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Global Energy Advisory 29th January 2016

Politics, Geopolitics & Conflict

• Despite the oil price slide, Iraqi Kurdistan remains one of the cheapest places in the world to produce crude oil. This venue is wracked with problems that range from the ISIS threat and budgetary problems to an ongoing rift with Baghdad over Iraqi federal budget money and the Kurds’ unilateral export of oil. But there is still a silver lining if the Kurds can keep things together under intense domestic and regional pressures. Genel Energy says it’s producing at $1 a barrel, so the company—one of the most important on the scene here—can withstand late payments from the Kurdistan Regional Government (KRG) for exports, as well as low oil prices. Genel’s shares may have fallen more than 80 percent over the past year, but it has staying power and remains attractive—perhaps even more so now.

• A suicide bombing at a Shia mosque in eastern Saudi Arabia on the 29th of January has killed at least two people and wounded at least seven others. Saudi security forces reportedly stopped the attackers before they managed to enter the mosque, leading them to blow themselves up near the entrance. The bombing took place near the border with Yemen. This is where the Saudis are risking their border security. They’ve got boots on the ground in northern Yemen, which is a Shi’ite Houthi stronghold. We expect this front in the proxy war with Iran to lead to more attacks across the border in Saudi Arabia, where the Saudi Shi’ite population is growing increasingly restive. A similar attack took place in October at a mosque in the city of Najran. One person was killed and 16 injured in that attack. This was preceded by another attack in August on a police station in which 15 were killed.

• South Sudan is in serious trouble. In the face of low oil prices, it’s losing tons of money because of the fixed fee it has to pay Sudan for the use of export pipelines. Sudan is getting $25 per barrel on transit fees, but South Sudan’s low quality crude is currently earning about $20 per barrel. The standoff continues.

• China’s largest oil company—PetroChina—warns that its net profit for 2015 could be 70 percent lower than 2014 due to the slide in oil prices. This compares to Shell’s expected results at 40 percent lower net profit.

• Vietnam has warned China to withdraw its drilling rig from the disputed sector of the South China Sea, though China insists the rig is not in disputed waters. As it did in 2014, this row could lead to violent anti-Chinese riots in Vietnam. This very same rig was at the root of a bloody dispute in 2014 that law five people killed in Vietnam and hundreds of mostly Chinese-owned factories looted and burned.

• The big story of the week is Libya—but for now the story is that there isn’t much of a story. ISIS is making clear gains in Libya as it takes advantage of the civil war chaos and eyes Libya’s strategic export terminals. The U.S. is believed to be considering military options, but can’t seem to get a handle on it. Advancing a clear military option to fight ISIS in Libya would also mean conceding that the conflict that overthrew Ghaddafi was a failure. Either way, Washington looks weak.

• The UK government is implementing a £250 million (over US$357 million) emergency oil and gas fund for the British oil industry, billing it as a ‘bridge to the future for all those involved in the North Sea.’

Regulations & Ratings

• North Dakota regulators have approved a proposal to build the largest capacity pipeline for Bakken crude oil. The proposed pipeline would be a mammoth 1,130-miles long and be able to transport some 600,000 barrels of crude oil from the Bakken oil fields through 50 counties across four states—the Dakotas, Illinois and Iowa. The state of Iowa still has to approve the permits. The project is estimated to cost roughly $3.8 billion, with the North Dakota leg alone costing $1.4 billion.

• The U.S. administration proposed a new rule aimed at reducing emissions of methane from oil and gas drilling on federal land. We would be looking a new mandate for companies to use equipment to capture leaked gas. This means an increase in extraction costs on public property. This was prompted by a decision last week by the Interior Department to delay new leases for coal mining on federal lands, and to reform the government’s program for leasing public lands to coal firms. The agency will hold public meetings on the draft rule in next two months. It should be finalized by the end of the year.

• Kure Beach, North Carolina, has passed a resolution opposing offshore drilling and seismic airgun blasting off the East Coast, as the Obama administration moves to introduce industrial offshore drilling for the first time in the Atlantic Ocean. The oil hunt plans stretch from the states of Delaware to Florida.


• Moody is considering downgrading 175 oil and gas companies and their debts, citing substantial risk of a slow recovery in oil prices. If they issue this officially, it could mean multiple-notch downgrades for some companies. Keep watch for this at the end of the quarter. Shell, Total and BP are among the majors included on the review list. ExxonMobil and Chevron are not on the list.

• S&P has downgraded Chesapeake’s corporate credit rating from B to CCC+. More specifically, senior unsecured debt rating dropped to CCC- from CCC+; first and second lien debt both dropped to B from BB-.

Deals, Mergers & Acquisitions

• Mercuria Energy Group, a major privately held oil trader, has completed its long search for a strategic investor, selling a 12% stake to China National Chemical Corp (ChemChina) for an undisclosed sum. This deal comes after Mercuria integrated the trading desk of JPMorgan to strengthen its position in the United States.

• Total has acquired a 70% interest in the leading fuel retailer of the Dominican Republic from Putney Capital Management. The deal includes 130 service stations, which will be managed by a joint venture called Total Dominicana. This will be folded into Total’s network of 600 service stations in nine Caribbean countries. Terms of the deal weren’t disclosed.

• Texas-based Carrier Energy Partners has acquired some U.S. Sugarloaf shale assets in the Eagle Ford area from Sydney-based AWE for $190 million in cash. The deal leaves AWE in a net cash position of $40 million after repayment of all debts. AWE acquired its 10 percent interest in Sugarloaf in 2010 and worked with operator Marathon Oil Corp. to develop the shale asset. Why the divestment? Sugarloaf’s fields and development are maturing. The deal should close in March.

Discovery & Development

• Russia’s LukOil says it is seeking to expand operations in Nigeria. LukOil already has joint operations with Chevron in Nigeria, as of 2015. This comes as LukOil warns Russia’s oil production could decline by 2-3 percent at a minimum, but potentially more if the Kremlin goes through with a tax raise.

• China's largest offshore oil company, CNOOC, has launched production at its Kenli 10-4 oil field in the south of Bohai Bay in northeast china. There are currently six wells producing approximately 6,540 bopd. Peak production should be reach at 9,600 bopd in 2016. CNOOC holds 100 percent interest in the field.

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