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Global Energy Advisory – 27th February 2015

Politics, Geopolitics & Conflict

Al-Shabaab Reaches for Stature

The Somali militant group Al-Shabaab—pushed back in Somalia largely by African Union (AU) forces and forced to regroup—has released a video calling on jihadists to attack shopping centers in Western countries, most specifically the US, UK and Canada, and is threatening more terrorist attacks in neighboring Kenya, an emerging East African oil giant. Specific Western targets are listed as the Mall of America in Minnesota, the West Edmonton Mall in Canada and the Westfield Mall in Stratford, UK. The FBI says there is no evidence supporting an imminent attack on the Mall of America, but intelligence-sharing is not exactly the forte of US intelligence agencies. At this point we would view the threat against Kenya as the most viable and investors on this oil scene should be on full alert. The Western mall threats are likely two-pronged, with the primary goal of winning new recruits by harnessing the momentum of the Islamic State (IS) in Syria and Iraq. Keep in mind, though, that while Al-Shabaab may not be a large group and it has been dispersed and had many of its power bases destroyed, it has a formidable intelligence unit of its own that has strategically taken over since the AU hit out at the group’s key positions.

Another High-Profile Kazakh Drama

There has been an interesting development in the murky world of the Kazakh elite. Rakhot Aliev, the former son-in-law of Kazakh President Nursultan Nazarbaev who turned harsh critic of the president, has been found dead in his jail cell in Vienna, Austria. The death is being reported as a suicide. Aliyev turned himself in to Austrian authorities in June last year. He was wanted on murder charges and charges of attempting to overthrow Nazarbaev—charges he claimed were politically motivated, and the Austrians had refused to extradite him to Kazakhstan. Aliev’s lawyer said he seriously doubted his client had killed himself. Early presidential elections will be held in Kazakhstan this year, and Aliev was a thorn in the side of Nazarbaev—threatening to disclose damaging information about the president’s dealings. Nazarbaev has been in power since the Soviet era, and Aliev—previously married to Nazarbaev’s daughter, Darigha, formerly served as the deputy chief of the National Security Committee. He certainly has information from his work at the committee and his marriage into the family that could damage Nazarbaev. In 2007, Aliev was targeted in the investigation into the abduction and execution of two Kazakh bankers, at which point he fled to Austria, where he had previously served as ambassador. The Austrian authorities investigated the abductions and executions on their own in 2011, and in December 2014 charged him with the murders. In 2008, a Kazakh court had sentenced him to 40 years in prison for allegedly plotting to overthrow the government and, in connection to this plot, to being behind an organized group orchestrating abductions. Then in 2013, he was charged (in absentia) for ordering the assassination of an opposition leader and his two associates.

Russia-Iran Deal Hits Dead End

Negotiations between Russia and Iran over a swap of oil for industrial goods have been blocked because Moscow is having a hard time finding buyers for the oil. There is fear among potential buyers of what the response in Washington would be given sanctions on both Iran and Russia. There has been a lot of talk recently about the potential for Russia-Iran relations to tighten, but we see no evidence that this is actually happening, nor are we convinced that Iran actually views this as beneficial at this time. It is easy to say that Washington’s moves against Moscow since it annexed Crimea in March last year would push it closer to Iran. But there are two sides to this relationship, and Iran does not seem to be pursuing this whole-heartedly. At the end of the day, the only real deal the two were working on was the oil-for-industrial goods deal, which now seems to have been stopped in its tracks.

Regulations, Legislation & Arbitration

• The Ohio Supreme Court has ruled in a 4-3 decision that cities and towns in the state cannot enact fracking bans through their zoning laws. This means that the court has effectively overturned a Munroe Falls ordinance that banned Beck Energy from fracking in the town. Beck Energy had sought to drill on residential property in Munroe Falls with the owner's permission and with a permit from Ohio's Department of Natural Resources. The back and forth rulings stem from residents’ concerns surrounding a recent study indicating that fracking had triggered 400 small earthquakes in 2013, and the potential for methane gas to leak from fracking wells close to residential communities. A flash incident that caused 25 families in eastern Ohio to be evacuated after a nearby fracking well sprung a leak fueled these concerns.

• The state of New York’s decision to ban fracking in December has led to 15 Southern Tier towns threatening to secede and join Pennsylvania. Presently, these towns—represented by a group calling itself the Upstate New York Towns Association--are conducting studies to determine whether it would be economically feasible to join Pennsylvania, where natural gas drilling is booming and there is no ban on fracking. The group is also comparing tax rates, business expenses and costs of living between the two states. The study is scheduled to be released in a matter of weeks. This puts a new spin on the fracking debate if the issue can actually lead to the reshaping of the US.

