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Global Energy Advisory 29th July 2016

Politics, Geopolitics & Conflict

• Libya is still struggling with the recovery of its oil industry amid a fresh spike in tensions between the national Oil Corporation, the UN-backed government and the country’s Petroleum Facilities Guard. Members of the guard have been blocking ports across the country, demanding pay they say the NOC owes them. A recent deal struck by the Government of National Accord, with the help of UN envoy Martin Kobler, and the PFG to release their hold of ports was slammed by the head of the Tripoli division of the NOC, who said any deal concerning Libya’s oil should go through the company and not the Guard. Things escalated further when an army general threatened foreign oil companies with direct fire to their vessels, should they try to ship any Libyan oil without the agreement of the Benghazi branch of the NOC. The situation in Libya is getting increasingly confusing, despite a recent ray of light when the two branches of the NOC seemed to be in agreement they should unite for the greater good. The prospects remain unclear at this point and in all likelihood oil output will remain subdued. At the end of the day, however, paying off militias for all intents and purposes, and rewarding them for hijacking the country’s oil will backfire.

• The Syrian army recaptured control of a major oil pipeline in western Syria from the control of ISIS. The victory has disabled an important financing channel from the terrorist group. Oil and refining assets have been a priority target for the Syrian forces as efforts are ongoing to hit at the group’s funding for recruitment and arms. The movement of the Syrian army and its allies has intensified recently, but we are nowhere near the end of this conflict, which will metamorphose geopolitically.

Deals, Mergers & Acquisitions

• Genel Energy has received $24.91 million from the Kurdistan Regional Government in Iraq as payment for crude oil marketed in June. The crude was pumped at the Taq Taq field, which produces an average 62,979 bpd.

• Sinochem and Unicore are among the bidders for German company Atotech, a surface finishing and metal plating manufacturer currently owned by French oil giant Total. The value of the deal, which has also attracted interest from buyout firms including CVC, Cinven, BC Partners, and Advent, could reach or even exceed $3.3 billion.

• M&A activity is seen to gather pace in the last quarter of the year, according to Ernst & Young. The consultancy believes that the stabilization of oil prices and subsiding worries about unprofitable deals will drive this acceleration. Already M&A is picking in the industry, after 2015 marking the lowest level of activity in this respect since 2004.

• Regional authorities in Vietnam’s Binh Dinh province have decided to cancel a $22-billion refinery construction project that was proposed by the country’s energy leader PPT and Saudi Aramco. Local government officials cited environmental concerns and doubts about the economic viability of the project as reasons behind their decision.

Tenders, Auctions & Contracts

• Netherlands-based Yuzgas, set up by investment fund Emerson Energy, has won a major shale gas exploration contract in the Ukraine after the withdrawal of Shell from the country. Yuzgas will develop the Yuzivska field, which is estimated to have the capacity to produce between 8 and 10 billion cubic meter of natural gas annually. Kiev is hoping the deal will help it reduce its energy dependence on estranged neighbor Russia.

• The UK Oil and Gas Authority has tendered 1,200 offshore blocks in its 29th Offshore Licensing Round. The round is part of a GBP20-million program aimed at the development of new offshore areas in the country’s continental shelf. The deadline for applications is October 26.

• Pakistan is planning to tender 20 oil and gas fields by the end of the year. A government official said the final decision is pending the approval of the Ministry of Defense. The last auction of hydrocarbon deposits in the country took place two years ago, when 50 blocks were sold, most of them to local companies.

• BP has awarded two offshore engineering and construction contracts to Italian Saipem about the expansion its the Tangguh LNG project in Indonesia. The first contract is for the construction of and installation of two unmanned platforms and a number of underwater pipelines. The second involves the building of an onshore LNG train, which will have a processing capacity of 3.8 million tons of LNG annually.

Discovery & Development

• Exxon is drilling a new exploration well of the coast of Guyana, after the recent success of the Liza discovery. The new well is being drilled 25 miles northwest of the Liza, which has total depth of 17,963 feet, with over 190 feet of oil-bearing sandstone formation. Exxon is partnering with Hess on the Guiana offshore development project.

