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Global Energy Advisory – 27th March 2015

Frontier Updates

• Amid the oil price slump, if you’re considering Africa, forget Nigeria and look to Kenya. The east African emerging oil giant has just received a boost from the World Bank, which raised its growth forecast for the country. According to the World Bank, Kenya’s economy will be boosted because, for now at least, it’s a net importer of crude. Nigeria, by comparison, is being pummeled by the Boko Haram insurgency, and its revenue base is not diversified enough to be able to handle low oil prices. That’s good for other investments, but what about Kenyan oil? We’re looking at about 2.6 billion barrels of oil—a figure that is likely to increase significantly with new discoveries. One thing to be aware of, though: Kenya—as an emerging oil giant—is under a lot of pressure to make sure production-sharing agreements are in the government’s favor. The country’s draft energy policy proposes a 75:20:5 sharing ratio between the national government, county governments and local communities, but when it comes to revenue-sharing agreements with companies, there is not yet a standard. To navigate this venue, look to Tullow Oil Plc—which made the initial breakthrough discoveries in Kenya and put the country on the oil map. Tullow excels at oil diplomacy, where others bulldoze through to failure.

• We have been waiting for many long months—two years to be exact—for Lebanon to pass the necessary decrees to launch its first auction for offshore exploration licenses in its portion of the Levant Basin. The waiting, it seems, will be eternal despite the excitement that followed massive Israeli gas finds in the form of the basin’s Leviathan and Tamar fields, the latter of which is already producing and the former a veritable giant. Companies are losing interest in Lebanon because they cannot submit bids and it would appear that this situation will continue indefinitely. The Cabinet needs to approve two pieces of legislation, and one of them is geopolitically tricky as it involves the division of Lebanon’s Exclusive Economic Zone (EEZ) into blocs. Among these blocs, two are disputed by Israel. Both further complicating matters and making the whole prospect more attractive is a question of infrastructure. Explorers and producers tapping into Lebanon’s part of the Levant Basin would theoretically have access to the Arab Gas Pipeline, which runs from the Egyptian Sinai Peninsula (problematic in itself) to Jordan and on to the Syrian-Turkish border. For Europe, this is brilliant because it would mean an easy way to bring Lebanese natural gas to the continent. The Syrian conflict, however, is a major hindrance.

Deals, Tenders, Mergers & Acquisitions

• Venari Resources was the highest bidder for 12 deepwater blocks in the Central Gulf of Mexico offshore lease sale held on 18 March by the US Bureau of Ocean Energy Management (BOEM). The Company bid on a total of 13 blocks, with 12 successful bids. Some of the bids were with subsidiaries of Chevron Corporation and Anadarko Petroleum Corporation. Of note are 9 blocks for which Venari and partners bid the highest in the Green Canyon. We are particularly eyeing the Green Canyon blocks because of their proximity to the major Anchor discovery in January, where Venari and Chevron are already partnering. Venari will have a 25% working interest in the new Green Canyon blocks with Chevron (operator) having a 75% working interest. With ultra-deepwater exploration and production becoming the rule of the day in terms of new discoveries, there is a great deal of optimism surrounding the Green Canyon prospects.

• The Shell Petroleum Development Company of Nigeria Limited (SPDC), a subsidiary of Royal Dutch Shell, has completed the assignment of its 30% interest in oil mining lease 18 and related facilities in the Eastern Niger Delta. Its interests in OML18 were assigned to Eroton Exploration & Production Company Limited with the total cash proceeds for Shell amounting to $737 million. OML18 covers 1,035 square kilometers and includes the Alakiri, Cawthorne Channel, Krakama, and Buguma Creek fields and related facilities. The average production here is around 14,000 boe/day.

• India is hoping to raise $3.6 billion through the sale of stakes in four state-controlled companies. The sale will reportedly include shares of ONGC and National Aluminum Company (NALCO). It will be a tough sale for India, however, and share estimates have been lowered from $3 billion to $2.1 billion for ONGC recently. Right now, we’re looking at cabinet approval of the sale of 5% of shares in ONGC. The sale will be hindered by Washington’s listing of ONGC as one of 5 companies maintaining energy ties with sanctioned Iran. Two of the other companies on the list are also Indian.

• Egypt's Dolphinus Holdings has signed an agreement to purchase a minimum of $1.2 billion of natural gas from the offshore Israeli Tamar field. The gas would be transported through an underwater pipeline that was originally built about 10 years ago to send gas to Israel—not the reverse. Now Egypt needs Israel’s gas—and Israel is swimming in it following massive finds in the Levant Basin, with Tamar being the much smaller field that plays second fiddle to the Leviathan field. Partners in the Tamar project—US Noble Energy and Israeli Delek—have signed a 7-year agreement that will see a minimum of 5 Bcm of natural gas to be sold in the first three years. The Tamar field, located about 80 km. west of Haifa, began flowing into the Israeli domestic market in March 2013. Noble Energy holds 36% of the basin. Delek Group subsidiaries Delek Drilling and Avner Oil Exploration each own 15.625%, while Isramco owns 28.75% and Dor Gas owns 4%. This is of high significance: It is Tamar’s biggest binding export agreement since the field started supplying the domestic Israeli market two years ago.

• Dragon Oil has reportedly received a $3 billion takeover offer from major shareholder Emirates-based ENOC. ENOC already owns 52% of Dragon Oil. The takeover offer apparently came after share prices jumped 10%. Dragon—registered in Ireland and headquartered in Dubai--explores in Turkmenistan primarily, but also has assets elsewhere in Central Asia, in the Middle East and North Africa. Dragon has set up an independent committee to assess the takeover approach by ENOC.

Regulatory Updates

US/Federal & Indian Lands Fracking Regulations

The federal government has released its first-ever fracking safety regulations for federal and Indian lands, which will take effect in 90 days.

Key components of the rules aim to ensure groundwater protection, increase transparency surrounding chemical use disclosures, improved storage standards, and more detailed documentation requirements for pre-existing wells. More specifically, the rules include:

• Provisions for ensuring the protection of groundwater supplies by requiring a validation of well integrity and strong cement barriers between the wellbore and water zones through which the wellbore passes;

• Increased transparency by requiring companies to publicly disclose chemicals used in hydraulic fracturing to the Bureau of Land Management through the website FracFocus, within 30 days of completing fracturing operations;

• Higher standards for interim storage of recovered waste fluids from hydraulic fracturing to mitigate risks to air, water and wildlife;

• Measures to lower the risk of cross-well contamination with chemicals and fluids used in the fracturing operation, by requiring companies to submit more detailed information on the geology, depth, and location of preexisting wells to afford the BLM an opportunity to better evaluate and manage unique site characteristics.

Petrobras Offshore Shutdown

Facing difficulty upon difficulty, Brazil's state-run Petrobras has been forced to shut down its P-58 offshore oil production ship due to ‘irregularities’ found on board the vessel. This is one of Petrobras’ most important offshore production facilities, producing 106,000 barrels of oil and natural gas equivalent a day in January from 7 wells. Production from this facility represented an astounding 84% of Petrobras’ crude and 4.1% of its total output in Brazil last month. The country’s regulatory body is stepping up inspections after a deadly explosion earlier this year on a Petrobras offshore oil and natural gas production ship operated by BW Offshore Ltd, a Norwegian-listed production vessel operator. There is also additional pressure now due to a number of refinery accidents and a high-pressure response by unions that is focusing on Petrobras’ safety record. The beleaguered Petrobras is now reaching its tipping point.

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