Iraqi Oil Update
Iraqi government forces have reportedly thwarted another attempt by the Islamic State (IS) to take over the Baiji refinery in northern Iraq. This refinery accounts for around one-third of Iraq’s total production, but produces for the domestic market, not exports. Key producing fields, for exports, in the south remain unaffected so far by the IS advance. In the meantime, Iran has come out with clear support for new Iraqi Prime Minister, Shi’ite Haider al-Abadi, after the ouster of Nouri al-Maliki. Iran has also been providing Iraqi Kurdish forces with weapons to fight back IS in the north, bringing Iranian and American short-term intentions here in line with each other, which has a number of geopolitical implications further down the road, especially for the Saudis.
IS militants have managed to take control of some areas on the edge of territory controlled by the Kurdistan Regional Government (KRG) in the north, but have not yet breached this official territory and their advances have been limited to the disputed territories of Northern Iraq. The supply of weapons from Iran and the potential for US air strikes against IS should the Kurds require this, leads us to believe that Kurdistan will be difficult to breach.
At the same time, as we expected, the Kurdistan Regional Government (KRG) has won a victory over its $100 million in crude stranded offshore Texas, as a judge threw out the court order calling for its seizure by the federal government. The cargo has been stranded off the coast of Texas for nearly a month, but is in international waters, and the new ruling will allow it to be released.
In terms of opportunities, the Kurdistan Region of Iraq (KRI) in our assessment remains a solid investment, though developments must be monitored very closely.
Canadian Talisman, which owns a 40% stake in the Kurdamir block in Kurdistan, operated by another Canadian firm, WesternZagros Resources Ltd, has made another substantial find amid the fighting, estimating it could contain around one billion barrels of crude and produce as much as 150,000 bpd. Still, despite this find, Talisman is planning to divest in Kurdistan. This is an extremely attractive block and we advise anyone interested to contact OP Tactical for further analysis.
Ukraine has about 15.2 billion cubic meters of gas in storage, which amounts to about 47% of its storage capacity. Ukrainian Prime Minister Arseniy Yatsenyuk has estimated that Ukraine will need around 5 billion cubic meters in order to make it through the winter season. If it doesn’t make a deal with Russia for this 5bcm (which is likely an understatement), it will need Gazprom’s permission to use Russian transit gas in the east—earmarked for Europe--for domestic consumption. Some gas could come from Slovakia, where there has recently been a test launch for reverse flow to Ukraine, but this would account for possibly 3bcm per year. Another problem is that Ukraine cannot use the gas it has in storage in the far west to supply consumers in the east this winter—logistically speaking, it won’t work. In a cynical twist, however, Ukraine might not consume as much gas this year due to the conflict in the east, which has cut industrial production by up to 12%, meaning that gas consumption could be cut to around 47bcm, from 53 bcm, according to analyst Timothy Ash, who also notes that some modest energy conservation efforts could further reduce needs to 45bcm. Ash calculates the gas shortfall at around 10bcm, considering that there is around 15bcm in storage and the country is producing 22bcm, though a recent doubling of taxation on private gas producers could further reduce production. Around half of this shortfall could be covered by reverse flow from Europe, with the remaining 5bcm covered by Russia—though cutting a deal will be tough—and still the numbers are “pretty tight”.
Rival militia groups from Misrata and Zintan have been fighting for weeks in Libya, reaching into the capital Tripoli but largely confined to the south and south-western areas of the city and close to the airport. There are some indications that recent air strikes in Tripoli targeting Misrata militia may have been conducted by external forces, either Algerian or Egyptian, which could mean an even more significant escalation of the conflict. Risk to personnel and operations is also increasing near the border with Tunisia. Clashes are also continuing in Benghazi between forces loyal to former military general Khalifa Haftar and Islamist militants. Control of Benghazi remains up in the air, though Islamist forces are gaining ground. On the oil front, the largest port, As-Sider, is now operational, and the first tanker of oil has left the port—after a year of blockades. Output is said to have risen to around 560,00 bpd now, but that pales in comparison to the 1.6 million bpd capacity in Libya. This will continue to go back and forth as long as the conflict is ongoing.
