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Global Energy Advisory - 26th September 2014

Geopolitical & Conflict Updates

Iraq

For August 2014, Iraq’s oil export revenues were down to $7.1 billion, from $7.8 billion in July. Exports for August were at 73.6 million barrels, and the selling price for Iraqi crude was at $97.4 per barrel, down from $102.8 per barrel in July. This reflects the cutoff of exports from the oilfields in northern Kirkuk since the beginning of March due to the Islamic State’s (IS) overrunning of the area and attack on a pipeline to Turkey, while production continues unimpeded in Iraq’s major-exporting southern fields.

This is just a sneak preview, though of the geopolitical quagmire in which we’re about to find ourselves buried. The US is bombing the IS ‘Caliph’ with Tomahawks, F-22s and drones bearing Hellfire missiles. They’ve destroyed checkpoints, a mansion in Raqqah that used to be mayor’s home but was turned into an IS headquarters and a handful of checkpoints along the stretch of Iraqi and Syrian territory controlled by IS. What they’re really doing is bombing Syrian leader Bashar al-Assad using Iraq as the justification that they couldn’t swing when we were only talking about Syria. The problem is that the Pentagon doesn’t really have a handle on who they’re bombing. They’re targeting the Khorasan group, for one, which is a special cell within al-Qaeda that includes figures from across the Middle East and into Pakistan (aka Taliban). The road from Syria to Iraq is littered with jihadist groups that the Pentagon can’t actually define and which in some cases are bitter enemies. Khorasan grasps ones attention because it managed to bring some of the IS hotshots together with al-Qaeda assets. But these aren’t simply Iraqi and Syrian jihadists that are being bombed—they span the Middle East and should be considered ‘traveling’ jihadis. The nomadic nature of their violence means that they can’t necessarily be bombed out of power. They will just be shifted.

Libya

Production resumed Monday at Libya's largest oil field, Sharara, as security improved despite ongoing violence and chaos. The field had closed last week, after only re-opening in July, marking another major setback for Libya.

Europe Eyes Turkey

Europe is eyeing the capabilities of the Trans-Anatolian gas pipeline project (TANAP), which will deliver around 6 billion cubic meters of gas per year to Turkey and 10 billion cubic meters of gas per year to Europe. Turkey ratified an MOU with Azerbaijan on TANAP in late May 2014, and the $10 billion project should be commissioned in 2018. Initially, TANAP will have a 16 billion per year capacity, which could be expanded to 31 billion cubic meters.

In the meantime, Turkey has handed out oil and gas exploration licenses to 16 companies in 116 new fields since mid-June. Turkey is largely unexplored but is expecting big things from its shale formations. Approximately 20% of Turkey’s onshore basins have been explored and only about 1% of its offshore basins. In the next two years, the government estimates that around $1.5 billion in foreign investment will be poured into oil and natural gas exploration over the next two years, based on the average cost of projects in each of the 16 licenses.

Deals, Mergers & Acquisitions

•    Siemens will purchase US oilfield equipment firm Dresser-Rand in a $7.6 billion deal whose overall aim is to help the German conglomerate boost its North American oil and gas prospects. Siemens made an $83-a-share bid, and the transaction could be completed by the summer of 2015. The acquisition is subject to approval by Dresser-Rand shareholders, as well as approval from regulators in Europe and the US. Siemens will be barred from selling advanced technology for oil extraction to Russia, which is traditionally one of the most important markets for this industry, so we could see more mergers of this nature as part of the indirect fallout of sanctions against Russia (more below).

•    Egypt has won $187 million in new oil and gas exploration deals in seven exploration regions. Germany’s RWE has taken two exploration blocks in the Gulf of Suez, while Italian Edison and Canadian TransGlobe won five blocks in the western desert, in partnership with Tunisian HBSI. This is a fairly large victory for Egypt, where it’s hard to make money and to recoup gas development costs.

•    Hess Midstream Partners MLP has filed for a $250 million IPO representing an interest in Hess Corp's North Dakota oil and gas storage facilities and processing plants.

•    Pakistan is planning to sell a 7.5% stake in its state-owned Oil & Gas Development Co. Ltd for over $800 million. The sale will be handled by Bank of America Merrill Lynch, Citigroup, and Pakistani broker KASB Securities. Earlier this year, Pakistan raised $146 million from a sell down in Pakistan Petroleum Ltd.

•    Thailand’s PTTEP will acquire a 20% participating interest from Shell Brasil Petroleo Ltda in Concession BM-ES-23 in the Federal Republic of Brazil. The concession is located in the Espirito Santo Basin, in deep water offshore of Brazil. Upon approval of the deal, PTTEP will hold 20% participating interest in the concession, with Petrobras (the operator) holding 65% and Inpex 15%. The joint venture partners plan to conduct exploration and appraisal drilling during 2014-2015.

Russia Sanctions Fallout

•    US and EU sanctions have targeted state-run Rosneft and Lukoil, which rely on Western support for shale projects and deep-water exploration and production activities, including offshore Arctic projects. (On 12 September, the United States imposed sanctions on Gazprom, Gazprom Neft, Lukoil, Surgutneftegas and Rosneft, banning Western firms from supporting their activities in exploration or production from deep water, Arctic offshore or shale projects.)

•    In order to comply with US sanctions against Russia over Ukraine, Exxon Mobil has said it would wind down its drilling project in the Kara Sea in the Russian Arctic, despite the fact that it has apparently received a license to continue working beyond the sanction deadline. The sanctions deadline was 26 September. The project is part of a broad collaboration between Exxon and Rosneft, Russia's largest oil company.

•    French Total SA is experiencing the effects of US and EU sanctions on Russia and will now have to seek non-dollar financing for its Yamal gas project. The company will have to finance its share of the $27 billion Yamal LNG project in euros, Chinese yuan and Russian rubles. Total is developing the Yamal project onshore in the Russian Arctic with independent Russian gas producer OAO Novatek and China National Petroleum Corp.

•    Total has also been forced to halt its joint venture with Russia’s Lukoil to explore shale oil in western Siberia.

Regulatory, Legal Updates

•    Australia’s conservative coalition government led by Prime Minister Tony Abbot has submitted a draft policy to deregulate the country’s energy industry, increase domestic gas supply and reduce renewable energy subsidies, while increasing LNG exports. An official policy is scheduled for unveiling before the end of the year. The beneficiaries will be Origin Energy Ltd (the largest energy retailer with big LNG export plans), and the second-largest retailer, AGL Energy Ltd (which will absorb the gap in domestic sales once Origin and others start exporting).

•    On 16 September, Russian billionaire Vladimr Yevtushenkov was arrested on money-laundering charges. The charges stem from Yevtushenkov’s 2009 acquisition of Bashneft oil and petrochemical company. Prosecutors allege that Bashneft was illegally privatized by partner Ural Rakhimov and that Yevtushenkov thus purchased illegally privatized state property and engaged in money laundering and bribery. Yevtushenko headed AFK Sistema (which owns Bashneft), and Rakhimov and other top company managers fled Russia fearing arrest, while Yevtushenkov remained. He is now under house arrest. Analysts are comparing Yevtushenkov’s arrest to that of former Yukos head Mikhail Khodorkovsky in 2003 and fear that this will bring private property rights into question in Russia. Like Khodorkovsky’s arrest, Yevtushenkov’s arrest is likely about state-controlled Rosneft. Rosneft acquired Yukos when Khodorkovsky was arrested, and probably is targeting Bashneft in the same manner, while Yevtushenkov wasn’t willing to play ball. Sanctions pressure may render Rosneft more desperate to ensure it gets what it wants at this time.




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