Global Energy Advisory – 26th June 2015

Politics, Geopolitics & Conflict

Greece on the Brink

The back and forth between Europe and Greece over the past few weeks is reaching its denouement. Earlier this week it appeared as if Greece and its European overlords - EU member states led by Germany, the European Central Bank, and the International Monetary Fund - were close to a deal. But in the last few hours things have taken a gloomy turn.

After several days in which many insiders and analysts insisted that a deal was "very close," they have failed to find common ground. And in the last 24 hours, it appears that Europe has toughened its stance, rejecting Greece's latest counteroffers. Europe is demanding deeper cuts to pensions, a faster raise of the retirement age, removal of subsidies for farmers, among other austerity measures. The demands can only be interpreted as an ultimatum just a few days before Greece has to meet a $1.7 billion debt payment to the IMF - Greece has to either agree to Europe's terms or blow past the deadline for repayment, likely triggering a default, bank failures, and potentially an exit from the Eurozone currency union.

Complicating matters further is the fact that even if Greek Prime Minister Alexis Tsipras agrees to Europe's demands, he has to sell the package to his parliament and public back home. Elected on an anti-austerity platform, he would have to agree to significant austerity policies if Greece is to avoid default. That won't be popular.

German Chancellor Angela Merkel struck a dour note after the negotiations failed on Thursday, telling reporters that "[w]e still haven't made the necessary progress; in some places it looks like we're even going backwards." Talks will resume on Saturday, but the clock is running out. Merkel has said a deal must be reached before financial markets open on Monday.

China's Bear Market

China has been the main driver of global economic growth for much of the last decade. But cracks are forming in the Chinese economy that are raising concerns across the world. China's main stock exchange, the Shanghai Composite Index, fell the most in five months this week, dropping 7.4 percent. That brings the exchange down 19 percent from its peak earlier this year. China's stock exchange suffered its worst two-week performance in nearly two decades.

Investment firm Morgan Stanley is now advising investors to steer clear of China's stock market. "This is probably not a dip to buy," Morgan Stanley's head of Asia and emerging-market strategy, wrote in an investor's note. "In fact, we think the balance of probabilities is that the top for the cycle on Shanghai, Shenzhen and the ChiNext has now taken place." In other words, the stock market has peaked and could be entering a down period.

There have already been concerns that a variety of assets in China are overvalued or even in 'bubble' territory, including China's real estate market, provincial debt, and of course, the stock exchange. If it starts to unravel, that would present an enormous downside risk to the global economy.

Deals, Acquisitions & Mergers

• Howard Midstream Energy Partners LLC has proposed plans to construct a natural gas pipeline that would link South Texas with Mexico. The pipeline would run from Webb County to Monterrey in the Mexican state of Nuevo Leon. The 30-inch "Nueva Era Pipeline" would run 200 miles and transport 600 million cubic feet of natural gas per day to Mexico. It would provide natural gas producers in Texas with a new market, and Mexican industrial consumers would gain access to competitively-priced natural gas. If the project moves forward, Howard Midstream says it could begin operation in July 2017.

• Solar company Sunrun Inc. has filed documents for its initial public offering. The solar developer offers solar panels at little or no upfront cost, a leasing model that was pioneered by competitor SolarCity (NYSE: SCTY). With revenue of nearly $200 million in 2014, Sunrun has 79,000 customers and counting. Residential solar is booming, and Bloomberg New Energy Finance released a recent report that predicted decentralized solar would likely become one of the main sources of new electricity generation in the coming decades, meaning companies like Sunrun have a bright future.

• Israel moved closer to resolving a months-long dispute over its massive offshore natural gas field. The government has been pursuing an antitrust case against Noble Energy (NYSE: NBL) and Israel's Delek Group, which together control most of the major offshore natural gas fields in the Mediterranean. Israel's security cabinet just approved a plan, not yet made public, that would allow Noble and Delek to maintain control over the Leviathan field, the world's largest and most impressive natural gas find in the past ten years. Under the agreement Noble and Delek would have to sell off part of their positions in smaller Tamar natural gas field. Noble might have to trade down its stake to 25 percent from 36 percent, but it could move forward with Leviathan. After months of uncertainty, the deal will be welcomed by the shareholders of Noble.

• Russia's state-owned oil firm Rosneft reported that first quarter earnings jumped by 30 percent. The company's earnings took a hit from higher taxes and lower oil prices, but the figures were in line with expectations. Rosneft still has debt of over $43 billion, but that number fell by 5 percent in the first quarter of 2015. The Russian firm produces 5.2 million barrels of oil equivalent per day.

• Royal Dutch Shell (NYSE: RDS.A) and Eni (NYSE: ENI) reportedly visited Tehran in May and June to discuss potential terms of investment with the Iranian government. The deadline for nuclear negotiations is June 30, and international oil companies, especially those from Europe, are eager to get a foothold in the OPEC country if and when sanctions are lifted.

• Chevron (NYSE: CVX) is seeking to sell two shallow water offshore blocks off the coast of Nigeria. In February, the U.S.-based oil major sold off oil mining leases (OML) 83 and 85, in which it had a 40 percent stake, to local Nigerian firm First Exploration & Petroleum Development Company Limited. Now Chevron hopes to sell off OML 86 and 88.

• Anadarko (NYSE: APC) is in talks with a Japanese company to sell LNG supply from Mozambique. The Japanese company Jera, a joint venture of Tokyo Electric Power (TYO: 9501) and Chubu Electric Power (TYO: 9502), is poised to become the world's largest purchaser of LNG. East Africa, including Mozambique and Tanzania, is becoming an emerging region for LNG investment as several large natural gas fields have been discovered off Africa's east coast. Anadarko is building a $23 billion, 10 tonnes of LNG per annum (mtpa), export facility. Jera is looking for a long-term supply deal from Anadarko.

Regulations & Litigation

• Operators in offshore Norway avoided a disaster this week as the offshore workers union agreed to a new labor deal. The 574 workers agreed to a 1 percent wage increase, heading off a planned strike. Spanish firm Repsol (BME: REP), BG Group (LON: BG) could have been affected as the two companies are developing oil fields with the rig workers. BG's Knarr oil fields are expected to eventually produce 63,000 barrels per day. The strike would have likely expanded to thousands of other workers at other fields, threatening to cut Norway's oil output.

• The state of Oklahoma could be eyeing new regulations on oil and gas development after a sudden spike in the number of earthquakes. An estimated 35 earthquakes hit the state between June 17 and 24. The seismic activity has been linked to wastewater disposal wells, and the state imposed light regulations several months ago. With no reduction in the frequency of earthquakes, regulators have called the latest round a "game changer," likely eliciting a new round of regulation.

• The Alberta government announced an increase in the province's carbon tax from $15 to $20 in 2016. The tax will rise to $30 in 2017. The newly-elected NDP party ushered out four decades of rule by the Progressive Conservative government, a traditional ally of the oil and gas industry. The NDP has raised concerns among industry executives that Canada's oil sands could become less competitive if taxes significantly increased.

• A federal judge in the U.S. put a stop to Obama administration regulations on hydraulic fracturing. The federal government is implementing fracking regulations for drilling on public lands, but the U.S. District Court of Wyoming put a stay on the rules on June 23, just a day before they were set to go into effect. The judge wants more explanation from the U.S. Department of Interior on how it formed the regulations. The court's move amounts to a major stumbling block for the government's effort to regulate fracking.