Regulations, Transparency & Compliance
• Russia is working to finalize a new three-year oil tax plan that will be in favor of producers. The new plan would reportedly cost the state about $6.6 billion and is designed to attract new investment beginning next year. There are two draft proposals floating around right now, featuring different tax rate cuts. Right now, the government gets 45% of its revenue from oil taxes. Companies like state-run Rosneft could see an earnings boost by around $1 billion next year if the new tax plan is realized.
• The US Environmental Protection Agency (EPA) has extended the public comment period by 60 days for its proposed rule that would force petroleum refiners to implement additional controls on toxic air emissions from their refineries. The new deadline is 28 October 2014.
• The parliament of Mozambique has passed an amended petroleum law that requires investors to partner with the state oil firm. The law will also make it possible to open up a new licensing round for oil and gas exploration. The new law comes into effect at the end of the year. Bidding for new concessions will start sometime around then as well. The key players on this scene right now are US-based Anadarko Petroleum Corp and Italy’s Eni—both involved in high-profile LNG export projects for the prolific Rovuma basin.
• Exxon Mobil has scratched exploration plans with French Total Sa in South Sudan due to the violent conflict.
• Turkey’s state-run oil company, TPAO, is expanding its operations abroad, now expressing interest in oil exploration in Angola—the new darling of African oil that could rival Nigeria. TPAO would explore onshore in Angola, rather than offshore. The company estimates it will invest $2.4 billion in exploration in 2015, two-thirds of that outside of Turkey.
• US-based Cobalt International Energy Inc. been issued with a Wells Notice by the US Securities and Exchange Commission over its Angola oil operations, which may have breached federal securities laws.
• Norway’s DNO oil and gas company is planning to withdraw from Somaliland due to security threats after clan militia ambushed its exploration team in the town of Hudur earlier this week.
Deals, Mergers & Acquisitions
• Russian Rosneft has agreed to buy a large state in US-listed North Atlantic Drilling (NADL), with Arctic drilling capabilities. Rosneft will buy a 30% stake in North Atlantic Drilling in exchange for an undisclosed amount of cash and 150 of Rosneft’s onshore drilling rigs. North Atlantic is listed on the New York Stock Exchange, but based in Bermuda. NADL is majority owned by oil-services giant Seadrill Ltd (SDRL), also of Bermuda. Both NADL and SDRL are controlled by Norwegian billionaire John Fredriksen.
• Egypt and Israel are negotiating a gas deal that could possibly see the sale of $60 billion in Israeli gas to liquefied natural gas (LNG) plants in Egypt. The partners in Israel’s Tamar and Leviathan offshore gas fields—US Noble Energy Inc. and Israeli Delek Group Ltd—plan to deliver up to 6.25 trillion cubic feet of gas to LNG facilities in Egypt’s Damietta port and the coastal town of Idku. The deal could be sealed by the end of the year.
• Dynegy Inc is planning to buy 12,500 megawatts of coal and gas generation assets from Duke Energy Corp and Energy Capital Partners in two deals valued at $6.25 billion.
• The German government has approved the sale of utility RWE's oil and gas unit DEA to Letter One.
Markets, Discovery & Development
• Japanese company Idemitsu has announced a new gas find off the coast of southern Vietnam. The find was in the fourth well in blocks 05-1b and 05-1c and contains gas and condensate. Operator Idemitsu and JX Nippon Oil & Gas Exploration Corp both have 35% stakes in the blocks, while Inpex Corp has 30%.
• Iran says it will stop importing gas from Turkmenistan soon as the country plans to boost domestic gas production by some 200 million cubic meters by March 2015. This contradicts earlier statements coming out of Iran only in May this year that existing levels of imports of Turkmen gas would be maintained. It could be simply a negotiating tactic in respect to prices on the part of Iran, which had only in 2010 helped finish up a second pipeline to import Turkmen gas.