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Global Energy Advisory – 20th November 2015

Politics, Geopolitics & Conflict

What Paris Means

The terrorist attack in Paris means more than most are willing to concede. Europe’s borders have been seething for some time since the outbreak of the conflict in Syria. Now they are explosive. Incidents that appear to be one-offs or only indirectly related are indicative of a larger, expanding disaster.

We cautioned clients privately when the Eastern Europe and the Balkans found themselves embroiled in a seemingly innocuous border tussle regarding refugee movements just a couple of months ago. This, we said, was indicative of a growing problem—that Western Europe is not secure.

When Croatia, Serbia and Hungary engage in tit-for-tat border closures to stem the flow of refugees all desperately trying to make their way into the European Union, it is easy to sit back and watch calmly; sure, that the dispute will be resolved more or less. These border spats, though, were harbingers of insecurity. And now that it has been revealed that terrorists are slipping across borders with refugees, the story becomes much more poignant.

For investors continent-wide, we recommend very close monitoring of the situation, but with this in mind: It is all connected and it all reverberates. Assets across the Middle East and throughout Europe will be affected in some way over the course of the coming months. Newton’s laws apply, and this conflict will continue to be spilled far beyond the borders of Syria and Iraq and in more ways than the obvious.

Auctions, Tenders & Deals

• The Canada-Newfoundland and Labrador Offshore Petroleum Board (C-NLOPB) received 13 bids totaling $1.2 billion for its NL15-01EN blocks, the first call for bids in the Eastern Newfoundland region under the scheduled land tenure system. The board offered 11 offshore parcels totaling more than 2.5 million hectares in the Flemish Pass basin. The 13 bids included 9 companies and 7 parcels were awarded during the license round. It represents the biggest-ever combined amount to come in a round of bids for exploration rights in the region. Statoil--already a major Flemish Pass player—is involved in six of the seven bids. ExxonMobil is partnering in three of the winning bids. There are also new players to the region involved in some of the winning bids, including BG International Limited, BP Canada Energy Group and Nexen Energy.

• Saudi Arabia and Indonesia are close to signing a deal to construct their first jointly owned refinery in Indonesia. The agreement is expected to be signed by the end of the year and would set the conditions to build the refinery with a 300,000 bpd capacity. The facility could become the first major development to emerge from Indonesia's acceptance into OPEC, which is scheduled to occur at an OPEC meeting on 4 December.

• UK-based Ineos has signed an agreement with Shell and ExxonMobil to secure ethane from US shale gas for the Fife Ethylene Plant (FEP) in Scotland. According to deal, the facility will receive ethane from Ineos' new import terminal in Grangemouth, Scotland, beginning in mid-2017. ExxonMobil owns and operates the FEP plant, while Shell has 50% capacity rights. The plant is one of the largest ethylene facilities in Europe, with an annual capacity of 830,000 tons. Ineos has committed $670 million to construct the new ethane import terminal at its Grangemouth plant, with the company describing it as the most significant investment in UK petrochemical manufacturing in recent years.

Regulations & Litigation

Argentina's Supreme Court has ordered state-run YPF to disclose the secret clauses of a controversial investment deal with Chevron to produce oil and gas in Vaca Muerta, one of the world's largest and most-prized shale deposits. The court found that since the state has owned 51% of YPF since 2012 when it seized Repsol’s controlling stake, and given that the government has a demonstrably strong influence over the company, it must operate according to the laws allowing anyone to request information from a state-run institution.

In 2013, two companies agreed to operate a cluster of unconventional oil in the formation of Vaca Muerta, which included an investment of around $1.5 billion. Chevron and YPF have announced joint investments that could total as much as $15 billion under the terms of the accord. Opposition lawmakers believe the contract contains secret clauses that hand concessions to Chevron and undermine national interests. This is an extremely significant development for Vaca Muerta watchers and investors.

