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Global Energy Advisory – 5th June 2015

Global Energy Advisory – 5th June 2015

Forget About Syria, or Reduced OPEC Production

Syria is now a lost cause as far the US is concerned. By this we mean that the US has lost this game in which it was only dabbling—with significant consequences—from the start. China and Russia will go on about how there was an underlying sinister plan on Washington’s part when it helped the Saudis create what is now the Caliphate-bound Islamic State (IS), but this was quite simply incompetence. This is Iran’s game now. Wealthy Saudis are, of course, still doing their best to keep IS coffers full behind the scenes, but the Saudi Kingdom itself is busy trying to control the danger flooding across their border. This follows the launch of an all-out war in neighboring Yemen, which will in turn, end up either forcing Iran’s hand there or giving the oil wealth to Islamic jihadists in the form of Al-Qaeda in the Arabian Peninsula (AQAP). Iranian forces are being fortified to help Assad fight back against the IS. Iraq is also Iran’s game—another Washington has largely lost. (We won’t lay all of this on Obama, though his wishy-washy actions in Syria have helped to create a real monster. The incompetence stretches far back, with the bulk of the damage done under the preceding president). Amid this chaos, and a major oil price slump, Iran and Iraq are talking about plans to expand oil production. This will add to the desperation of non-OPEC producers who continue to reel from low prices as OPEC countries continue to pump above production quotas. And though it’s falling apart at the seams, Iraq will likely be the largest contributor to OPEC’s production increase in 2015—thanks to Western technology and knowhow.

Discovery & Development

• In Angola, Total has now produced a cumulative two billion barrels from its deepwater block, which is now producing over 700,000 bpd. Total operates four floating production, storage, and offloading units on major production zones. Total operates Angola’s Block 17 with a 40% interest. Norway’s Statoil has a 23.33% interest; Esso Exploration Angola Block 17 Ltd. 20%, and BP Exploration Angola Ltd. 16.67%.

• Brazil’s state-run Petrobras and partners (Portugal’s Galp and two other Brazilian companies, QGEP and Barra Energia) say the giant Carcara offshore discovery extends far beyond the initial discovery. The partners have drilled in the 3-SPS-105 Carcara N evaluation well, discovering light oil at API 31 degrees in a continuous column of oil-bearing rock a minimum of 358 meters tall. The discovery shows the oil-bearing rock is connected to the previous Carcará find in 2012 in the same BM-S-8 block. Petrobras is the operator with a 66% interest, while Galp owns 14%, QGEP 10% and Barra 10%.

Deals, Acquisitions & Mergers

• Statoil has been awarded four licenses in the largely unexplored Sandino basin of the Nicaraguan Pacific. Statoil will operate the licenses with 85% interest along with partner Nicaraguan Petronic, which will hold the remaining interest. The initial exploration phase will continue for 2.5 years and will include reprocessing 2D seismic data and geological and geophysical studies.

• Chevron New Zealand has sold its 11% interest in New Zealand Refining, which operates the 107,000-b/d Marsden Point refinery at Northland on the North Island’s east coast. The deal earned Chevron more than $59 million from institutional investors. The other main shareholders in NZ Refining are BP with 21%, Exxon Mobil with 17% and Z Energy with 15%. In March this year, Chevron also sold its 50% interest in Caltex Australia, the largest refiner in the country, for approximately $3.7 billion.

• After filing for bankruptcy in October last year, Houston-based Endeavour International has announced that it will sell all of its US assets and its North Sea assets. In the North Sea, Endeavour has interests in five producing oil and gas fields: Alba, Bacchus, Rochelle, Bittern and Enoch. Prior to filing for bankruptcy, the company defaulted after it failed to make interest payments on its debt. The company subsequently reached a restructuring agreement with many of its investors to decrease its $1.2 billion debt by $568 million. Is this worth picking up? Well, yes. It will eventually be worth it if oil prices climb back up. While many will say that the North Sea is maxed out, that’s not really the case. However, what’s left there is in more remote areas and will be more difficult and expensive to access, but it still has a lot to give.

