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Global Energy Advisory – 3rd July 2015

Politics, Geopolitics & Conflict

Egypt

We are concerned about the potential fallout and wider implications of the assassination of a high-ranking Egyptian official, Prosecutor General Hisham Barakat, who was killed when a car bomb was detonated next to his motorcade in Cairo's Heliopolis district on Monday. Barakat is the highest-ranking government official to be assassinated in the past two years. This is a major show of force by unknown militants, and the security response will be heavy-handed. Two days later, militants launched a major strike in the Sinai Peninsula to mark the anniversary of Egypt’s military coup. Investors should be aware that this is likely the real beginning of an onslaught against Egypt’s security forces and the backlash will be formidable, putting future oil and gas investments at risk.

Russia-Ukraine

Russia has announced that the price Ukraine pays for natural gas will be reduced by $40, to $247 per 1,000 cubic meters due to falling global energy prices. This is largely a meaningless deal in light of the ongoing conflict in Ukraine's Donbas region. There is still no end in sight to this conflict and Moscow’s impatience is becoming more visible by the day. The Kremlin wants Ukraine to legalize the Donetsk and Luhansk people’s republics and rewrite the constitution, but Ukraine has so far not bowed to Russia’s provocations, through proxy hostilities, to implement the political terms of an armistice put together in February. In the meantime, sanctions and the oil price slump are putting pressure on Russia’s energy sector, and we’ve been following new deals, for which there is a growing hunger, and losses recently. The main loss was French Total’s withdrawal from the Shtokman gas project in the Barents Sea, allegedly because of sanctions. As such, Gazprom has taken over Total’s 25% share, but the larger indication is that other Russian Arctic projects will by stymied as well. But there have been a lot of new deals, some of which we list here:

• Russia and Greece have agreed to create a 50/50 joint economic venture for the proposed Turkish Stream pipeline, which we have discussed in earlier briefings. This pipeline is planned to run from Russia’s Black Sea coast underwater to Turkey and across the Turkish-Greek border carrying 47 billion cubic meters of natural gas annually to Europe.

• Gazprom signed an MOU with Shell, Austrian OMV and German E.ON to potentially double the capacity of the Nord Stream gas pipeline and extend it beyond Germany into Austria. This could get tricky for Shell in terms of sanctions against Russia.

• Russian state-owned Rosneft signed a total of 57 agreements recently, including one for the sale of a 20% interest in the Taas-Yuryakh oil and gas field to BP and another for the sale of a 29% interest in the same field to the unknown Skyland Petroleum, which is apparently an Arab fund.

Regulations & Litigation

• Nigeria’s new president, Muhammadu Buhari, has dissolved the board of state-run Nigerian National Petroleum Corporation ostensibly to reform the oil sector. This was part of Buhari’s anti-corruption campaign pledge, for which he beat out Goodluck Jonathan in March elections. This is only the beginning, so investors should be watching closely for impending changes. Buhari and the ruling party (All Progressives Congress) are considering getting rid of a pending oil-industry bill and putting a new version on the table. A new oil bill would be based on talks with international oil companies. The current bill that will now be scrapped has been languishing in parliament for an amazing six years due to political infighting. The scrapped bill was opposed by international oil companies largely due to the unfavorable tax and royalty terms. We may also be looking at some serious corruption allegations and charges against state-run oil company executives as a full audit and investigation are likely to get under way. Last week, Nigeria's lower house of parliament voted to establish a committee to ascertain whether the government had been cheated by NNPC's scheme to exchange crude for refined products.

• Brazil’s state-run Petrobras has approved its 2015-2019 business plan, which will cut investments by 37%. Petrobras now expects capital spending over the 2015-19 period to be around $130.3 billion. The implications of this for Brazil’s economy are significant, but Petrobras is in a position in which it needs to lower its ratio of net debt to earnings before interest, taxation, depreciation and amortization threefold by 2018 from 4.77 times at the end of last year. In addition to the ongoing corruption scandal rocking the state-run company, Petrobras is also being hit hard by a government policy that forces it to import petrol at international prices and sell it in the domestic market at a subsidized rate. Between 2011 and 2014, this policy cost Petrobras $40 billion—a cost it can ill afford in its present state.

• A federal judge in Argentina has ordered the seizure of assets of five companies drilling for oil in the Falkland Islands, worth in total $156 million. The companies include Premier Oil Plc, Rockhopper Exploration Plc, Falkland Oil and Gas Ltd, Noble Energy Inc and Edison International Spa. Three of the companies are British-based, one is American, based in Texas, and one is French-owned, based in Italy. This is a tit-for-tat game that really means nothing for the companies in question and is a paper threat meant to demonstrate that Argentina is serious about thwarting Falkland Island oil exploration and extraction in an ongoing territorial dispute. The intensification of this battle comes as Premier Oil announced in May a new significant discovery at the Isobel Deep well, which we have covered in previous briefings.

