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Global Energy Advisory – 6th February 2015

Politics, Geopolitics & Conflict

Somalia in 2015

Major joint offensives launched through the past year by the Somali National Army (SNA) athe African Union Mission in Somalia (AMISOM)—with a significant infusion of Ethiopian troops—have made a fair amount of progress in pushing al-Shabaab insurgents out of key urban strongholds in south and central Somalia. However, the push by AMISOM that began in August/September against al-Shabaab in coastal towns--where ports are key to their fundraising efforts--is possibly the most significant. This by no means is indicative of the end of al-Shabaab, however, as it enjoys a highly sophisticated intelligence network that allows it to operate unconventionally as well. While its prowess as a fighting force has been stayed since last year, the 3rd and 4th quarters of 2014 still saw the group launch major attacks in Mogadishu—using its intelligence unit—in Djibouti, and in Kenya.

What is of most concern here from an oil and gas perspective is the threat to Kenya’s highly promising oil ambitions and the eternal question of whether Somalia is ripe for its own exploration and development of oil resources. Defining this threat to Kenya and Somalia’s readiness to host foreign oil and gas companies securely depends on how al-Shabaab evaluates its current position.

With regard to Kenya, the offensives against al-Shabaab have certainly chipped away at the group’s ability to organize its fighting forces and to raise revenues, but now the threat is less clear. Near the border with Kenya, al-Shabaab controls a single district—Bardere; but this is the largest of the districts on the border.

Al-Shabaab has met with defeat before—and it has proved temporary. The group is highly adaptive. Then there is the question of the group’s new leadership, in the figure of Ahmad Omar, on whom the jury is still out. If he is emboldened by the Islamic States (IS) successes in Syria and Iraq, we can expect al-Shabaab to rise again.

Somalia’s new prime minister (the third in a year) and his 20-strong cabinet is not equipped to deal with al-Shabaab—or with foreign oil and gas companies. They are largely inexperienced in politics and we expect no end to the chaos. The answer to the question of whether Somalia is ripe for foreign oil and gas companies is a definitive ‘no’. As to whether Kenya is secure, the situation is less certain. It is secure—in the medium term—from any conventional attack by al-Shabaab, but the movements and plans of its formidable intelligence unit should be very closely monitored, with any serious oil and gas operations understanding how and why they might be targeted and taking necessary precautions.


Another major attack on Egyptian security forces in the Sinai Peninsula has left at least 31 soldiers dead at the hands of Islamic militants. Ansar Beit al-Maqdis, an affiliate of the Islamic State (IS) since mid-last year, has claimed responsibility for the attack, which Egypt’s president blames on the Muslim Brotherhood and which thus heralds a further crackdown on the sidelined Brotherhood. The attack was fairly sophisticated and more of this nature will be devastating for Egypt’s current rulers. For anyone depending on pipelines through the Sinai, Egypt is a major liability. The government cannot get a handle on security in the Sinai, and we are most likely to see an uptick in attacks—and more sophistication—as the Egyptian ‘affiliate’ is further emboldened by IS achievements in Iraq and Syria. But it’s not only the Sinai that is of concern here: Security country-wide is being undermined by events in Iraq and Syria, and due to the new government’s hard-handed attacks on the Muslim Brotherhood. Cairo is always under threat of bombings, and late last week, a car bomb near a police station in Alexandria killed one person and wounded two others. Only economics at this point can provide the government with the support it needs to stay alive.


• On Monday, Kurdish peshmerga forces regained control of a small crude oil station run by the state-owned North Oil Co. near the northern Iraqi city of Kirkuk. The station had been seized by IS forces over the weekend. Kirkuk is an oil-rich area that lies in the territories disputed by the Iraqi central government and the Kurdistan Regional Government (KRG). The IS attack led to a halting of production at the Khabbaz oil field near Kirkuk.

• Oil exports from the Basra Gulf were lower this week due to rejections from buyers based on lower quality, higher-water content crude. Overall, Iraqi oil exports fell by nearly 14% in January. The federal State Oil Marketing Organization (SOMO) sold just 2.535 million barrels per day (bpd) in January, compared to 2.94 million bpd in December.

• Iraq has approved its 2015 budget ($105 billion) based on $56/barrel crude oil prices, while earlier drafts had based it on $60. This also puts the definitive ink on a deal with the Kurds to allow the Kurds to export 300,000 bpd from Kirkuk and 250,000 bpd from their own fields within the KRG and still receive their 17% of the Iraq annual budget.

Development & Discovery

• Shell has signed a deal with the Iraq government to build an $11-billion petrochemicals complex in Basra. The facility (Nibras) is scheduled to come online within 5-6 years and should produce 1.8 million tons of petrochemical products per year. The project will utilize ethane feedstock separated out from flared natural gas recovered from southern oil fields by the Basra Gas Company JV of state firm South Gas, Shell and Japan’s Mitsubishi. The south is the key area for gas flaring and accounts for 80% of Iraq’s gas flaring. In total, Iraq flares about 70% of its 1.9 bcf/day production.

