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Global Energy Advisory – 25th September 2015

Politics, Geopolitics & Conflict

Where you should be worried about things in the global oil patch:

Egypt: Everyone’s gotten used to the terrorist attacks in the North Sinai by now, but investors should be watching the oil and gas projects in the Nile Delta, where attacks are increasing in momentum and where the coming months will likely see an intensification. The USGS estimates means of 1.8 billion barrels of recoverable oil, 223 trillion cubic feet of recoverable gas, and 6 billion barrels of natural gas liquids in Egypt’s Nile Delta area. And the biggest news here is Italian Eni’s recent discovery—one of the world’s largest natural gas fields—off the Egyptian coast. The Zohr field is being billed as a game-changer for Egypt—and as such makes this area a much more attractive target for terrorist attacks. Eni in June signed a $2 billion deal with Egyptian authorities to explore in Sinai, the Gulf of Suez, the Mediterranean and the Nile Delta. While Sinai attacks continue to claim the spotlight, the most recent attack in the Nile Delta in late August has sparked concerns that this venue—due to the growing oil and gas significance—could become a serious secondary target. On 24 August, a roadside bomb in the Nile Delta claimed the lives of three policemen and wounded 27 others. The bomb targeted a bus carrying conscripts.

Libya: The world powers that be are suggesting that a final draft peace accord could possibly resolve Libya’s rival parliament problem; however, the deal still has to be signed, with a deadline scheduled for mid-October, when the mandate for the elected House of Representatives ends. A lot can happen in Libya in a month, and this deal is not expected to end the armed conflict and usher in stability.

Turkey: Turkey’s southeast, a key oil and gas destination very unfortunately near the border with Syria, is experiencing a great deal of unrest—even more so now that Turkey is targeting the PKK (Turkish Kurds), while at the same time hoping the Syrian and Iraqi Kurds will be able to fight back the Islamic State across the border. The PKK’s retaliation against Turkish bombings could very well be commercial assets.

Discovery & Development

• Norway’s Statoil and partners have commissioned the first subsea gas compression facility (at water depth of 300 meters) at the Åsgard field in the Norwegian Sea. This will service the $2.3b-billion Aasgard subsea plant, which is expected to add approximately 300 million barrels of oil equivalent to the field’s output of the field. Recovery from the Midgard reservoir on Åsgard will increase from 67% to 87%, and from 59% to 84% from the Mikkel reservoir. Statoil operates Aasgard with a 34.57% interest, while its partners include: Petoro AS (35.69%), Eni Norge AS (14.82%), Total E&P Norge AS (7.68%), and ExxonMobil E&P Norway AS (7.24%).

• Esso Exploration & Production—a subsidiary of ExxonMobil—has launched oil production ahead of schedule at the Erha North Phase 2 project 60 miles offshore Nigeria. According to Exxon, the project also came in under budget, with savings of $400 million, which is attributed to the strong performance of its Nigerian contractors. Its phase 2 project will be linked up to an existing Erha North floating production, storage and offloading vessel. The expectation is that this will lead to the production of an additional 165 million bbl from the already-producing Erha North field. Peak production from the expansion is estimated at 65,000 bo/d, increasing total field production to 90,000 b/d. Esso E&P is the operator of the field with a 56.25% interest. Shell Nigeria Exploration & Production holds 43.75%.

• Kuwait plans to start an offshore oil exploration program within two years, as part of plans to boost oil output capacity. Seismic surveys of marine areas conducted by state-run Kuwait Oil Company (KOC) and the Kuwait Gulf Oil Company proved that some of the offshore and onshore fields have extended reserves. Kuwait currently produces around 2.9mn barrels of oil per day, although this is likely to rise following the new discovery. New reservoirs could increase the country's production levels to 3.3 million barrels in two years. Most of Kuwait’s production is from the onshore Burgan field, the world’s second largest, in the southeast of the country, though it also extracts reserves from an offshore Neutral Zone where it shares facilities with Saudi Arabia. In April, KOC discovered four new oilfields in the north and west of the country. Two reservoirs for unconventional oil in the north of the country were also discovered. Also, KOC has finalized the 16 strong list of companies prequalified to bid on the three contracts comprising the first phase of a plan to develop the country’s Jurassic Basin reserves. In August, KOC invited bids on the development of the onshore East Raudhatain, Umm Niqa, West Raudhatain and West Sabriya fields in the north of the country, split into three packages of work each planned to deliver 40,000 bpd.

