Global Energy Advisory 4th March 2016

Politics, Geopolitics & Conflict

• Several situations have combined to see a reduction in Iraqi oil sales and exports for February, though exports are still at record highs. Exports from Turkey's port of Ceyhan remain blocked-as of 16 February. These exports include those controlled by the Kurdistan Regional Government (KRG) in the Kurdish region of Iraq as well as crude from Kirkuk in northern Iraq, coming from the central government's North Oil Company (NOC). A section of this pipeline has been rendered inoperable and has cost the KRG-for one--$200 million so far. An explosion on this pipeline two weeks ago was reported without any details, and there still are none. Turkey seemed to be blaming the Kurdistan Workers Party (PKK) in a knee-jerk reaction, but the Kurds kept quiet-not pointing any fingers. No one has claimed responsibility, and this is off profile for both the PKK and the Islamic State (IS). There are now suspicions emerging that the Turks shut down the pipeline themselves in order to launch military operations against the PKK near the section of the pipeline that's been offline. The Kurdish silence on the issue would suggest this might be the case as well. How the Kurds would agree to such a move remains unclear because it certainly cannot afford the losses right now. And if they didn't agree, then it remains unclear what the consequences of this will end up being. Genel Energy-one of the main producers in Iraqi Kurdistan-says the pipeline will be back online within a couple of days (from the time of writing on Thursday, 3 March). Kurdish sources have said it would be online by the end of this week, according to Reuters.

• A diplomatic dispute between Turkey and the West could intensify amid reports that Turkey has refused to allow NATO vessels deployed in the Aegean Sea to gain access to Turkish waters, though both Turkey and Germany have denied these reports. The NATO vessels are seeking to take control over the smuggling of refugees into Europe by criminal networks. Reports coming out on Thursday morning also claimed that Turkey had denied entry into the country to the Germany Defense Minister via military helicopter. This is a highly complicated endeavor that is creating further tensions between Greece and Turkey. There is talk that the NATO mission would actually seal off the border because it may return migrants intercepted in Greek waters to Turkey. The Syrian conflict is causing an alarming refugee crisis that threatens to destabilize first southeastern Europe. Greek and Macedonian security forces are clashing with refugees near border, and Macedonia is threatening to close the border with Greece entirely (for migrants), pushing them toward alternative routes to Western Europe. The next flashpoint will likely be Albania.

• Further fallout from the Syrian conflict has seen a suicide bombing perpetrated by ISIS in Iraq's Diyala province. At least 40 people were killed and scores of others injured in the attack, which targeted the funeral procession for a high-profile Shi'ite militia commander who had been killed in Baghdad. Secular tensions in Diyala are running extremely high and this suicide bombing could set it over the edge.

• Meanwhile, as the Syrian conflict intensifies, the loose alliance between Turkey and Saudi Arabia over this conflict becomes more interesting when we consider what the two forces see as an end game. Both want Assad out of the picture, but there is no way they could agree on what comes after Assad, nor will they be able to come to any agreement on the Kurds, who each side would seek to absorb on their own terms. The Turks will want to place Assad with the Muslim Brotherhood, but the Saudis would fight this tooth and nail. Sunnis they both may be, but that's where the alliance ends. This is one reason why the Shi'ites have an advantage in this playing field-there is a certain unity of end game ideas here among Assad, the Iranian-backed Shi'ite militias fighting ISIS and the Russians, who are providing air support.

• Heading eastward, North Korea has fired short-range missiles into the sea in an apparent show of reprisal against a UN Security Council move to place tough new sanctions on the regime over its mass destruction weaponry testing. This show of reprisal is really par for the course for North Korea, and we wouldn't read too much into it for now.

