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Global Energy Advisory – 22nd January 2015

Politics, Geopolitics & Conflict

Yemen

Shi’ite Houthi rebels in Yemen have taken over the presidential palace in the capital Sana’a after negotiations over a power-sharing deal with the government collapsed, raising the spectre of an all-out civil war. Oil and gas companies have suspended operations and staff are being evacuated. The country’s only gas terminal has ceased operations. We are looking at the southern province of Shabwah and Marib Province here, where the bulk of oil and gas activities are concentrated. Operations have been halted not only due to security concerns but in part as a form of protest over the kidnapping by Houthi forces of Yemen’s Presidential Chief of Staff, while the whereabouts of the Yemeni president himself remains unclear. Marib produces more than 70% of Yemen’s oil and gas, while French Total SA is the largest investor in the country’s gas export industry, holding a 40% interest in Yemen LNG. US-based Hunt Oil also owns a 17% stake.

Iran

Iran is poised to take geopolitical and diplomatic advantage of the drop in oil prices, with Iranian calls now coming for an alliance of oil-producing countries against Saudi Arabia and Kuwait to halt the price slide. Iran is rightly claiming that Saudi Arabia in particular has political objectives; otherwise it would not accept a trillion-dollar annual loss in oil revenue. There is much speculation about the decline in oil prices claiming that it is about Saudi attempts to undermine the Iranian economy and thereby undermine Iran at a time of turmoil in Iraq and Syria. This is a much more pertinent game for the Saudis than is undermining fracking in North America, despite the ramblings on bastions of analysis such as CNN and Fox News. The advances of the Islamic State (IS/ISIS/ISIL) in Iraq and Syria and most notably an attack by the IS on Saudi forces at a border point should bring the Saudis around to the conclusion that the Sunni jihadist monster it has helped to create as a bulwark against Iran is now its own enemy. It will be this realization first and foremost that prompts and oil price response from the Saudis.

Deals, Mergers & Acquisitions

• Schlumberger Ltd is acquiring a 45.65% stake in Russia’s largest drilling company, Eurasia Drilling (EDC), for approximately $1.7 billion. Not only will Schlumberger take the company private, but it will also have a call option to allow it to purchase the remaining shares over a period of two years. Schlumberger had struck a strategic alliance with Eurasia Drilling in 2011. The acquisition is an interesting one given the US’ tensions with Russia over Ukraine. Schlumberger’s assessment is that the deal will not be affected by Western sanctions on Russia, but there is certainly high risk here. Eurasia shares took a 60% dive over the past year because two of its biggest customers faced US sanctions in Russia. EDC provides onshore drilling services in Russia and Iraq, and offshore drilling in the Caspian Basin.

• Brazilian HRT Participacoes SA oil and gas company has reportedly agreed to buy the offshore assets of Royal Dutch Shell Plc in the Campos Basin.

• Nigeria's Seplat Petroleum Development Company has won a deadline extension for announcing whether it intends to make a firm offer for oil producer Afren.

• Kuwait has awarded $4.2 billion for the Lower Fars Heavy Oil Development Phase I to UAE-based Petrofac International and Greece-based Consolidated Contractors Co. Under the project, the plan is to produce 60,000 bpd of heavy crude by 2018 and to build the necessary infrastructure to make subsequent phases of the project possible. Ultimately, by 2030, Kuwait envisages heavy oil production of 270,000 bpd.

Discovery & Development

• Italy’s Eni has announced a new oil discovery in Egypt’s Western Desert in the West Meleiha. Eni drilled the West Meleiha well to a depth of 4,175 metres, finding high-quality oil estimated with a production rate of 2,100 barrels of oil per day.

