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Global Energy Advisory – 28th August 2015

Politics, Geopolitics & Conflict

The Iraq Update

The Kurds are once again going it on their own, selling oil unilaterally, bypassing the Iraqi central government of Baghdad, which cannot meet the financial commitments laid out in a deal that had temporarily resolved the oil dispute. Now, supermajor oil traders such as Vitol and Trafigura are locking in billions of dollars in Kurdish crude oil and shipments of this oil are becoming increasingly regular. Israel has been getting more than one-third of the Iraqi Kurds’ crude exports between May and August. From the Israeli side, this means it has been meeting up to three-quarters of its oil needs with Iraqi Kurd crude.

In total, since early May to 11 August, Israel has imported more than 19 million barrels of Kurdish crude. Iraqi crude is also going to refineries in Italy and France, among other destinations. Since May, the Kurds have sold nearly 40 million barrels of oil to traders through Turkey’s port of Ceyhan. Since May, we’re looking at about 450,000 barrels per day in sales; however, pipeline sabotage temporarily sabotaged that. There is not a lot Baghdad can do about it right now; it’s barely managing to contain the advances of the Islamic State. So, we’re not going to see any lawsuits against traders in Iraqi Kurd oil for the time being.

Certainly, Iraq’s key oil province—Basra—is eyeing these developments with interest. Basra is hoping to win autonomy on the scale of Iraqi Kurdistan, and earlier this week the Iraqi Independent High Electoral Commission said that petitioners had collected enough legitimate signatures to support the formation of a region. This will move Basra closer to being able to hold a referendum.

In the meantime, we are hoping against all odds that Donald Trump will go away. While this is great eye candy for major US ‘news’ outlets, the reality is that Mr. Trump really has no idea what he is talking about. His colorful media campaign that suggests destroying Iraq’s oil fields in order to defeat the Islamic State should require no comment and we’re counting on our readers—who are of a more educated class—to understand this without explanation. This is a publicity stunt that can only end very badly for all parties, and it is rather sad that chief US military personnel are being forced to actually address this idea in public and explain why it is a bad idea.

The people of Basra should be cringing. In an ideal world, someone would let Mr. Trump know that Basra is Iraq’s key oil region. This is where around 90 percent of the oil is produced, and this is also far from the IS conflict. What could threaten production in Basra are protests from people who wish to see Basra have more autonomy like the Kurds—and the Kurds are clearly more productive without Baghdad.

Regulations, Law, Governance

• A new chairman of Mozambique’s state oil company (ENH) has been appointed, lending more uncertainty to this emerging gas venue for foreign investors. The new chairman assumes positions only months ahead of some major strategic decisions on massive LNG projects. The new chairman is former bank economist and deputy minister Omar Mitha. He replaces Nelson Ocuane, who has been chairman since 2007. Omar Mitha had been appointed Deputy Minister of Trade and Industry in a cabinet reshuffle only six months ago, and then he was suddenly fired days before the announcement that he was to become the new chairman of ENH. Mitha will now be tasked with chairing a state company in a country that has enough natural gas to become one of the top LNG exporters in the world. Key companies operating in this venue include Texas-based Anadarko Petroleum Corp. and Italian Eni. Mozambique’s oil and gas industry regulator has also seen a change in chairman, with former exploration manager Carlos Zacarias replaced Arsenio Mabote. There are significant downstream opportunities here for foreign investors who do their homework, particularly with the state holding company IGEPE, which is actively looking for partners downstream.

• Canadian regulators have approved two Novia Scotia LNG export projects--Pieridae Energy and Bear Head, both of which were granted gas export licenses last week. With this new approval, Canada as now approved more than 20 billion cubic feet a day of exports. This represents a figure that is 50 percent higher than Canadian gas production was last year. Both projects have received permits from the US Department of Energy (DoE) to re-export US gas to FTA countries. Pieridae has already signed a deal with Germany’s E.ON to deliver 5 million tons per year of LNG year from Goldboro LNG.

Discovery & Development

• Paris-based Maurel & Prom—France’s second-largest oil company—has opened the first two wells at the Mnazi Bay gas field in Tanzania. These wells will deliver gas to the Madimba processing center, which serves as the entry point of the gas pipeline linking Mtwara to Dar es Salaam. First output will be for commission operations for new facilities. After this, production is projected to increase to 70 MMcfgd with the connection of two more wells in October. By the end of this year, production should be at 80 MMcfgd. Maurel & Prom entered Tanzania in July 2004 with the Bigwa-Rufiji-Mafia permit, taking a 60 percent interest. In 2009, it acquired the Mnazi Bay permit, with a 48.06 percent operating interest. The joint venture partner here is Wentworth Resources.

