Global Energy Advisory – 21st August 2015

Politics, Geopolitics & Conflict

• Following the Iran sanctions game, as it progresses swiftly, Switzerland has now become the first Western nation to put an end to Iran sanctions in the aftermath of the 14 July nuclear deal. What this means is that there will no longer be a requirement to report trade in Iranian petrochemical products. It also means that the ban on precious metals transactions with Iranian state companies has been lifted. Furthermore, there will be no obligation to report the transport of Iranian crude oil and regulations on insurance and reinsurance policies related to such transactions. This is promising news, but it's not shocking. The Swiss were positioned to be the first to make this move as they had already informally suspended the sanctions in January last year. This is, however, a message from the Swiss-it's meant to signal others to follow suit, and we expect they will.

• In the ongoing back-and-forth between the Kurdistan Regional Government (KRG) and the Iraqi central government in Baghdad, a deal to share oil revenues and return the Kurds' portion of the federal budget is again on the chopping block. The Kurds have withdrawn from the deal in another threatening move as Baghdad is having a hard time getting them the budget money promised under the arrangement. Baghdad is short on cash due to the fight against the Islamic State (IS) and the Kurds are playing hardball and have the upper hand to do so.

• At the same time, interesting pipeline sabotage developments in Iraqi Kurdistan illustrate the challenges of fighting the IS when it comes to Kurdish-Turkish relations. The pipeline that runs from northern Iraq to Turkey's Ceyhan has been under attack and has so far cost the KRG over $500 million since the beginning of July, according to Kurdish authorities. The attacks are being blamed on the Kurdistan Workers' Party (PKK), though the PKK denies this. Turkey, at the same time, is launching bombing campaigns against PKK positions in northern Iraq. This makes things a bit tricky because the Kurds are necessary to fight back the Islamic State (IS). Turkey is playing a dangerous game here, hoping to assist Iraqi and Syrian Kurds to push the IS back from Turkey's border, while at the same time fighting against Turkish Kurds and refusing to include them in this battle. Turkey does not wish to see any unification of these three groups of Kurds, which it views as a threat. By this logic, an attack on the Kurdish-Turkey pipeline perceived to have been perpetrated by the PKK would further strain relations between the PKK and the Iraqi Kurds, which suits Turkey's goals.

Licenses, Auctions & Tenders

• Brazil's next oil and gas licensing round set for October has seen 39 companies register so far. This will be Brazil's first such auction since 2013. Up for auction are 266 exploration blocks, 182 of which are onshore and 84 offshore. Among the companies registered are Exxon Mobil, BP, Anadarko, Galp, Alvopetro, CNOOC, Ecopetrol, Engie (formerly GDF Suez), GeoPark, Imetame, Premier Oil and Sonangol.

Regulatory Update

• The UK government has announced new legislation giving ministers the power to step in and take control of fracking applications if councils fail to do so within the current 16-week statutory timeframe. If they repeatedly delay, ministers might take over the power to decide all future applications in the area. Significantly, this takes decision-making away from the council's and gives it to higher government. Reading between the lines here, this is David Cameron's way of making good on his promise to make the most of the country's shale gas resources. This new legislation will make it easier for ministers to override council objections to fracking. To date, only very few shale gas wells have been drilled, and only one well has been fracked, due to a high level of localized opposition. Ministers already have powers to take over the decision on any controversial planning issue at any stage of the application.

• Following on news earlier this month about the move towards ending the four-decade ban on U.S. crude oil exports, the U.S. administration is taking further steps to end this ban by approving swaps of U.S. light crude oil for imports of heavy Mexican crude oil. The U.S. Department of Commerce has told members of Congress it intends to approve an application by the national oil company of Mexico to exchange heavy oil pumped there for light crude pumped in the U.S. The department granted a request from Pemex to swap as much as 100,000 barrels of U.S. crude oil per day for refining. The new deal would require Mexico to refine the U.S. crude on its own territory and would not allow that crude to be re-exported to third countries. American producers should be rather excited because this effectively gives them another new market to sell their crude, which is increasingly important in the current depressed oil price environment. It should also be viewed as a significant step towards ending the 40-year ban on U.S. crude exports. Still, keep in mind that this will all move fairly slowly and that the Department of Commerce has rejected other similar deals.

