Global Energy Advisory – 31st July 2015

Politics, Geopolitics & Conflict

Kazakh Oil and the Long Road to the WTO

This week, as Kazakhstan-after 19 years of trying-has finally had its membership in the WTO formally approved, we will take a brief look at Kazakhstan's oil scene and what's out there for foreign investors.

First things first, Kazakhstan's WTO process was a painfully long one because of slow progress in enacting energy reforms, among other key reforms and tariff regimes. At the same time that the WTO has approved Kazakhstan's membership in the club, the Kazakh government has announced plans to build a fourth oil refinery in Mangistau and that the construction of this refinery would likely be done in cooperation with Iran. Talks to this end have already been launched with the Iranian Oil Ministry. Oil from Mangistau will be sent to northern Iranian ports, while Iranian oil from the south will feed Mangistau and beyond. The refinery project is estimated to cost around $6 billion and the two sides are hoping to sign a construction deal by the end of this year. Kazakhstan needs the refinery as its other three cannot meet the local demand for petroleum products and fall short by about 1.5 million tons (30% of the total market demand, which is largely now covered by imports from Russia).

Overall, however, this is what potential foreign investors should be looking at: Kazakhstan is the largest landlocked country in the world and it sits right between Russia and China, rendering it an incredibly strategic geopolitical venue for oil-in which it is rich. It is a gateway both to the Caspian Sea and to Europe, but it needs more infrastructure and regional trade. Right now, Kazakhstan is wary of both Russia and China, but perhaps more so of the latter and this will make it a vital part of the new great game that will unfold around Asia.

For big oil, it's all about the Kashagan Oil Field, and here we're closely watching Italian Eni's maneuvers. In late June, Eni took on a larger stake in the Isatay oil reserve area in the Caspian Sea. The Italian giant acquired 50% of the subsoil use rights in the field from its partner and the operator, KazMunayGas (state-owned). This block will be operated by a joint venture established by KMG and Eni on 50-50 basis. Eni is a partner in Kashagan, offshore in the Caspian Sea, which has an estimated 16 billion barrels of oil reserves.

Things haven't gone smoothly, however. In October 2013-only a month into the game--production was halted when a pipeline cracked. Problems at Kashagan persist, and this has hit hard at the country's expected oil output, but once these problems are resolved, Kazakhstan and its supergiant field and strategic positioning will be a major venue in the New Great Game. The country is also drafting new tax incentives for oil and gas producers, which is sure to attract additional foreign investment.

Syria and the Turkish Dilemma

Over the past week, Kurdish YPG forces (Syrian Kurds) have made significant process in the north and east of the country, retaking Tel Abyad and Ain Issa from the Islamic State-but these could very well be lost once again and fighting will continue to intensify. The response from Turkey and the US is apparently to provide air cover for Syrian rebels and to remove the IS from their position close to the Turkish border. There is also (still) talk of creating a 'buffer zone' along Turkey's southern border.

Turkey is attempting to prioritize its enemies here-an activity that has ended up placing the PKK at the top of the enemy list, followed by the Islamic State (IS). Quite possibly, the IS, which presents a clear and present danger, is gaining top priority on this list. Nonetheless, Turkey's game with the Turkish Kurds (PKK) will get in the way. Syrian and Iraqi Kurds are trying to fight back IS forces in the north and east of Syria, close to Turkey's border, and they haven't always had Turkey's support in this despite the threat the IS poses to Turkey. Turkey has been pitting two groups of Kurds against each other, the Iraqi Kurds against the PKK and their Syrian counterparts, the PYD/YPD. But the biggest problem here is that Turkey is indirectly (and possibly even directly) supporting the IS against the PKK and this will create a very real national security threat that will, in the end, reverse any perceived gains against the Turkish Kurds. To render this in less complicated terms, Erdogan's plan appears to be to allow the IS to operate unimpeded in the short-term; carry on a long-term war against Damascus; and deal with the Kurds in the immediate-medium term. This will not work.