Deals, Mergers & Acquisitions

• Total has entered a special licensing agreement with Eni for use of Eni Slurry Technology (EST), a proprietary refining process technology that converts heavy feedstock into lighter, higher-value products. The technology was developed solely by Eni, which spent around $1.2 billion on it, and implemented it in the Sannazzaro refinery in 2013. EST is based upon a hydro-conversion process that has been developed through a special catalyst and a current of self-produced hydrogen starting from methane. According to Eni, the technology can valorize the exploitation of unconventional crudes and has the capacity to produce gasoline and gasoil without generating coke or fuel oil.

• Kinder Morgan has extended its search for commitments for the proposed $4-billion Utica Marcellus Texas Pipeline (UMTP) project. This was originally supposed to close on 15 September, but has now been extended to 15 December 2015. If realized, the pipeline will transport natural gas liquids and condensate produced from the Utica and Marcellus basins to delivery points along the Texas Gulf Coast, including connectivity to a Kinder Morgan dock located along the Houston Ship Channel. The project would involve the abandonment and conversion of 964 miles of natural gas service on KMI’s existing Tennessee Gas Pipeline, the construction of 200 miles of pipeline from Louisiana to Texas, storage in Ohio, and 120 miles of laterals to provide basin connectivity.

• Kentz—a subsidiary of Canada’s SNC-Lavalin Group—has won a front-end engineering design contract from ExxonMobil for an oil processing facility that will increase production at the West Qurna-1 field in Iraq. While no official contract value has been disclosed, there has been much speculation that it’s worth around $500 million. The West Qurna-1 facility has a production capacity of around 100,000 stock tank barrels of crude oil per day. The new design will enable the processing of full well stream fluids from the production wellhead area and the separation of these fluids into associated gas, crude for export and untreated produced water. Kentz has an engineering hub in the UAE emirate of Abu Dhabi, where this contract will be undertaken. Completion of the project is expected to take 26 months.

• French Total SA is selling a 10% interest in the Fort Hills oil sands mining project to Suncor Energy for about $234 million. Total is seeking to lower its exposure to Canadian oil sands projects at a time of depressed global oil prices. Suncor is also assuming about $700-million in new spending commitments under the deal. Fort Hills has a planned capacity of 180,000 barrels per day. Construction activities are approximately 40% complete while the operator’s target is to start up the project by end-2017. Upon finishing the deal, expected to close in fourth quarter of the year, Total will hold a 29.2% interest in the Fort Hills project, while Suncor Energy will be the operator with a 50.8% interest, and smaller partner Teck Resources with a 20% interest.

Regulatory Updates

• The New Orleans Court of Appeals has ruled that Iraqi Kurdistan (the Kurdistan Region of Iraq) cannot sell its crude unilaterally—without Baghdad’s blessing—in the US. The US court dismissed the Kurdistan Regional Government’s (KRG) attempt to overturn a judge’s earlier decision against its planned sale of oil to an unidentified American buyer. This is just the latest in the ongoing saga between the KRG and the central authorities in Baghdad. Last year, Baghdad sued to seize a crude tanker from the KRG in the Gulf of Mexico, some 100 kilometers off the Texas coast. A Houston judge had ruled that the KRG must notify the court before making any future sales attempts in the US. The KRG’s response to this situation was to turn the tanker around and offload the crude in Israel.

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