Global Energy Advisory – 20th February 2015

International Oil & Gas Spotlight

• After making massive finds offshore Israel, in the Levant Basin, Texas-based Noble Energy and its Israeli partner, Delek Group, are facing regulatory challenges as Israeli officials says the two likely will have to sell off some acreage to break up what is being perceived as a monopoly. First, the Antitrust Authority echoed these sentiments, and this week, Israeli Energy Minister Silvan Shalom chimed in with the same conclusion. Israelis are concerned that due to the potential monopoly situation, electricity prices could increase, along with the cost of living. In March 2014, the Antitrust Authority took a decision to allow Noble and Delek to retain the giant Leviathan gas field (22 trillion cubic feet) and the smaller Tamar gas field (10 tcf, already producing). That decision has now been reversed. The fields were discovered in 2009 and 2010 and will turn Israel into a significant energy exporter. The question now is how the government will ensure the development of the two fields, while at the same time removing the monopoly.

• JKX Oil & Gas is seeking $180 million in compensation from Ukraine, claiming the country has violated international treaties. JKX is currently in talks over a possible buyout. The company has launched arbitration proceedings against Ukraine under the Energy Charter Treaty between the UK and Ukraine and a parallel treaty between Ukraine and the Netherlands. The explorer is seeking compensation for losses related to Ukraine's treaty violations. In part, losses are blamed on the government's failure to treat JKX's investments in a "fair and equitable" manner, as well as its failure to comply with earlier commitments. JKX is seeking repayment of more than $180 million in rental fees that its Ukrainian subsidiary has paid on production of oil and gas in Ukraine since 2011. Oilprice.com has repeatedly warned investors about the situation in Ukraine, with veteran Ukraine energy expert Robert Bensh expounding on these violations at great length. The bottom line is that the government has lied to investors. Ukraine's current energy strategy, taxation and fiscal regime have forced Ukraine's current producers of oil and gas to stop drilling new wells and curtail production.

Politics, Geopolitics & Conflict

• Now is a good time to start watching Russia and anti-Russian maneuvers in Syria. Russia is particularly keen on getting control of Syria's oil, especially the offshore potential in the Levant Basin (where Israel has made massive finds). To this end, a Russian company, Soyuzneftegas, has already clinched the only offshore exploration license granted by the Syrian regime. Soyuzneftegas is controlled by former Russian energy minister Yuri Shafranik-who also happens to be Vladimir Putin's deal broker and gateway into Middle Eastern and Former Soviet Union oil and gas. Soyuzneftegas sealed this deal in 2013, in the middle of a raging conflict. Shafranik has his hands in some other valuable oil projects in Syria as well, once the dust settles. His gatekeeper in Syria is the first cousin of Bashir Al-Assad, Rami Makhtouf. No one gets anywhere in high-level Syrian business without going through Rami. Now, the general sentiment is that Saudi Arabia is using its dominance of the global oil market to pressure Russia into ceasing support for Assad. Supporting Assad, however, at this point also means helping to reduce the capabilities of the Islamic State (IS)-no one's quite sure who their worst enemy is in this game, but the end game definitely has oil in mind, not to mention that geopolitically tricky race to get the first pipeline through Syria.

• Full-on civil war is imminent in Yemen, and unless Saudi Arabia learns a long-awaited lesson here soon about real enemies, this will also be where a major proxy war between Saudi Arabia and Iran is played out. In recent days, forces loyal to Yemeni President Abd-Rabbu Mansour Hadi have seized control of a number of areas in the southern city of Aden. In the central Yemeni desert area, Sunni tribesmen are demonstrating by the hundreds against the threat of Shi'ite militias who represent the forces now ruling much of the country since Houthi rebels seized the capital city in September. Oil will be what determines whether the Houthis can maintain what they've seized, so the fact that the Sunni's are queuing up around the oil-rich Marib province means they know this, too. The coming civil war will be about who controls these resources.

Regulations, Investigations & Compliance

• The European Commission has launched an investigation into Siemens' planned $7.6 billion acquisition of one of the largest suppliers of rotating equipment solutions to the oil and gas industry, Dresser-Rand. Dresser-Rand is expanding its business with O&G equipment in the US. The two parties are hoping to close the deal by this summer.

