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Global Energy Advisory – 6th March 2015

Politics, Geopolitics & Conflict

Anxious Times For Kurdistan Producers

It’s not an easy time to be a producer in Iraqi Kurdistan, where there is much promise, and a lot is coming out the ground, but no one’s getting paid yet. The December deal between the Kurds and the Iraqi central government to share oil revenues remains incredibly fragile. Baghdad claims the Kurds are pumping as much oil as they should be, while the Kurds say they haven’t been paid their share of the federal budget as promised. This means that producers aren’t getting paid, even though they’ve been pumping oil for almost a year. The Kurds can’t afford to pay them, particularly not now when most of their budget is going to secure the Kirkuk oil fields from the Islamic State (IS) and to fight back IS in the Kurdish areas of Syria. One producer, Gulf Keystone, is already giving up—selling its assets before it runs out of cash. Once again, the Kurds are threatening Baghdad that they will halt shipments to protest the lack of payment. There are nuances to this deal that will tricky to maneuver. For one thing, the Kurds are producing oil in Kirkuk, but Kirkuk is not officially part of the Kurdistan Regional Government (KRG)—it is essentially territory disputed between Erbil and Baghdad. Baghdad has only paid a small portion of the budget cash it promised the Kurds, using the argument that the Kurds aren’t pumping as much oil as they promised and that a lot of it is from Kirkuk, and they’re not sure this is “Kurdish” oil. The KRG agreed to export 550,000 bpd from its own fields and from Kirkuk through Iraq’s state marketing authority, SOMO. In return, Baghdad agreed to restart federal budget payments to the Kurds. Baghdad says the Kurds are exporting about 300,000 bpd to Turkey’s Ceyhan terminal. The war with IS, the lack of Iraqi payments and the global oil price slump (now selling for about $64 per barrel) has made it nearly impossible for the Kurds to pay their foreign producers. Since 2013, the Kurds have accumulated more than $20 billion in debt to their foreign producers. It is important for Baghdad to remember, however, that without the Kurds providing security, the oil-rich fields of Kirkuk would have fallen to the Islamic State.

In this atmosphere, it is good news then that a tanker carrying Kurdish oil shipped long before a deal with Baghdad was struck has finally docked in the Israeli port of Ashkelon. This tanker has been held up for months. Last year, it tried to unload in Texas but Baghdad pressed the US to legally challenge this and the tanker was turned away. The tanker was carrying 1 billion barrels of Kurdish crude oil. It will be interesting to see how the Kurds handle this shipment to Israel in light of the deal struck with Baghdad after the tanker’s departure.

In the meantime, foreign producers are still languishing, but so far only Gulf Keystone is willing to cut and run because it’s running out of cash. Genel Energy—the largest producer—was owed $140 million. Genel’s share prices are not being hit by this either. So why are the rest of the producers sticking around? That is simple: It’s worth the wait. Kurdistan has a lot of oil—about one-third of what Iraq has, and Iraq is swimming in oil. Moreover, Kurdistan is one of the cheapest drilling venues in the world, with total costs amounting to around $12 per barrel. It’s hard to beat this math, and it’s hard to give up something like particularly when it’s still economic during a major oil price slump.

Doomsday In Libya

Libya has declared force majeure on 11 oilfields after a series of attacks by Islamic militants, though it remains unclear precisely which group is in control here, while the Western media defines everything as “the Islamic State”. The internationally recognized Libyan government, which is fighting off attempts to take control by a parallel Islamic government—can no longer secure the oilfields and had declared force majeure in order to protect itself from claims against future disruptions. Among these fields are:

• The Dahra oil field: 500 kilometers southeast of Tripoli. Dahra was operated by a partnership with Marathon Oil Corp, Hess Corp. and ConocoPhillips. The field was captured by militants earlier this week. From what we can tell, they have destroyed the control room and oil tankers, but have abandoned the site.

• The Mabruk oilfield: which is operated by a Libyan joint venture with France’s Total SA. This field, in central Libya, was attacked last month and again this week. It is now occupied by militants. The field produced about 40,000 bpd.

• The Bahi oilfield: Also attacked last month and again this week and now occupied by militants, Bahi was operated by a partnership with Marathon Oil Corp, Hess Corp. and ConocoPhillips.