• Exxon Neftegas (ExxonMobil’s Russian unit) has started production at the Sakhalin-1 project's Arkutun-Dagi field- the final of three fields to be developed as part of the project. Peak production is expected to reach 90 K/bd. It total, the three fields are estimated to contain potential recoverable resources of 2.3 billion barrels of oil and 17.1 trillion cubic feet of gas. Production from Sakhalin-1 is projected to continue through to 2050, with total investment reaching $10 billion to $12 billion. Production from Sakhalin-1’s Arkutun-Dagi field will be routed through the existing Chayvo onshore processing facility on Sakhalin Island and delivered through pipelines to the De-Kastri oil export terminal located in Khabarovsk Krai. Exxon Neftegas Ltd. is the Sakhalin-1 consortium operator with 30% interest. Its partners in the consortium include Sakhalin Oil and Gas Development Co. Ltd. (30%), ONGC Videsh Ltd. (20%), and two affiliates of Russian state-owned Rosneft, RN-Astra (8.5%), Sakhalinmorneftegas-Shelf (11.5%).

• Ecopetrol has suspended two development wells (Backlad E10 and Cup Sur XL7) in Cupiagua in Colombia’s eastern Casanare province, due to slumping oil prices.

• Lundin Petroleum AB has launched first production of oil from its Bøyla field, on PL340 in the Norwegian sector of the North Sea. This field is a subsea tie-back to the Alvhein field, where Lundin has a 15% non-operated interest. Bøyla iss estimated to gross reserves of 23 million barrels of oil equivalents and is expected to produce at a gross peak rate of approximately 20,000 barrels of oil equivalent per day (boepd) once the second production well has been completed.

• Spain’s Repsol is abandoning oil and gas exploration off the Canary Islands, citing insufficient results. The project began only in November, amid a high level of opposition for environmental reasons.

• Premier Oil (PMO:LSE) is delaying development of new fields, including its controversial Sea Lion project off the Falkland Islands, due to the slump in oil prices. Sea Lion is a $2 billion project, and Premier has said it would not approve this project or its Bream project off the coast of Norway with oil below $50.

• By the end of January 2015, China will have its new 2,400-km crude oil pipeline with a 440,000 bpd capacity and a deep sea port should be up and running. The new Kyaukpyu Deep Sea Port will handle 100,000-ton crude oil tankers carrying oil from the Middle East. Construction on an affiliated refinery to handle the processing of this oil is not yet complete and is said to be months away from coming online.

• Shell and Qatar Petroleum have cancelled the construction of the $6.5 billion Al Karaana petrochemical plant in the emirate as it is no longer deemed economically feasible due to high capital costs. The project was initiated in late 2011 and was looking at the construction of a new world-scale petrochemicals complex in the Ras Laffan Industrial City north of Qatar. It would have been operated by a QP-Shell JV, 80% owned by Qatar Petroleum and 20% owned by Shell. This the second petrochemical project in Qatar to be cancelled since the fourth quarter of 2014.

Tenders & Licences

• Brazil is likely to postpone the next licensing round in the first half of this year over the scandals surrounding Petrobras and amid the slump in oil prices. This 13th licensing round was originally scheduled for April or May this year. When it happens, we will be looking at new licenses for onshore and offshore regions, but no pre-salt plays.

• Italy’s Eni has won a three-year extension for exploration in Angola of offshore Block 15/06. The initial exploration period expired in November, but Eni sought an extension to drill three wells and conduct 1,000 square kilometers of 3D seismic. This is a prolific block, and new discoveries are expected.

Regulations & Litigation

• South Africa has sent a bill back to parliament for review which would give the state free ownership stakes in new energy projects. The bill would give the state 20% ownership in energy ventures and the right to buy an additional stake, likely setting back any new private exploration investment. The controversial bill was passed in March 2014 but President Jacob Zuma refused to sign it into law.

• Puerto Rico has signed into law a bill amending an oil tax rise and paving the way for potential inflation adjustments to the oil tax. The bill increases the excise tax on a barrel of crude oil by 68%. Governor Alejandro Garcia Padilla said he plans to file additional legislation to slightly amend the new law and help the government access financial markets. The tax per barrel would increase from $9.25 to $15.50 and generate about $178 million a year. The measure takes effect on 15 March 2015.




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