• Brazil’s embattled state-run Petrobras may sell $8 billion in Gulf of Mexico assets as part of its $13.7 billion 2015 divestment plan. Petrobras has hired BNP Paribas to study the possible sale of its stake in off-shore oilfields in the region. This will be the second time Petrobras tries to divest Gulf of Mexico assets, after an attempt in 2013. The divestment is to help offset $120 billion in debt for the scandalized company.

• Earlier in May, a Bloomberg article accused Russian oil and gas company Surgutneftegas (Surgut) of functioning as the Kremlin’s personal pocketbook, suggesting that President Vladimir Putin was planning to raid the company’s $34 billion cash reserves by encouraging it to invest in state-owned Rosneft. The logic behind this theory is that history repeats itself and the Kremlin has a tendency to take over oil and gas assets when it needs a new ‘piggy bank’—i.e., when things start going really well for a company. This is what happened to Yukos Oil Co. a decade ago, and in 2014 to Bashneft. Surgut denies all of this and says they are rumors meant to manipulate the market. Regardless of whether the rumors are true, the relationship between the state and private companies in Russia is indeed questionable. If this is true, and Surgut bails the Kremlin out financially, it will certainly be interesting for Norway, whose sovereign wealth fund is among Surgut’s private investors.

Regulatory Updates/Bankruptcies/Auctions

• The US Department of Energy has issued a conditional authorization for Alaska LNG Project LLC to export as much as 2.55 bscfd of US-produced natural gas for a 30-year period to countries with no free-trade agreement with the US. The DOE concluded that the project was both in the public and national interest. First exports from this plant would likely begin in early 2016. The project is led by ExxonMobil, BP, ConocoPhillips and TransCanada, and is estimated to be worth $45-$65 billion. It will include an 800-mile transportation pipeline which will deliver gas from Alaska's north down to Nikiski on the Kenai Peninsula. The gas will then be transformed into LNG for exports overseas, with the Asian market being the most lucrative for the time being.

• Mexico’s National Hydrocarbons Commission, the country’s oil regulator, will allow pre-qualified companies (Chevron and ExxonMobil) to bid on all 14 shallow water blocks up for auction after removing restrictions, which had limited participation to five blocks. A total of 19 companies and seven groups were approved to bid on blocks. With these shallow water blocks, we’re looking at potential production of around 80,000 bopd, and a nice $17 billion in private investment for Mexico. We should see the winners of the bidding process announced in mid-July and we will keep you posted on this. Mexico will also auction nine other shallow-water blocks in the Gulf of Mexico in September and 26 onshore blocks in December.

• In September, the government of Romania will submit a draft law on oil and royalty taxes to parliament for consideration. Once approved, the government will tender 36 new concessions for onshore and offshore hydrocarbon licenses. The new tax system will likely include differentiated royalties for onshore and offshore extraction and will apply only to new contracts. It will also include a levy on profit from upstream activities, in addition to the global flat 16% tax on profit, and a system of deductions based on investment. Companies currently pay royalties ranging from 3.5 to 13.5% of production for oil and gas, depending on the amount extracted. They also pay a tax on special buildings such as oil wells and a tax of up to 60% on income from higher prices due to ongoing energy market deregulation.

• The US Environmental Protection Agency and the Army Corps of Engineers jointly released a final Clean Water Rule that significantly expands federal enforcement under the Clean Water Act. Congressional Republicans and US industries including oil and gas immediately said it goes too far. EPA said that the rule assures that waters protected under the CWA are more precisely defined and determined predictably, making it less costly, easier, and quicker for businesses to obtain permits. It does not create any new permit requirements for agriculture and maintains all previous exemptions and exclusions. Before the new rule, up to 60% of American streams and millions of acres of wetlands were potentially overlooked by the Clean Water Act, EPA officials say. Oil and gas industry associations and other business groups expressed immediate concern, saying that it creates “needless regulatory uncertainty around economic development—at a major cost to farmers, home builders, manufacturers, and a wide range of industries”. The new regulations are due to take effect 60 days after publication, but critics in Congress have vowed to block them, and opponents have said they are planning litigation to challenge many of their provisions.

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