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Global Energy Advisory 4th December 2015

Politics, Geopolitics & Conflict

Russia has hit Turkey with a bit of economic warfare in the form of embargoed goods, targeting most damagingly Turkey’s textile and tourism industries. Notably, there is no mention of cutting of Russian gas for Turkey.

This would be a move Russia could ill afford right now. Moscow needs Turkey both as a gas customer and as a very significant gas-transit point. But the bigger picture here can only be arrived at by historical comparisons. And when we do this, a frightening bigger picture emerges. For Turkey, ISIS offers an ill-perceived pathway back to the glories of the Ottoman Empire, which controlled a Sunni Arab empire—and, incidentally, used Palestine as a wasteland that was one of the first breeders of the ‘Palestine problems’ today, later fomented further by the British, the French and powerful Arab kingdoms who definitively did not have the interests of the Palestinians in mind; rather used and abused them to the point of no return.

Turkey’s leader, Recep Tayyip Erdogan, likely sees an opportunity here—in line with an egomaniacal profile—to restore the Ottoman Empire after a fashion. Turkey has long harbored these greater ambitions, which would give them more clout against the Kurds and even against the oil-powerful Saudis. Many right now are ignoring the threat of ISIS because they foresee this as the only existing front against Shi’ites—which means against a resurgence of Iranian power.

In this, Turkey will find a reluctant friend in Israel, and in Western countries who can’t properly weigh these threats or agree on the balance. Propping up ISIS terrorism is, then, a dangerous bulwark against Shi’ite Iran. In this case, the bulwark is potentially worse than what it’s holding back. Russia and Turkey have never been friends—but they have had a marriage of oil and gas convenience that will not be easy to forego. Here is an important point to keep in mind: Iran has always been able to control its Shi’ite terrorists; no one can control the Sunni version. They are used and then discarded and allowed to branch out on their own, particularly since the U.S.-led invasion of Iraq. They cannot be contained as such.

Deals, Mergers & Acquisitions

• PetroChina will sell its 50% stake in a Trans-Asia Gas Pipeline for up to $2.4 billion to a unit of state-owned China Reform Holdings Corp. PetroChina and its parent company, China National Petroleum Corp., are divesting in order to meet year-end government-set annual profit goals. PetroChina’s profit dropped 81% in the first three quarters of 2015. PetroChina, Sinopec and Cnooc are under political pressure to reform and increase profitability amid a slowing Chinese economy.

• Israel’s Delek Group and a group of private Egyptian businesses under the umbrella of Dolphinus Holdings have signed a letter of intent to supply natural gas to Egypt from the yet to be developed Leviathan gas field in Israel’s part of the Levant Basin. Delek Drilling, a subsidiary of Delek Group, said that the contract is for a maximum 4 billion cubic meters annually for a period of 10-15 years. Leviathan will start pumping the natural gas to Egypt beginning in 2019 or 2020, according to the agreement. The gas will be transmitted to a facility in Ashkelon, in Israel, and from there will be transmitted to Egypt through the EMG underwater pipeline to El Arish, in north Sinai. From there the pipeline runs over ground west to Egypt. Leviathan, which holds an estimated 622 bcm of gas, is being developed by Texas-based Noble Energy and Delek Group.

• BG Group is acquiring a 35% interest in the Aphrodite block offshore Cyprus from Noble Energy for $165 million cash. The block was discovered in 2011, with gross mean natural resources of 4 trillion cubic feet. The block is right across from Israel’s Leviathan gas field, which was discovered in 2010 by Noble. Noble will remain operator of the Aphrodite block with a 35% working interest, while Delek Group—it’s partner in Leviathan--holds the other 30%.

• The parent company of Ireland’s Whitegate oil refinery—Phillips 66--has put the facility (the only one in Ireland) back up for sale after reported 2014 losses of more than $280 million. The facility is a 71,000-barrel-per-day refinery and has an associated wholesale marketing business. A year ago, the company took the refinery off the market when it was unsuccessful in finding a buyer. The company is contracted to operate the refinery until July 2016.

• Scotland’s Wood Group has won an approximately $90-million contract to deliver services to a leading Iraqi blue-chip international oil company whose identity remains shrouded. Effective immediately, Wood Group will provide project management for an onshore facility under a three-year contract. Last month, Wood Group also won a multi-million dollar subsea contract with BP to provide engineering services in the Gulf of Mexico, UK and Norwegian continental shelves and offshore Azerbaijan. A good run for Wood Group.

• Iran has offered 52 new oil and gas development projects to foreign investors with local partners. The projects, estimated to be worth more than $30 billion, include 29 new and currently producing oilfields and 23 gas developments, with onshore fields accounting for 34 of the projects. Shell, French Total and Russian Lukoil have all specified fields they would be interested in developing in Iran, according to the Iranian authorities.

Discovery & Development

• Lundin Petroleum has launched Norwegian North Sea oil production from the Edvard Grieg field in PL338 on the Utsira High. Lundin made the discovery in 2007, in its Norwegian exploration well debut. The play is estimated to contain gross 2P reserves of 187 million boe. Drilling of the development wells is expected to continue into 2018. Edvard Grieg has been designed as a field center, and will receive oil and gas from neighboring Ivar Aasen field for further processing. Lundin Petroleum is the operator of PL338 with a 50% working interest. Partners are OMV Norge AS (20%), Norway’s Statoil ASA (15%), and Wintershall Norge AS (15%).

Business Climate/Ratings

• Mexico's state-run Pemex has lost its highest credit rating ever after Moody's Investor Service downgraded it one level to Baa1. This is one level below Mexico's A3 sovereign rating, and two above the minimum investment grade. Declining oil and gas production, low oil prices, high taxes and a deteriorating credit profile were cited by the agency as justification for the downgrade. More specifically, the agency noted that over the last three years, Pemex has increased debt to fund large outflows for taxes, duties and capital spending, without achieving sustained increases in production or operating efficiencies. "Even when oil prices were at peak levels in 2014, cash flow from operating activities of US$9.1bn fell well short of covering US$15.1bn in capital spending outlays," Moody said.

• The oil and gas industry is celebrating the victory in Argentine presidential elections of conservative, pro-business/pro-oil candidate Mauricio Macri, beat out President Cristina Fernandez de Kirchner’s chosen successor, Buenos Aires province governor Daniel Scioli, in 22 November run-off polls. Argentina is home to the second-largest reserves of shale gas and the fourth-largest reserves of shale oil in the world. To wit: 27 billion barrels of recoverable oil and 802 trillion cubic feet of natural gas. At the same time, domestic oil and gas prices are fixed above international benchmarks and costs per well could decline by 25-30%. The government’s $11-million-plus incentivized oil program has also spurred growth. Macri’s party, Cambiemos, has called for the price initiative—which was set to expire on 31 December—to continue until international oil prices regain ground. Macri—a former president of Shell—the importance of defying the market for Argentina’s oil and gas exploration and production, and his energy policy would focus on achieving real energy security and honoring regulatory frameworks adopted by Congress.

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