• ConocoPhillips has started drilling on the first oil development in Alaska’s National Petroleum Reserve. Production is expected to launch in the fourth quarter of this year. Current development plans call for 15 wells with expected peak gross production of 16,000 bo/d. Primary project infrastructure—including a road, gravel pad, four bridges, and pipelines—is already complete. Total project investment should be more than $1 billion. The drill site is part of the Colville River unit operated by ConocoPhillips Alaska Inc. with 78 percent interest. Anadarko Petroleum Corp. holds the remaining 22 percent.

• A consortium led by Norway’s Statoil has won Norwegian government approval to launch the first phase of development for the giant Johan Sverdrup field, with the first oil projected to be produced in late 2019. The first phase—on paper—should see four $14.5-billion bridge-linked platforms and three subsea water injection templates put into play. Full production is estimated at 550,000 to 650,000 barrels of oil equivalent per day, accounting for about 40 percent of total oil production from the Norwegian continental shelf. Johan Sverdrup is expected to generate $200 billion in revenues within the next 50 years and create 51,000 direct and indirect jobs. Statoil holds a 40.03 percent interest; Swedish group Lundin, 22.60 percent; Norwegian state-owned Petoro 17.36 percent; another private Norwegian group, 11.57 percent; and Denmark’s Maersk, 8.44 percent.

• Cairn Energy has won approval to begin drilling off the coast of Senegal, following two discoveries in the area last year, Cairn estimated fields there could contain more than a billion barrels of oil. Cairn has a 40 percent interest in three blocks offshore Senegal. Its partners include ConocoPhillips, FAR Ltd and the Senegal National Oil Company, Petrosen. Cairn estimates that the existing two discoveries have an estimated mean risked resource base of more than a billion barrels. The company expects to start drilling operations in the fourth quarter.

• Italy’s Eni has finally announced it will launch oil production from Norway’s first Arctic development—Goliat--within a matter of weeks. This project has been beleaguered by major cost overruns and delays. Production from the Goliat field was originally expected to begin two years ago. It is the first oil field to be developed in the Arctic waters of the Barents Sea. The Goliat field is estimated to hold about 174 million barrels of oil. Eni is the operator with 65 percent, while Norway’s Statoil holds the remaining 35 percent. The project costs increased to $5.62 billion from an original estimate of about 3.6 billion in 2009, when the development plan was green-lighted.

Deals, Mergers & Acquisitions

• We are closely watching geopolitical developments that dictate supply surrounding Qatari gas. Earlier this month, Qatargas reached an agreement with Trafigura to supply LNG to Jordan’s National Electric Power Company (NEPCO). NEPCO’s gas tender closed on 18 August, and rumor is that Trafigura will deliver one of two October cargoes awarded by NEPCO in the high $7s/MMBtu.

While Jordan is going to be getting Qatari gas, Iranian media is talking about a new way to get natural gas to Europe, which would involve adding some Qatari gas into the mix as well. Iran is offering to take Qatari gas and transit it to Turkey to be pumped into Europe—assuming it can get Qatar and Turkey to agree. Apparently, discussions of this nature had begun before but were stymied by sanctions. According to the Iranians, officials from Nabucco and Swiss EGL had ‘raised the prospects of reviving plans to take Iran’s gas to Europe (with extra Qatari gas thrown into the mix) once sanctions are lifted.

Pakistan has also been hoping to get its hands on some Qatari gas in the form of a government LNG deal. However, the Pakistanis are balking at the conditions the Qataris are putting on the deal, including the dredging of Port Qasin, a monitoring and payment mechanism guaranteed by the Finance Ministry, and the opening of a back-to-back standby letter of credit (SBLC).

• China’s Sinopec has acquired a stake in Kazakhstan oil and gas fields from Russian Lukoil for $1.09 billion. The acquisition gives Sinopec a 50 percent stake in Caspian Investments Resources, a participating player in five Kazakhstan fields. Kazakh authorities signed off on the deal last month. Lukoil will continue to develop projects in three Kazakhstan fields. Sinopec and its parent company already own the other half of Caspian Investments Resources, which holds stakes in fields with more than 200 million barrels of proved oil and gas reserves.

• AEP has signed a letter of intent and a three-month exclusivity agreement with Australia's Armour Energy to buy a 75 percent stake in 21.5 million acres of drilling rights in Georgina, Southern McArthur and northwest Queensland basins in Australia. The preliminary agreement requires AEP to invest $100 million in drilling over five years and to pay Armour as much as $18 million in signing bonuses. Armour will be free carried during Phase One of the farm-in and receive an upfront payment of US$11 million. It will also be provided access to US$100 million of debt funding for its share of Phase Two appraisal and development costs. Armour will retain 100 percent ownership of the southern two tenements covering 7.8 million acres over overlapping Georgina and Southern McArthur Basin tenements, and all of its tenements in northwest Queensland covering 5.1 million acres.

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