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Global Energy Advisory – 2nd April 2015

Kurdistan Oil Update

• Gazprom Neft Middle East is preparing to conduct a 2D seismic survey on the southeastern section of the Halabja block. The seismic equipment is en route from another section of the block, where seismic has already been conducted. The first exploration well here will be drilled within a year, with vague references to 2015/2016. This is one of four Gazprom Neft projects in Iraq; and one of three in the Kurdistan Region of Iraq.

• Gulf Keystone Petroleum Ltd, which operates the Shaikan field in Kurdistan, has resumed production and truck loading operations at its two production facilities here. The back story here is that production had been halted due to the failure of the Kurdistan Regional Government (KRG) to pay arrears for crude oil sales. According to Gulf Keystone, the KRG has received a $26 million pre-payment (of which $20.8 million is net to Gulf Keystone) for future Shaikan crude oil sales. Production capacity here is 40,000 bpd and with the pre-payment on future crude oil sales, Gulf Keystone will ramp up production to full capacity. Gulf Keystone has 9 producing wells in Shaikan and two newer production wells should add to existing capacity. The bottom line is that the KRG is footing a rather significant security bill to keep the Islamic State (IS) away from Kirkuk and other Northern Iraq locations where Baghdad has fallen short.

• At the same time, we note that Gulf Keystone is a rather controversial company and that there is pressure building for the removal of its chairman, Simon Murray, who took over less than two years ago. This will be the trade-off for backing for a share placing to raise £30 million in funding. According to British Sky News, several major London institutions have told Gulf Keystone that they want Murray replaced. Prospective buyers are currently considering the acquisition of all of Keystone or some of its assets. Shares in Gulf Keystone have slumped by more than 63% during the last year, valuing it at just £330m, while it continues to carry debts of nearly £400 million.

• Reports emerged on Monday that operations at the Kirkuk-Ceyhan pipeline had been halted again, ostensibly for ‘technical reasons’. Operations were also temporarily halted on 9 March (for five days)—again for ‘technical reasons’. Oil production at Kirkuk is said to have reached 400,000 bpd in early March; however, we note that stability is uncertain given the situation with the Islamic State.

• The KRG has received a second payment from the federal budget of Iraq for this year. Last week, the KRG said it had received $408.3 million. The previous payment was on 26 February for $208.3 million. So far so good for the oil-revenue-sharing deal between Erbil and Baghdad, but we don’t expect Baghdad to linger on this because they need the Kurdish peshmerga to fight back the IS.

• Potential opportunity: US-based Hess Corp and Ireland's Petroceltic International Plc are pulling out of the Kurdistan’s Dinarta license due to the fall in oil prices and disappointing well results. Hess holds 64% of the license, while Irish Petroceltic owns 16%. They’ve been in Kurdistan since 2011.

Deals, Mergers & Acquisitions

• Carlyle private equity firm will buy Canadian-listed Sterling Resources’ gas fields in Romania for $42.5 million. Carlyle International Energy Partners (CIEP) is snapping up non-US energy assets and planning to spend around $2.5 billion in total, with around 12 investments outside the US. In Romania, CIEP will pick up Sterling’s four license blocks offshore in the Black Sea.

• Investors bidding on Greece’s deep-sea oil and gas exploration blocks in the Ionian Sea and off southern Crete have been given more time to submit their bids. At play are 20 blocks, and the Greek Energy Ministry says that major Russian firms will be taking part in the bidding, which has been extended for two months.

• The government of New Zealand is preparing to auction off more oil and gas exploration permits in different basins. There will be three reserve areas on offer with a combined acreage of 165,752 square miles, most of it offshore. The government said there are 149 million barrels of oil reserves remaining in fields, which are already in production.

• Shell Oil Co. has won a major victory in the Arctic with the Obama administration reaffirming a 2008 government auction of Arctic drilling rights over objections from environmentalists. Shell is hoping to resume exploratory drilling in the Chukchi Sea this summer, in its Burger Prospect, which is about 70 miles from the Alaskan shoreline.