• The US Interior Department has proposed the first-ever federal regulations for oil and natural-gas drilling in the Arctic Ocean. The proposed regulations would require companies to prepare extensive contingency plans for swift responses to potential oil spills. The proposal shortens the drilling season and requires nearby backup rigs.

• A Russian court has refused to grant Rosneft access to a gas pipeline which is part of the Far East Sakhalin 2 project's infrastructure. Rosneft plans to appeal the decision. Rosneft had requested access to the pipeline to reduce spending on its LNG project with ExxonMobil. State-run Gazprom owns 50% plus one share in Sakhalin Energy, had turned down Rosneft’s request before it went to court, saying that it planned to expand its own LNG plant within the Sakhalin-II project.

Discoveries, Deals, Mergers & Acquisitions

• Murphy Cameroon Ntem Oil has agreed to transfer its 50% interest and operatorship of the Ntem Concession, offshore Cameroon, to Sterling Energy. Sterling will not pay any consideration for the stake and the transaction is subject to Cameroon Ministerial approval. Sterling Cameroon will operate and hold 100% of the Ntem concession after completion of the transaction. The Ntem Concession is a large under-explored block in water depths ranging from 400 to 2,000 meters in the prospective southern Douala – Rio Muni Basin. The minimum work obligation for the current phase of the Ntem Concession was met by the drilling of the Bamboo-1 well in 2014. The well was drilled in 1,600 meters of water and discovered no commercial hydrocarbons.

• Connected to the above (because both Sterling and Gulfsands are Waterford Group investments) UK-based Gulfsands Petroleum has announced that drilling operations on the Douar Ouled Balkhair 1 gas exploration well in Northern Morocco have now concluded with the DOB-1 well being confirmed as a gas discovery. DOB-1 is located within the Rharb Centre permit and it has flowed gas to the surface at a rate in excess of 10mln cubic feet per day. Analysis has indicated a gas bearing sandstone reservoir section with excellent quality. The primary reservoir target was found to have 4.2 meters of gross thickness - 3.7 meters net – with average gas saturation of 70% and porosity of 34%. This comes after Waterford tried to remove the CEO in an early February EGM in opposition to the company’s strategy in Morocco.

• Russia's Eurasia Drilling is delaying a deal to sell a stake to Schlumberger as it awaits approval from Russia's Federal Anti-Monopoly Service. In January, Schlumberger said it planned to buy a 45.65% stake in Eurasia for about $1.7 billion. Eurasia Drilling Company’s share price has dropped over 14% since it announced the delay.

• Anadarko’s Kifaru-1 well in the onshore Rovuma Block in Mozambique has been drilled to a final total depth of 3,100 meters but has failed to find commercial levels of hydrocarbons. The consortium on this block also includes Wentworth (11.59%). Anadarko is the operator with 35.7% interest. Last week, Anadarko said it was negotiating the annual supply of more than 8 million tons of natural gas from Mozambique to Asian customers. The World Bank recently said Mozambique has the largest natural gas deposits in Sub-Saharan Africa with over 20 billion barrels reserves of natural gas in deep waters.

• A Russian-led consortium has been chosen to build and operate Uganda’s $2.5 billion Hoima oil refinery project. Russian RT Global Resources is a subsidiary of Russian defense company Rostec. The RT Global consortium outbid a group led by SK Engineering and Construction Co. of South Korea. Final offers were submitted in January. The refinery will be in western Uganda, near Alberta Lake. Initial refining capacity will be 30,000 barrels per day. The government of Uganda will have a 40% interest in the project, with the Russian-led consortium holding 60%. There is some suspicion that the deal was won with promises of arms deals attached, particularly given the connection here to Rostec. Rostec CEO Sergei Chemezov is on the list of Russians subject to sanctions imposed by the European Union because of Moscow’s actions in Ukraine.

• Shareholders in Canada’s Talisman Energy have voted to approve an $8.3 billion offer from Spain’s Repsol under which a wholly-owned subsidiary of Repsol will acquire all of Talisman’s outstanding shares. 99% of shareholders voted in favor of the agreement. Repsol will also assume Talisman's $4.7 billion long-term debt.

• Kenya will begin work landmark work next month on a massive regional infrastructure project--the Lamu Port-South Sudan-Ethiopia Transport (LAPSSET) project—that stands to turn the country into THE East African energy hub. The project will include a port, new roads, a railway and a pipeline by 2030 that will give landlocked South Sudan and Ethiopia access to the Indian Ocean. The price tag on the project is in the neighborhood of $25.5 billion. In 2013, officials said a consortium led by China Communications Construction Co Ltd had won a $449 million contract to build the first three berths of the port. Kenya could start exporting oil as soon as next year, led by UK-based Tullow, which is trying to fast-track production plans in the Lokichar basin.




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