• A Peruvian oil pipeline that produced two considerable spills earlier this year will likely remain shut down for another six months. The 687-mile long pipeline transported 12,000 barrels of crude daily from fields in the Amazon to the Pacific coast until February, when it was shuttered following the second spill. As a result, production at two fields in Peru has been suspended as well.

• Iraq is in talks with Petrochina and Exxon for the development of two oil fields – Artawi and Nahran Omar – with an estimated combined output of half a million barrels daily. Right now, the two fields are producing just 70,000 bpd. Iraq is seeking to maintain its oil production at the current 4.8 million bpd level through 2016. If the talks come to a successful end, the full-scale development of the two fields should start within six months, a government official told local media.

• Hungary’s MOL Group has launched test production in two gas fields in Croatia—the Zebanec and Vuckovec fields. Production at a third field—Vukanovec—is expected to start in early 2017. In the first two fields, five production wells have been drilled along with 100 kilometers of new pipeline. This is all part of the Medimurje project.

Company News

• Shell reported $200 million in current cost of supplies (CCS) income attributable to shareholders for the second quarter of the year, down from $3.4 billion for the second quarter of 2015.

• BP booked net loss attributable to shareholders of $1.42 billion in Q2 2016, down from $5.82 billion for the same period last year. On an adjusted basis, earnings were positive at $720 million, down from $1.3 billion in Q2 2015.

• Statoil reported an adjusted net loss of $28 million for the second quarter, down from a profit of $929 million in the respective period of 2015.

• Anadarko Petroleum announced a net loss attributable to shareholders of $692 million for Q2, down from a profit of $61 million booked for Q2 2015.

• Tullow Oil surprised analysts by delivering a $30-million profit for the first half of 2016, versus expectations for a negative $196 million. Pre-tax profit was $24 million, from a loss of $10 million a year ago.

• Schlumberger swung to a loss of $2.16 billion in the second quarter, from a profit of $1.12 million a year ago, on the back of impairment and layoff charges totaling $2.57 billion.

• Hess Corporation booked a net loss of $392 million for Q2, an improvement on the negative $567 million posted a year earlier.

• Spain’s Repsol reported a 30% drop in quarterly profits for April-June 2016, to 205 million euro, on the back of restructuring costs. The company said it had allocated 346 million euro for restructuring purposes over the first half of the year.

• Baker Hughes slipped further into the red with a loss of $911 million for the second quarter of the year, disappointing analysts, on the back of lower drilling activity and lower prices for its services.

• ConocoPhillips’ Q2 performance was also disappointing: the company posted a loss of $1.07 billion, a considerable increase on the negative $179 million reported for the second quarter of 2015.

• Total countere4d the overall trend, with its Q2 financial statement beating analyst estimates: the French major reported a 30% decline in profits, to $2.17 billion, down from $3.09 in Q2 2015. The positive performance was made possible but cost cuts and an increase in production.

Regulations & Litigation

• Hess Corporation is suing Schlumberger for a faulty valve that, according to the plaintiff, led to the shuttering of three wells in a field in the Gulf of Mexico, hurting production. Hess is seeking $40 million in compensation. Two of three wells at the field were closed for maintenance in the second quarter of the year, but the defective valve caused the shuttering of another one as well, cutting production at the field from 25,000 to 10,000 barrels of oil equivalent per day.

• Ecuador has paid a compensation of $112 million to Chevron to settle a decades-long dispute. The dispute stems from a 1973 deal between Texaco (which Chevron bought in 2001) and the Ecuadorian government, which saw the company developing fields there in exchange for selling crude to the government at below-market rates. The first court decision in favor of Chevron was issued five years ago in the Hague and it saddled Ecuador with a bill of $96 million. The South American country has been appealing the decision repeatedly, to no avail. In a separate case, Chevron is being sued by a group of Ecuadorian villagers seeking $9 billion in compensation for environmental damages.

• Italian prosecution has indicted energy giant Eni, its former CEO Paolo Scaroni and Eni’s oilfield services arm Saipem on bribery charges regarding contracts Saipem secured in Algeria. The prosecutors have alleged that Saipem paid some 198 million euro in 2010 to make sure it got contracts worth 8 billion euro in the North African country. The trial is set for early December.

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