• In a major development for Texas-based oil and gas darling Noble Energy, the Israeli Cabinet has voted to override the Antitrust Authority and transfer control of natural gas development to the government, listing it as a matter of national security. Cabinet voted to allow the government to override the Antitrust Authority, which objects to the current draft agreement between the Israeli government and the gas companies that made major discoveries in Israel’s Levant Basin at the Leviathan and Tamar gas fields. In these discoveries, Noble Energy is partnered with Israeli-owned Delek Group. The security cabinet move allows the government to consider a compromise agreement under which Delek and Avner Oil Exploration, a subsidiary, would sell their interests in the producing Tamar gas field within 6 years as well as their holdings in smaller, non-producing Karish and Tanin fields. Noble Energy would reduce its interests in area fields but remain the operator. The compromise deal awaits approval by the full cabinet. The development of these Levant Basin gas fields has been halted since December, when Israel’s Antitrust Agency said it would review whether the market dominance of Delek Group and Noble Energy constitutes an illegal “restrictive agreement.” Gas has been pumping from the smaller Tamar field to Israel since March 2013, but the bigger Leviathan field has not been developed due to the disagreements.

Discovery & Development

• Russian Gazprom says a fourth well has been brought to production at the Badra field in eastern Iraq, bringing total field output to 28,000 b/d. By the end of the year, there should be 7 drilling rigs at the field. Badra is in the Wasit Province of eastern Iraq. Preliminary estimates indicate total oil in place at the Badra field to be in the order of three billion barrels. The contract for development of the field is expected to run for 20 years, with potential for extension by a further five. Commercial production started in 2014. Gazprom Neft is the operator with a 30% interest, while partners include Iraqi Oil Exploration Co. (25%), Korea Gas Corp. (22.5%), Petronas (15%), and Turkey’s state-run TPAO (7.5%).

• Canadian Husky Energy has launched oil production from the South White Rose extension project in the Jeanne d’Arc basin offshore Newfoundland and Labrador. The company has a 68.9% interest in South White Rose. Net peak production from the subsea satellite tieback is expected to reach 15,000 b/d following startup of a second well in late summer. Work at South White Rose began two years ago and was expected to cost more than $1 billion.

Deals, Mergers & Acquisitions

• UK Oil & Gas has struck a deal with Egdon Resources to acquire a 20% stake in the Holmwood project in the Weald basin in the southeast of England. This is in the exploration license adjacent to the UKOG’s Horse Hill project and it is also in the same neighborhood as company’s Brockham field. To acquire the stake in the neighboring acreage UKOG proposes to pay for 40% of the cost of drilling a well at Holmwood (around $1.9 million). The Holmwood prospect is estimated to contain prospective resources of 5.6 million barrels.

• The Ugandan government has shortlisted 17 oil companies to bid for six exploration blocks in which commercial quantities of oil have been found. Crude production is expected to be launched in 2018. In February, authorities announced the first competitive bidding round for exploration blocks, with six of them covering 3,000 square kilometers. Shortlisted companies are from 11 countries including the United States, Russia, China and Africa's largest oil producer, Nigeria. London-listed Tullow Oil, which is already operating in Uganda alongside France's Total and China's CNOOC, was also on the list. This is Uganda’s prolific Albertine Rift basin, which was discovered nearly a decade ago. Less than 10 percent of the basin has been licensed. (You can read more about this in a series of special reports coming up soon on Oilprice.com).

• Shell has made a final investment decision to advance the Appomattox deepwater development in the Gulf of Mexico. The development will initially produce from the Appomattox and Vicksburg fields, with average peak production estimated to reach about 175,000 boepd. Two fields will be owned by Shell and Nexen Petroleum, a subsidiary of China’s CNOOC. Cost estimates are still not forthcoming. The development is about 120 kilometers off Louisiana’s coast. Startup is expected sometime around 2020.

• Oilfield services companies Trinidad Drilling and CanElson Drilling have agreed to merge in a deal worth $505 million. Trinidad will acquire all CanElson shares for either $4.90 cash or 1.06 Trinidad shares per CanElson share, representing a 23.5% premium to CanElson's 20-day average trading price. The combined company will operate one of the newest and largest fleets of oil and gas drilling rigs in North America with a combined total of 163 gross land drilling rigs, including eight international rigs under Trinidad’s joint venture.

• European Union regulators have approved the $7.6 billion acquisition by Siemens of one of the largest suppliers of rotating equipment solutions to the oil and gas industry, Dresser-Rand. The deal, expected to close on 30 June, was approved after a four-month investigation that concluded that the transaction would not harm competition in the bloc. Siemens will form a new Dresser-Rand unit within Siemens Power and Gas Division with a primary focus on the O&G industry. Siemens will also take on $1.2 billion in Dresser Rand’s debt.




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