Discovery & Development

• A maritime boundary dispute between Ghana and Ivory Coast may force British oil firm Tullow Oil to suspend offshore exploration in Ghana in what is known as the TEN project. Ivory Coast has applied for provisional measures, asking the International Tribunal of the Law of the Sea (ITLOS) in Hamburg to stop Tullow oil and others from exploring and exploiting oil in the disputed area. Ghana commenced an arbitration process in 2014 before a Special Chamber of the ITLOS, seeking a declaration that it has not encroached on Ivory Coast’s territorial waters. Tullow now faces a period of uncertainty while the tribunal makes a decision on the Ivorian request, which the company said was expected by the end of April.

• Flotek Industries is unveiling a new technology called Complex nano-Fluid chemistries for remediation and restimulation of unconventional wells. Company data suggests that a remediation or restimulation treatment of a well using a tailored CnF chemistry design can reinvigorate production by 30-70% and, in some cases, return the well to its original production profile. The company claims the costs sit at a fraction of the costs of drilling and completing a new well. The process will involve a basic pump and pressure treatment utilizing a coil tubing unit, using CnF in a fluid system that will penetrate the existing fractures in the formation and mitigate wellbore blockages caused by paraffin’s, asphaltenes, and other clogging particles.

• Rosneft-Gazprom joint venture Tomskneft has launched the deployment of drones to monitor its pipeline routes and oil and gas production assets. The drones will monitor some 5,000 kilometers of pipelines and help improve the quality of pipeline condition monitoring, to enhance reliability of pipeline operations, and to ensure detection of unauthorized access to the pipeline protection zone. The drones use on-board photo and video survey equipment, as well as thermal-imaging technology.

• In India, Reliance Industries (RIL) and its partner, BP, have announced eight oil discoveries in the Cambay basin block in the fifth round of new exploration. The discoveries in block CB-ONN-2003/1 reportedly hold oil-initially-in-place (OIIP) of 15.04 million barrels. The block CB-ONN-2003/1, covering an area of 635 square kilometers that is divided into two parts — Part A & B, is located nearly 130 km from Ahmedabad in Gujarat in the Cambay basin. RIL, as the operator, holds a 70% participating interest, while BP has remaining 30% stake. So far, 18 wells have been drilled and a total of eight discoveries were made during phase I, including the extension period.

• Egypt’s Ganoub El Wadi Petroleum Holding Company has announced a new petroleum discovery 30 km from Hurghad. Tests show that the production flow will be 430 barrels of crude oil per day, and it has a reserve of 9.6 million barrels.

Deals, Mergers & Acquisitions

• Brazil’s state-run Petrobras will sell $13.7 billion in assets over the next two years, largely because of the massive corruption probe that has rendered its access to overseas debt markets very limited. Its earlier plan was to unload $5-$11 billion in assets by the end of 2018. The assets up for sale will be within its exploration and production, supply, gas and energy divisions. Petrobras has accumulated $135 billion in debt. Moody’s Investors Service cut the company’s credit rating two levels last week on concern the corruption probe will hinder Petrobras’ ability to obtain financing and trim its debt.

• US Enterprise Products Partners, Anadarko, DCP Midstream Partners and MarkWest Energy Partners will form a joint venture with for a 181-mile natural gas liquid pipeline to transport mixed NGLs from northeast Texas (Panola County) to a major refinery hub along the Texas Gulf Coast. US Enterprise will continue to serve as operator of the Panola Pipeline and own the remaining 55% interest. Enterprise recently announced plans to install 60 miles of new pipeline, as well as pumps and other associated equipment as part of an expansion project designed to increase capacity by 50,000 bpd. The incremental capacity is expected to be available in first quarter of 2016.

• Houston-based Noble Energy has announced it will soon become the first of the large cap E&Ps to issue equity in the oil price downturn. Only a week after Noble said it was enacting a 40% reduction in its 2015 Capex to $2.9 billion, Noble unveils a $1 billion offering. Noble has priced a public offering of 21 million shares of its common stock at a price to the public of $47.50 per share. Noble Energy also granted the underwriters the option to buy up to an additional 3,150,000 shares of its common stock. The total offering of 21-24 million shares implies a 6% dilution.

• Offshore oil and gas contractor Cal Dive International and its US subsidiaries have filed for voluntary bankruptcy protection after having been hit hard by slumping oil prices. The contractor’s foreign units have not sought bankruptcy protection.

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