• In Nigeria, Shell has completed the $1.7 billion sale of its eastern Niger River Delta oil lease to state-run Aiteo Eastern. Shell sold its interests in OML29, which includes the Santa Barbara, Nembe and Okoroba fields along with the Nembe Creek Trunk Line pipeline. The pipeline was commissioned in 2010 and transports crude to the Bonny Crude Oil Terminal (BCOT)—which was the subject of a major corruption scandal. The terminal is not part of the transaction and will remain owned & operated by the Shell JV. The divested infrastructure includes flow stations together with associated gas infrastructure in addition to oil and gas pipelines within the OML. The divested fields produced on average around 43,000 boepd last year. The sale has been approved by Nigeria’s federal government, which owns the remaining interest through the Nigerian National Petroleum Corporation (NNPC). Aiteo Eastern has also purchased a stake in a Nigerian oil field from France’s Total for $569 million. Total has so far divested $1 billion in Nigeria since 2010.

• Chevron is reportedly trying to sell its 50% stake in Australia’s largest refiner, Caltex, for around $3.6 billion—a major sale in Australia if it goes through. Chevron is offering the shares at a 10%. The company is aiming overall to divest $15 billion to make up for low oil prices. Caltex shares have risen 10.7% this year, outpacing a 9.4% rise in the benchmark Australian share index.

• In a first for Mexico post-energy reform, state-run Pemex is getting its first major investment, with US-based BlackRock and First Reserve pumping in $900 million for a 45% stake in a pipeline project to transport US natural gas to central Mexico. Completion of the pipeline—with construction already launched—is scheduled for end-2016.

• Italian Eni will start exploration in Myanmar (Burma) soon, having signed two production-sharing contracts for exploration offshore Myanmar (formerly Burma), which it was awarded last year. The two contracts cover offshore blocks MD-02 and MD-04. Eni will be the operator of both blocks, with an 80% interest, in a joint venture with Petrovietnam Exploration Production Corporation (20%). Block MD-2 is in the southern part of the Bay of Bengal, in the Rakhine Basin, about 135km from the coast, covering 10,330sq km in waters 500-2400 meters deep. Block MD-4 is in the Moattama-South Andaman Basin, about 230km from the coast, covering 5,900 sq km in water 1500-2200 meters deep.

Discovery & Development

• Japans JX Nippon Oil and Energy Corp., Inpex Corp., Malaysian state-owned Petronas and Australia’s Santos Ltd. have found oil in their deepwater Bestari-1 exploration well in east Malaysia, and are now drilling further to evaluate the discovery. JX Nippon is the operator, and Santos only acquired its stakes in January. The well hit 67 meters of high-quality oil in depths ranging from 1,860 meters to 2,702 meters below the sea. Recoverable volumes are not yet known. This well is in deepwater Block R, near the Kikeh oil field discovery, where production was launched in 2007.

• Norway’s Statoil has announced a new natural gas discovery offshore Tanzania at its Mdalasini-1 exploration well. Statoil says it has discovered an additional 1-1.8 trillion cubic feet of natural gas in place in the well, bringing total in-place volume up to 22 trillion cubic feet in Block 2. The Mdalasini-1 discovery is located at a 2,296-metre water depth. Statoil oil has 100% interest in the Mdalasini-1 well, while it operates the license on Block 2 with a 65% interest on behalf of the Tanzania Petroleum Development Corporation (TPDC). ExxonMobil Exploration and Production Tanzania Limited holds the remaining 35%. TPDC has the right to a 10% working interest in case of a development phase.

• Production has officially been launched by ExxonMobil in the deepwater Gulf of Mexico at Hadrian South. This is a subsea production system with flowlines connected to the Anadarko-operated Lucius truss spar, which started production in January. Here we are looking at expected production of around 300 MMcf/d of gas and 3 Mbbl/d of liquids daily, from two wells. ExxonMobil holds a 46.7% interest in Hadrian South and a 23.3% interest in Lucius.

Litigation & Regulations

• Schlumberger Oilfield Holdings (a Schlumberger subsidiary) will enter a guilty plea and pay $233 million for violating US sanctions in Iran and Sudan. The company will also forfeit $77.6 million in illegally obtained profits. To date, this is the largest criminal fine ever imposed on a US company for sanctions violations. Schlumberger manufactured oil drilling equipment for clients based in Sudan and Iran and provided maintenance services for that equipment between 2004 and 2010 and tried to hide the fact from authorities, understanding that this was in clear violation of sanctions.

• Brazil’s scandalized Petrobras may lose its mandatory 30% ownership and operatorship of all of the country’s pre-salt developments as the Senate works out a new bill. The existing law also mandates that Petrobras is responsible for all direct or indirect execution and management of exploration, production, appraisal and development activities, which may also be amended with a new bill.

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