well. Note that while Davey has given Fridman three months to divest, he’s also quietly said he might be willing to extend that to six months. And the clincher: Right now we’re less than three weeks away from the UK’s elections to be held on 7 May. Nailing Fridman—or, more importantly—appearing to nail him on this could score some good political points, even if nothing ever comes of it after the elections.

Russia is being squeezed from all Western flanks, but sometimes the squeeze isn’t genuine.

Then we have the US—which is the more important squeeze over the longer term. What’s really got Russia concerned is not the wishy-washy European Commission, but the specter of US LNG flooding the market. This could be a geopolitical game-changer once it really gets going. And while this is not an immediate threat to Russia’s gas dominance of Europe—it is a longer-term threat to its market share. Of course, once again politics comes into play. Washington is keen to get this very message out, and they attribute an immediacy to it that is not realistic. Long-term, yes, this is huge. Washington would have us believe that by the end of this year, US LNG will be flooding the market and change the rules of the gas game. It’s only the first wave of LNG shipments that might begin by the end of this year. More likely, they will launch in early 2016. Now, when Energy Secretary Moniz says that in this decade the US stands a ‘good chance’ of becoming a LNG exporter on the scale of Qatar, it’s a possibility. What Washington is eyeing is the title over Russia as the largest supplier of natural gas.

When the US launches full-on global LNG exports, it will drive global LNG prices down and threaten Russia’s pricing power in Europe, which in turn threatens Moscow’s political leverage over European countries.

Discovery & Development

• Kosmos Energy has announced that the Tortue-1 exploration well in the Tortue West prospect offshore Mauritania has made a ‘significant play-opening gas discovery.’ This play is in the Transform Margin off the northern coast of West Africa, and drilling costs are said to be comparatively low. Further drilling is planned immediately to determine the scope of the discovery. Mauritania is not a major oil venue. Kosmos took a risk on this prospect last year, agreeing to a $400 million farm-in agreement with Senegal’s state-owned Petrosen and privately owned Timis Corp. A unit of Chevron Corp has the option to take a 30% stake in the Tortue prospect. In neighboring Senegal, Cairn Energy made two discoveries last year, one of which it says may be the biggest oil discovery of 2014. Kosmos is banking on replicating this in Mauritania.

• In May, a Saudi Arabian subsidiary of Chevron intends to close down its Wafra onshore oilfield , which is jointly operated by Saudi Arabia and Kuwait, for which Chevron’s Saudi subsidiary has a Kuwaiti partner. The reason for the closure is irreconcilable differences between the partners. Wafra is in a shared neutral zone on the border between the two countries. The Chevron Saudi subsidiary claims that Kuwait ceased issuing work permits for its Wafra employees. Kuwait’s grievance in this affair is that it was not consulted when the Chevron concession to operate the field was renewed by Saudi Arabia in 2009 until 2039. Saudi Arabia, Kuwait and other OPEC members are under increasing pressure to scale back output amid a global supply glut and slower demand growth.

• Abu Dhabi has announced plans to invest over $25 billion in the next five years to increase oil production from its offshore fields. Qasem al-Kayoumi, manager of Abu Dhabi National Oil Co announced the plan as part of the UAE's strategy of boosting its crude oil production potential to 3.5 M/bpd by 2017-18, from current 2.8 M/bpd. The Abu Dhabi National Oil Co. will also spend some $2.5 billion a year over five years on drilling activity, with an eye on boosting gas recovery rates.

Regulations & Litigation

• Brazil’s beleaguered Petrobras has finally disclosed its audited 2014 financials, showing that it is $7 billion in the red. Overall, the company says that corruption, bribes and devaluation of assets cost it over $17 billion in 2014 alone. Losses to corruption were set at $2 billion.

• Colorado and North Dakota have now joined Wyoming in a lawsuit challenging the new regulations for fracking on public and tribal lands proposed by the US Bureau of Land Management (BLM) last month. BLM announced that it will require companies that drill on federal and tribal lands to disclose the chemicals used in the hydraulic fracturing process. The new rule will take effect in June, and marks the first set of federal safety standards to govern the fracking process. The three states assert the move is unlawful in part because it interferes with their own regulations that address the process.

• The German-based Special Chamber of the International Tribunal of the Law of the Sea (ITLOS) has rejected Côte d’Ivoire’s request that Ghana be ordered to suspend all oil exploration, exploitation and issuing of permits in the disputed zone including the highly-prized TEN Project. The project is operated by Tullow Oil and is over 55% complete. ITLOS has ordered a number of provisional measures which both Ghana and Côte d’Ivoire are required to comply with; including continued cooperation until ITLOS renders a final decision, which is expected in late 2017. Tullow is not a party to this arbitration process and will now await a decision by the government of Ghana on how it will implement the provisional measures order.

Deals, Mergers & Acquisitions

• Freeport McMoRan is said to be considering spinning off its oil and gas business. The news comes as a surprise as the company only bought into the oil and gas business two years ago for $9 billion (diversifying from copper mining). The company booked a huge $2.4 billion impairment charge related to its oil & gas properties. Development is costing the company more than it bargained for in this depressed oil market. To raise funds, Freeport is considering offing a minority stake in its O&G business in an initial public offering.

• French Technip, in partnership with Japanese engineering consultant Unico, has been awarded a project management consultancy contract to upgrade the Iraqi Basra refinery. The project has been funded by the Japan International Cooperation Agency (JICA). This award follows the PMC contract attributed to Technip in June 2013 for the Karbala refinery.




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