Discovery & Development

• South Africa's Sacoil has agreed a deal for the construction of a $6billion pipeline to transport natural gas between Mozambique and South Africa. This will enable the development of a natural gas pipeline that will be 2,600 kilometers long and will transport gas from the Rovuma Basin in northern Mozambique to South Africa's Gauteng Province, delivering to key towns along the way. The deal has been signed by a consortium that includes Empresa Nacional de Hidrocarbonetos E.P (ENH), Profin Consulting Sociedade Anonima (Profin) and the China Petroleum Pipeline Bureau.

• China's state-run offshore giant CNOOC has tapped into the country's first deep-water natural gas discovery. The discovery is in northwestern sector of the South China Sea in the Lingshui 18-1-1 well. We have no estimate yet of gas flows. Expectations are high, however, as the field is located next to another deep-sea gas discovery, Lingshui 17-2, which has proven reserves of more than 100 billion cubic meters of natural gas.

• Norway's Statoil has launched drilling at its first well in the Johan Sverdrup field. The company said that eight total wells are slated for the pre-drilling stage. Permanent drilling platforms should be at the site by 2018 in time for full-scale production. The field is one of the five biggest oil fields ever discovered on the Norwegian continental shelf, with a reserve basin of as much as 3 billion barrels of oil equivalent.

• Swiss industrial firm Satarem and Chinese partners have officially begun construction on a new 150,000-barrels per day refinery in Iraq's southern province of Missan. The project will be funded by the China Development Bank and the Export-Import Bank of China.

Regulations & Litigation

• French Total SA has been ordered by a court in Paris to pay €750,000 for siphoning cash from the $64-billion UN "oil-for-food" program that aided Iraq under the sanctions regime during the time of Saddam Hussein. Total and other companies and individuals were cleared of corruption in this scandal in 2013. Total had been accused of siphoning cash from the UN program, and judges at the Paris court of appeals found Total guilty of corrupting foreign civil servants. The Swiss-based oil group Vitol was also fined $330,000 for irregularities. Vitoil had already pleaded guilty to theft in the U.S. and agreed to a $17.5 million fine for paying kickbacks to Iraq.

• The European Commission has green-lighted a deal with Greece to build a pipeline that would bring Azeri natural gas from the Shah Deniz 2 field to the European Union. The agreement provides the TAP pipeline with a tax regime for 25 years from the start of commercial operations. Construction is scheduled to start in the middle of this year. The pipeline will connect up with the Trans Anatolian Pipeline (TANAP) at the Turkish-Greek border, cross Greece and Albania and the Adriatic Sea, terminating in southern Italy.

Deals, Tenders, Mergers & Acquisitions

• Mexico will hold its first deepwater oil auction in early December this year. The auction will cover 10 blocks in the Gulf of Mexico. Six of those blocks will be in the Salina Basin and four in the Perdido Fold Best. This latter is on Mexico's maritime border with the US. Shell, BP and Chevron have all invested in the U.S. side of the Perdido region. The auction will be the fourth round of tenders to private companies since Mexico launched its major monopoly-ending energy reforms. The auction comes as Mexico's state-owned Pemex reports losses of $30.3 billion last year, up 96.4% from 2014.

• Australian Santos has completed the sale of its 35% stake in the field Kipper gas field off the coast of Victoria for $376 million to Japan's Mitsui. The Kipper field is operated by ExxonMobil. The filed, which lies about 45 kilometers off the coast of Victoria-holds some 620 Bcf of recoverable gas and 30 MMbbl of condensate/LPG. Production is slated to begin this year. Like many other companies, Santos using asset sales to trim debt after reporting a $1.4 billion loss last year.

• Anadarko Petroleum Corp. will reduce its capital spending by 50%. It will also cut its onshore rig count by 80%, and reports say that up to 1,500 jobs could be shed along with 95% of contractors. Dividends have also been slashed 80%. By the end of the year, the company hopes to have $3 billion in cash due asset sales and spending cuts.

• Shell is reportedly targeting $30 billion in asset sales over the next three years that would include assets in the US, Trinidad and India. The massive divestment comes after its acquisition of BG Group, which was finalized last month.