In early October, Argentina announced the discovery of a ‘super well’, the Loma Campana 992, with an impressive initial production of 1,630 barrels per day—production figures, says YPF, that are higher than anything ever seen before right off the starting blocks. The ‘super well’ was discovered by YPF in partnership with Chevron (NYSE:CVX) in the Vaca Muerta block in Neuquen. At the same time, the politics are critical. The energy industry is banking on a victory in presidential elections for Conservative pro-business candidate Mauricio Macri, who made a surprisingly strong showing in the 25 October poll, setting the stage for a run-off vote on 22 November—so read a lot of politics into this latest development. Macri is the leading candidate now, and will face President Cristina Fernandez de Kirchner’s chosen successor, Buenos Aires province governor Daniel Scioli in the run-off.

• Mexico submitted a request on to join the International Energy Agency (IEA) with authorities saying that the addition would advance regional interests. The request comes amid the implementation of energy reform of country’s energy sector- passed in late 2013 and implemented since then via secondary legislation. Once the IEA's governing board approves the request, the IEA will work with Mexico on steps required to meet its conditions for membership, including the need to hold oil reserves equivalent to 90 days of net imports. Mexico is the Organization for Economic Development and Cooperation’s third-largest oil producer.

Sales, Mergers & Acquisitions

• BP has announced plans to sell its petrochemicals complex in Alabama as part of a broader reorganization of the company’s global petrochemicals business. The complex operates on 1,000 acres just outside the Decatur city limits and can produce 1 million tons per year of purified terephthalic acid. BP said it is spending $200 million to improve its Cooper River, South Carolina and Geel, Belgium facilities, both of which are the largest PTA-producing sites in the Americas and Europe. The investment will enable the two facilities to lower operating costs, improve reliability and reduce emissions.

• Det norske oljeselskap has paid $120m in cash for North Sea oil producer Premier Oil Norge (PONAS), the Norwegian subsidiary of UK-based Premier Oil. Sold assets comprise the Vette development, which Premier Oil operates, and the adjacent Mackerel and Herring discoveries, in which the company has a 50% interest. All oilfields are located in Norwegian waters in the North Sea. Premier said that the move to sell its subsidiary represents the latest step in its program of active portfolio management. The proceeds will be used to pay down the firm's debt, which stood at $2.3 billion. The transaction is subject to government approval and is expected to be completed by year-end.

• TransCanada has won a contract to build, own and operate a $500-million natural gas pipeline for Mexico’s state-owned power company. The pipeline should be completed by late 2017 and it has a 25-year contract with the Comision Federal de Electricidad to operate the line, which will run from the state of Veracruz to natural gas power plants in central and western Mexico, supplying up to 886 million cubic feet of gas a day. The Canadian company already owns and operates the Tamazunchale and Guadalajara pipeline systems in Mexico and is working to complete the Topolobampo and Mazatlan pipelines.

• Japan's biggest oil refiner, JX Holdings, is reportedly in discussions to merge with rival TonenGeneral Sekiyu, which would create a company that will control over half of the market. Reuters reported that JX has already held negotiations with TonenGeneral, the former has a market cap of roughly $9.4 billion and the latter is worth about half that. The two companies plan to start full negotiations soon with an eye to reaching an agreement by the end of the year. Both companies are experiencing difficulties in the present market, mainly due to the declining fuel demand of Japanese consumers.

• Rosneft is in talks with Chinese companies to allow them to take part in its offshore Arctic projects in order to help with energy exploration strategies there. The Arctic shelf is believed to hold huge amounts of oil and natural gas. Russia has laid claim to deposits within its offshore border areas. A lack of infrastructure in the arctic north of Russia is putting a moderate throttle on the region's oil production. At the Yamal Peninsula, in Russia's far north, full-year 2015 oil production is falling by almost 4% from 2014 to approximately 152 million barrels. Rosneft suspended drilling in the Arctic’s Kara Sea in 2014 after U.S. ExxonMobil withdrew from the project because of Western sanctions over the Ukraine crisis. In September, according to Russian media, Rosneft entered into an agreement to engage in exploration in the arctic waters in the Sea of Ohkotsk with China Oilfield Services and Norway's Statoil.

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