Kobani is in the area of Rojava in northern Syria. This area brings together three largely Kurdish provinces. There is a bit of a revolutionary governance experiment going on in Rojava that transcends ethnicity and as far as we can tell, challenges every known system of governance. It's an experiment that no one else wants to see succeed, including Turkey, the US, Saudi Arabia and the Iraqi Kurdistan. And one of the key fighting groups here is comprised of women warriors (the YJA Star militia) who are taking on the IS, which only adds fuel to the Islamic jihad fire.

In the middle of the Syrian conflict, Rojava cut a deal with Assad, in which they largely agreed not to target the regime as long as it left them alone to follow through with their governance experiment. That system of governance includes decision-making by popular assemblies that are comprised of mixed ethnicities, including Kurds, Arabs, Assyrians and Armenian Christians. One of the top three municipal posts must also be held by a woman. This unique system has been referred to by some as "libertarian municipalism." This is not about a Greater Kurdistan, but that's how the Turkish government continues to perceive it.

Militarily, the bulk of the fighting is led by the PYD. This is the Syrian branch of the Turkish PKK. Washington has branded both the PYD and the PKK as terrorist organizations, but of late it has had a change of heart and is now assisting the PYD, much to Turkey's dismay. The PYD (with help from the PKK) have been instrumental in fighting back the IS. Right now, the IS has surrounded Kobani, and the PYD is trying to create a corridor to break through this.

Kobani is of no immediate strategic value to the IS. It has no oilfields; rather it is largely an agricultural region. Taking Kobani does not result in cutting off any of Assad's supply routes or access to strategic areas or facilities. Assad has not been in control of this area for some time. There is also no airport here. The only gain for the IS in taking Kobani is in terms of image, as it establishes a base at Turkey's border. This also makes up for some recent losses in Iraq and Syria with the US-led bombing campaign.

What Turkey wants is for the Syrian Kurds to take orders from the Free Syrian Army, which Turkey has long been nurturing. That "army" is now about to embark on a new session of training in Saudi Arabia. The first attempt at training these "rebels" resulted in funding, aiding and weaponizing what is now the IS, whose members had infiltrated the ranks of the Syria rebels to the point that they were rendered irrelevant to the fight against Damascus. It is virtually impossible to arms these rebels without the weapons falling into the hands of the IS or related groups, but this is a lesson that will not be learned. Not only does Turkey want the Syrian Kurds to bow to the Free Syrian Army, but it is also demanding that the Syrian Kurds give up any ideas of autonomy or self-governance. Turkey will not get its way here. They PYD will never agree to this, nor will Washington, which is now helping the PYD (suddenly no longer a terrorist group for all intents and purposes).

Turkey has very friendly relations with the Kurds in Northern Iraq, within the Kurdistan Regional Government (KRG). The Iraqi Kurds here view the PKK as enemies. Turkey is taking advantage of this by trying to use the Iraqi Kurds, and their peshmerga (a very formidable fighting force that is helping to keep the IS at bay in Northern Iraq), to subdue the PKK and PYD. What Erdogan is trying to do here is introduce a "friendly" Kurdish fighting force into the mix.

The PYD has already started talking about a power-sharing agreement with the KRG in Rojava. With the KRG's peshmerga gaining power in Rojava, this will undermine the PKK, as the two groups are rivals. The Iraqi Kurds (peshmerga) also have the advantage over their Syrian brethren because they can cross the Turkish-Syrian border freely, meaning that communication channels are open for the peshmerga, but not for the PYD or PKK. The overall game plan is to ensure that the peshmerga lead the fight against the IS, while the PYD and PKK are undermined in the process. This would also ensure that Rojava does not continue with its governance experiment, which the KRG is also keen to thwart. It is an extremely risky endeavor, especially if it weakens the Kurds' ability to fight back the IS.

In mid-October, Turkey said it would support the creation of eight buffer zones on the Syrian side of the 565-mile border, where some 400,000 refugees would be "contained". At the same time, this buffer zone would destroy the three autonomous provinces, really targeting Rojava, and give Turkey nominal control over them in the buffer zones. This will start a war with the PKK and will reset the dynamics between the PYD, PKK and KRG (the outcome of this remains difficult to predict).