• Russian oil companies are seeking an easing of environmental regulations, which they say they cannot adhere to in the current atmosphere of slumping oil prices. Five companies have signed a letter to President Vladimir Putin to this end. The signatories include: LUKoil head Vagit Alekperov, Gazprom Neft head Alexander Dyukov, Bashneft head Vladimir Bogdanov, Surgutneftegaz head Alexander Korsik and Tatneft head Nail Maganov. Specifically, they claim they cannot afford current penalties for gas flaring, nor will they be able to put aside funds as required from 2016 to 2018 for environmental damage clean-up. In addition, they claim they can no longer absorb the current costs of fines for pollution.

• The Ohio Supreme Court has ruled that communities may not exercise their home-rule powers to regulate oil and gas drilling if they conflict with a state law that regulates drilling. In its 4-3 decision, the court upheld an appellate court's ruling against the city of Munroe Falls that struck down regulations the community was trying to enforce against Beck Energy. Beck Energy in 2011 had been granted a state-required permit from the Ohio Department of Natural Resources to drill a traditional well on private property in Munroe Falls. The city sued, saying the company illegally sidestepped local ordinances.

Deals, Mergers & Acquisitions

• Lukoil (Russia) and a consortium headed by South Korea's Hyundai Engineering have signed a contract for procurement and construction of the Kandym Gas Processing Plant in Uzbekistan, with an annual capacity of 8.1 billion cubic meters of gas. The facility will process sour natural gas from the Kandym fields in the Bukhara region to produce treated natural gas and stable gas condensate. The Kandym group consists of six gas condensate fields - Kandym, Kuvachi-Alat, Akkum, Parsankul, Khoji and West Khoji.

• Kinder Morgan has closed its acquisition of Hiland Partners for a total purchase price of approximately $3 billion, including the assumption of approximately $1 billion of debt. Hiland's assets include crude oil gathering and transportation pipelines and natural gas gathering and processing systems, primarily serving production from the Bakken Formation in North Dakota and Montana.

• Hit by a slump in oil prices, London-based Afren has lost around 95% of its market value since July, while top executives have been dismissed. Iraqi Kurdistan has been a wash for Afren, which has been unable to find proved or probable reserves. The company was hoping for a satisfactory takeover offer from Nigerian explorer Seplat Petroleum, but that too now seems to have been sidelined. Credit agencies are warning of the imminent risk of default.

• Pipeline operator Energy Transfer has agreed to buy Regency Energy in a cash-and-stock deal valued at about $18 billion that includes debt. Both companies have operations in the Marcellus and Utica shales. Energy Transfer Partners is building the Rover Pipeline, which connects western Pennsylvania and West Virginia to natural-gas markets. Regency has pipelines in the Marcellus and Utica shales as well.

Discovery & Development

• US producer SandRidge Energy will cut its rig count in the Mississippi Lime formation in northern Oklahoma and southern Kansas in March and early April from 28 to 8. This is nearly a 75% reduction. Analysts are calling it this possibly the biggest rig reduction by a publicly traded US producer since oil prices began to plunge. Credit agencies are warning of an imminent risk of default.

• In West Africa, the government of Niger has announced a new crude oil discovery estimated at about 43 million barrels in its Bilma field. China already has a sizable footprint in Niger, producing from the country's Agadem bloc since 2011, though China National Petroleum Company (CNPC). Reserves at Agadem are estimated to be over 650 million barrels.

• GeoPark Limited ("GeoPark") (NYSE: GPRK) has announced a new oil field discovery after drilling the Tilo 1 exploration well on the Llanos 34 Block in Colombia. GeoPark is the operator, with a 45% interest. GeoPark drilled and completed the Tilo 1 exploratory well to a total depth of 11,293 feet. Testing resulted in a production rate of approximately 1,000 barrels of oil per day of 14.2 degree API, with approximately 10% water cut. Further production history is required to determine stabilized flow rates of the well and the extent of the field. There is a possibility that Tilo is a northeast extension of the larger Tigana field. The company also has assets in Chile, Brazil, Argentina and Peru.