• Saudi Aramco—Saudi Arabia’s state-run oil company—is putting the brakes on deep-water exploration in the Red Sea, citing high costs at a time of plummeting crude oil prices. The project was believed to be costing the company $1 billion per day. This decision comes after Saudi Aramco suspended a plan to build a $2 billion clean fuels plant at its Ras Tanura refinery.

• Chevron is pulling the plug on shale gas exploration in Poland, following in the footsteps of ExxonMobil, Total and Marathon. No one has yet found any commercially viable gas deposits in Poland. The only oil major remaining in Poland is now ConocoPhillips.

• Russian Gazprom and the Turkish government have approved the proposed route of the new Russia-Turkey pipeline via the Black Sea, expected to be in service by the end of 2016. The pipeline’s four branches will have a capacity of 63 billion cubic meters a year. Part of the gas would be sold to Turkey, with the rest to be stored at a distribution hub on the border between Turkey and Greece. The new pipeline is to replace the South Stream that Moscow scrapped in December. Under the new plan, the EU would have to build its own link to the proposed pipeline to Turkey to get Russian gas, which now accounts for around a third of its supply requirements.

• Videocon Industries has announced a new discovery in Brazil’s Sergipe-Alagoas Basin in an ultra-deep water project in well 3-SES-186 at the SEAL-11 offshore exploration block. The consortium—which includes Videocon (20%), Brazil’s state-run Petrobras (60%) and BPCL (20%)—drilled to 660 meters at a water depth of 2,467 meters. Videocon shares were up nearly 9% on 3 February after news of the discovery. There are not yet any indications of the size of the discovery. The SEAL-11 block is believed to hold more than one billion barrels of oil.

• On 3 February, the Brazilian president fired Petrobras CEO Maria Gracas Foster and other five other Petrobras executives over the long-running corruption scandal surrounding the state-run oil company. An official statement of the move followed on 4 February. A new board is expected to be elected on Friday, 6 February. Petrobras shares jumped 13.7% on the news on 3 February.

• Houston-based Live Oak LNG has announced it will develop a liquefaction and LNG export terminal in Calcasieu Parish, Louisiana, scheduled to open in 2019. The project will cost around $2 billion and will specifically be located on the Calcasieu Ship Channel and have a 5 million metric ton annual capacity, with two storage tanks with a holding capacity of 130,000 cubic meters of LNG. Port facilities that can accommodate standard LNG carriers are also part of the plan. Live Oak LNG is a subsidiary of another Houston-based company, Parallax Energy.

• Shell has cancelled its proposed Arrow LNG project with PetroChina, which envisioned the development of a CSG to LNG processing facility n Curtis Island, Queensland, Australia. Shell said that development of the Arrow CSG reserves in Queensland would however continue and be commercialized through a separate LNG project.

Deals, Mergers & Acquisitions

• Chevron agreed to sell output from its $54 billion Gorgon gas-export project in Australia to a division of South Korea’s SK Group. Chevron will sell 4.15 million metric tons of LNG, to SK LNG Trading Pte. Ltd. over a five-year period starting in 2017. Exxon and Royal Dutch Shell also hold sizeable shares in Gorgon, which will ship its first LNG cargo later this year.

• Egypt will sign an LNG import agreement with Gazprom. Gazprom reps were in Cairo this week to negotiate quantities through to 2020. So far, unofficially, we know that Cairo has agreed to import 35 LNG shipments until 2020.

• General Electric and Norway’s Statoil are launching a research and development partnership to cut greenhouse gas emissions. The partnership plans to develop new technologies that can reduce emissions and cut costs, for example by reducing the wasteful flaring of associated gas released during oil production. The program will focus on developing new approaches to create efficient, low-cost technologies for oil and shale gas production while simultaneously reducing emissions.

• Houston-based Lucas Energy is working on a possible merger with Austin-based Victory Energy Corp. Lucas Energy has defaulted on its debt and is now in need of capital to drill in the Eagle Ford shale. No definitive agreement has yet been signed, and a potential deal would likely see Lucas issue equity to Victory shareholders. This is the only way Lucas will be able to bring its Eagle Ford wells into production, and ensure drilling in the future on 130 locations in the area.

Regulatory & Labor Alerts

• The United Steelworkers union (USW) has launched strikes at nine locations after a labor contract expired on Sunday and no deal was reached to meet the union’s demands. The Union represents some 30,000 workers at over 200 US oil refineries, pipelines, terminals and chemical plants. The strikes are ongoing at the Marathon Galveston Bay Refinery in Texas City, Texas, the Shell Deer Park Refinery in Deer Park, Texas, and the Tesoro Carson Refinery in Carson, California, among other locations. The workers are seeking double the annual pay raises compared to the previous three-year contract.

• Scotland is imposing the first moratorium on onshore unconventional oil and gas exploration and hydraulic fracturing in the United Kingdom. Research on the environmental impact and an undefined period of public consultations will now commence. This is an abrupt about face considering that only last year a group of Scottish experts declared unconventional oil and gas exploration not harmful to the environment or public health. A UK-wide moratorium was just defeated this week by MPs. This will subdue recent talk that the UK could be the next venue for a shale revolution.

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