If this area of Turkey becomes the border with a Turkish buffer zone inside Syria, as is now planned, we expect a full-fledged war on three co-mingling fronts: Turkey vs. the PKK, the PKK vs. the Islamists; and eventually Turkey vs. both, but first using the Islamists to help destroy the PKK. Creating this buffer zone essentially drags southeastern Turkey directly into the conflict.

Discovery & Development

• UK-listed Tullow Oil PLC reports that oil production at the giant Jubilee field offshore Ghana is constrained to 65,000 b/d due to technical issues with gas compression systems on the Kwame Nkrumah vessel. First half production averaged 105,000 b/d. That announcement sparked a fresh sell-off in Tullow, sending share prices down in London to their lowest levels since January 2006. Gas exports to the Ghana gas plant at Atuabo have been suspended since 3 July. Tullow expects it to take two-three more weeks to reinstate gas exports and full oil production. Tullow is the operator of the discovery with a 35.5% share.

• Italian Eni is planning to bring a natural gas discovery on the Nooros prospect in Egypt online for production within two months. The well, located in the Nooros exploration prospect of the Abu Madi West license, will be tied-in to the existing Abu Madi gas treatment plant, located 25 kilometers to the south-east. Egypt's preliminary estimates indicate 530 billion cubic feet of natural gas in place. Eni's subsidiary in Egypt, IEOC, owns a 75% stake in the West Abu Madi development lease, while BP owns the remaining stake. In January, Eni signed two new agreements in the deep waters of the Mediterranean Sea following an auction held by the Egyptian government two years ago. Also earlier this year, it signed a framework agreement to develop Egyptian oil and gas reserves that calls for as much as $5 billion in investments.

• French Total SA has launched production from its Dalia Phase 1A project in deepwater Block 17 offshore Angola. Here, Total will develop additional reserves of 51 million barrels and will contribute 30,000 bpd to the block's production. The Dalia Phase project involves drilling of seven infill wells. Total operates Block 17 with a 40% interest alongside Statoil 23.33%, Esso Exploration Angola Block 17 Ltd. 20%, and BP Exploration Angola Ltd. 16.67%. State-owned Sonangol is the concessionaire. Total also operates with a 30% interest the ultra-deep offshore Kaombo development located on Block 32.

• Colombia's Ecopetrol SA has announced a discovery at a depth of 3,720 meters at its Kronos-1 well in the ultra-deepwater of Colombia's south Caribbean area. This discovery proves the geological model proposed for an unexplored area with high hydrocarbon potential. Kronos-1 is located in block Fuerte Sur, 53 Kilometers (33 miles) offshore, where partners Anadarko, operator, and Ecopetrol, each hold 50% interest. The well encountered a net pay thickness between 40 to 70 meters (130 to 230 feet) of gas bearing sandstones. Ecopetrol and partner Anadarko's integrated technical teams are evaluating the Kronos discovery results.

Deals, Mergers & Acquisitions

• French oilfield services firm Technip has been awarded a project management consultancy services contract for the Trans Adriatic Pipeline (TAP) project, which will transport gas from the Shah Deniz field to the European market. Technip will cover the onshore portion of the pipeline from Greece to Albania and in Italy. The services will include the overall project and site management, procurement and subcontracting. Technip will cover the onshore portion of the pipeline from Greece to Albania and in Italy.

• Only weeks after the Tanzanian government passed a new petroleum bill, survey company CGG has won a contract from Tanzania Petroleum Development Corporation (TPDC)-now recognized as the national oil company--to acquire data over two onshore areas. CGG will shoot high-resolution gravity gradiometry and aeromagnetic data over the tracts along the south-eastern Tanzanian coastal basin and the eastern arm of the East Africa Rift, gathering data over 30,000 square kilometers. The data gathering should continue for around two months, beginning in mid-August. Tanzania has an estimated 55.1 trillion cubic feet of gas reserves, the second-largest in the region after Mozambique.