• Israel's government has approved a regulatory plan for developing natural gas fields, which has been a major conflict since massive discoveries were made in Israel's offshore Levant Basin. The regulatory plan is backed by the government's majority, but opposition says it is overly generous to energy companies. This political energy back-and-forth has significantly affected Texas-based Noble Energy, which made the giant discoveries (Leviathan and Tamar gas fields), and its Israeli partner, Delek Energy. There have been major problems concerning what is perceived as Noble's 'monopoly' on Israeli gas with these discoveries. Under the tentative deal, Noble will have to reduce its stake in the already-producing Tamar gas field (which is the smaller of the two discoveries), while Delek must sell all of its interests in the field. Both companies will also have to sell off interests in two smaller gas fields, Karish and Tanin. The giant Leviathan, which is not yet producing, remains unaffected and the companies will (for now) be allowed to maintain their ownership interests. The new regulatory plan establishes a price ceiling and an indexing mechanism to regulate gas prices, and sets milestones for the companies' development of the fields by 2020. Critics say the new plan does not do enough to harness the companies' control over the Israeli gas market or to ensure low prices for consumers. The deal was initially unveiled two months ago, but has now passed through the Cabinet. Israeli Antitrust Authority head David Gilo resigned in June in protest against the terms of the new regulations, expressing concern about the lack of competition in the sector. What this means is that there are some fabulous opportunities coming online for investors savvy enough to brave the Levant Basin's gas wealth. Some of Noble and Delek's interests will be up for grabs, and surely the horse-trading has already begun. Make sure, however, that you understand the political-gas situation in Israel, and the geopolitical baggage. Italy's Edison SpA said it's interested in Israel's smaller gas fields.

• The U.S. administration has granted final approval for Shell's Arctic drilling program, clearing the way for the company to restart the on-and-off controversial hunt for oil in the northern reaches. Recall that Shell halted drilling here in 2012 after a series of setbacks and $7 billion in expenditures over seven years. No one's ready to give up, however, with experts certain that massive amounts of oil and gas are hiding under the Beaufort Sea. For now, work will remain suspended regardless as we await the arrival of a safety vessel designed to control blow-outs at wells. The Bureau of Safety and Environmental Enforcement (BSEE) has granted Shell permission to start drilling as the vessel neared the Burger prospect earlier this week. Opposition to this drilling remains intense due to fears of catastrophic consequences in the event of a drilling accident.

• The Environmental Protection Agency (EPA) is moving to reduce by almost half methane emissions from oil and gas production as the latest round of regulations kicks off. The target is to cut methane from oil and gas drilling by 40% to 45% by 2025, compared to 2012 levels. The regulations could cost the industry between $320 million and $420 million in 2025, according to the EPA's own estimates. The EPA has issued a rule cutting emissions from new and modified oil and natural gas wells, along with updated standards for drilling to reduce leakage from wells on public lands. The rule would require energy producers to find and repair leaks at oil and gas wells and capture gas that escapes from wells that use a common drilling technique known as hydraulic fracturing, or fracking. Republicans have soundly condemned the EPA's new proposal.

• At the same time, in other regulatory news, a reversal is potentially in order in the state of Pennsylvania, where the Department of Environmental Protection is talking about dropping plans to regulate the noise from shale gas drilling operations. Instead, the DEP is seeking to develop a watered-down 'guidance document' rather than a 'rule.' The rule would have been part of the final draft of a comprehensive revision of its oil and gas rules slated to take effect next spring.

Discovery & Development

• French Total SA is withdrawing from exploration at its shale well in Denmark, even though it made a recent gas discovery here. As it turns out, the discovery wasn't as significant as first thought, with Total noting that the layer found at the Vendsyssel-1 well was thinner than expected. The well will now be plugged and abandoned.

• India-based Mercator is experiencing a major share boost on a second oil discovery made by its exploration subsidiary, Mercator Petroleum Ltd. The discovery was in the Jyoti-2 well, Block CBONN-2005/9 in the Cambay Basin. The company enjoyed recent success as well with its first discovery at the Jyoti-1 well in the same basin.