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Global Energy Advisory – 6th November 2015

This week, we take you through a list of security and stability alerts in areas where oil and gas operations and other commodities may be affected.

• Egypt: Spillover from Syria

Another suicide car bombing at a policeman’s club in al-Arish, North Sinai governorate killed at least six and wounded 10 others. The attack is believed to have been perpetrated by a group that has affiliated itself with the Islamic State (IS), Wilayat Sinai. For oil and gas operations, this should be viewed as a significant security issue—both in the Sinai and the Nile Delta regions (the latter has been the site of some major new exploration)—representing the definitive spillover of the conflict from Syria.

• Romania: Political Unrest, Seething Corruption

Unrest in Romania intensifies, and the resignation of Prime Minister Victor Ponta does not seem to have helped at all. Mass protests were calling for his resignation and early elections after a 30 October fire in a nightclub in Bucharest caused 32 deaths. Ponta has now stepped down, but the protests continue. Corruption is the issue here, and Ponta has been charged in a number of cases and is expected to face trial. This is not, however, a case of one allegedly corrupt official. Corruption is entrenched at all levels, and that Ponta has now fallen largely means that he simply lost the game to his equally corrupt political rivals. Thus, protests continue. This comes shortly after Russian oil giant LukOil, PanAtlantic and Romgaz announced a ‘significant’ natural gas field discovery offshore Romania in the Black Sea continental shelf. LukOil is throwing around seismic data that estimates reserves here could exceed 30 billion cubic meters—but all of this would have to be determined in an evaluation.

• Zambia: Mining unrest and instability

Glencore was hoping to cut some 4,000 jobs at its Mopani Copper Mines unit, but Zambian President Edgar Lungu has vetoed those plans in order to avoid widespread labor unrest. While Zambia’s move may staunch some of the unrest, Glencore’s plans to suspend production and invest some $1 billion on plant upgrades at this time (while copper prices are low), will still reverberate with jobs and we expect labor unrest to pose problems regardless.

• Chile: More mining labor unrest

As Chile’s state-owned copper company Codelco moves to lay off workers, strikes and labor unrest could lead to further instability. Codelco has now laid off some 4,000 workers over slumping global copper prices and weak demand. While we expect instability to arise from this in Chile, for Codelco, managers say costs have been slashed by around 11% and production has not suffered. The mine got another boost last week when the Finance Ministry announced a $600 million fund infusion for Codelco’s five-year spending plan.

• Iraqi Kurdistan: Stalemate, IS Advantage

The Kurdistan Regional Government (KRG) remains in a dangerous state of political deadlock, which we fear the Islamic State (IS) will take advantage of.

Regulations & Litigation

• The World Bank’s International Center for Settlement of Investment Disputes (ICSID) said earlier this week that there would be a partial annulment of an October 2012 award that required Ecuador to pay Houston-based Occidental (Oxy) $1.7 billion in compensation for assets confiscated by Ecuador when the state nullified Oxy’s contract for extraction in the Amazon. The new compensation has been reduced to $1.06 billion. Still, the amount represents 3.3% of Ecuador’s entire 2016 budget.

• The Nigerian National Petroleum Corporation (NNPC) has canceled a controversial oil bartering program which used middlemen to pay for refined products from foreign partners in deals scandalized by opacity and high-level corruption. The new government of Muhammadu Buhari has canceled the program—which was originally, ostensibly intended to help meet demand for gasoline and diesel due to a shortfall from underperforming local refineries—and will replace it with a direct sale-direct purchase approach. The move is said to be in line with Buhari’s attempts to root out industry corruption. Between 2010 and 2014, Nigeria is estimated to have channeled over 352 million barrels of oil into oil swap deals. It is estimated that some $20 billion in oil sales over three years was missing from federal coffers. Last month, President of OPEC and former Nigerian Minister of Petroleum Resources Diezani Allison-Madueke was arrested in London on allegations of bribery and corruption.

Deals, Mergers & Acquisitions

• In other Oxy news, the company has announced it will make $600 million net by selling its Bakken formation acreage. Oxy has described its North Dakota operations as unprofitable at current crude oil prices. Instead, the company is looking to invest that money in Texas’ Permian Basin. Of the $1.2 billion Oxy spent in Q3 2015, more than half of it was used in the Permian Basin. The Bakken, on the other hand, has seen a fair amount of divestments across the board since the oil price slump began.

• Norway’s Statoil has completed a farm-in transaction with ExxonMobil, acquiring a 35% interest in the Tugela South oilfield, offshore South Africa. This gives Statoil entrance into the early exploration phase of this project. It is also Statoil’s first foray into South Africa. The remaining interests in the project are held by the operator ExxonMobil (40%) and Impact Africa (25%). The field covers an area of approximately 9,054 square kilometers and is located offshore eastern South Africa in water depths up to 1,800 meters.

• Malaysian Sona Petroleum has bought the Stag oil field offshore Western Australia for $50 million from operator Quadrant Energy and Santos. Stag has been online/onstream since 1998 and is now considered to be a mature field. Its production capacity is 5,500 b/d via a fixed platform connected to the Dampier Spirit floating storage and offtake vessel. Santos said the field was no longer material to its portfolio, while Quadrant is looking to move on into new growth opportunities.

• Canadian Octant Energy has bought Afren Oil’s oil and gas assets in Kenya and Tanzania for an undisclosed price. The deal gives Octant two blocks in Kenya (L17/L18 and Block 1) and one asset in southern Tanzania (Tanga Block). The assets have seen considerable investment since Afren acquired them in 2010, with 3D seismic shot across the acreage. We expect to see a fair amount of momentum on acquisitions and mergers in East Africa following concrete moves to get regional infrastructure projects underway.

• Shell has sold off stakes in Chinese and French holdings in the downstream sector following heavy third quarter losses. The company sold off its liquefied petroleum gas business in France to rival DCC Energy for a total of $510 million. For an undisclosed sum, Shell has also sold a 75% stake in a lubricants division to Chinese investment firm Huo's Group and US-based Carlyle Group. In Q3 2015, Shell reported a loss of $6.1 billion, compared to $5.3 billion profit it recorded in the same quarter last year.

Tenders & Auctions

• Mozambique has invited groups led by operators to negotiate for 6 contracts in the country’s 5th exploration and production licensing round. Bids came in from potential operators for eight of fifteen offshore and onshore areas on offer. Mozambique's state oil company awarded exploration rights off its Indian Ocean coastline earlier this month. Exxon Mobil, Eni, Sasol and Rosneft were among the winners. Mozambican officials expect more than $30 billion will be invested initially in the natural gas sector to build capacity to produce 20 million tons per year of LNG. First exports are expected to start in 2018. The next bidding round for new blocks should be in 2017.

Discovery & Development

• Chevron’s Congo subsidiary, Chevron Overseas Limited, has started oil and gas production from the Lianzi Field, located offshore between the Republic of Congo and Angola. The field is expected to produce an average of 40,000 bopd. Chevron is operator of the Lianzi Field and holds a 15.75% interest, along with Total, Eni and Sonangol.

• Houston-based Apache says it has made significant discoveries in the North Sea in both the Beryl and Forties fields which could hold up to 70million barrels of oil equivalent. The company found oil in the first two wells drilled in the Beryl area. Apache has also announced a discovery at its Seagull prospect, 50 miles south of the company's Forties Field, the largest oil field in the UK North Sea. The discoveries could increase its total North Sea reserve base by 50% and result in investment in new production facilities.

• Chevron’s Anchor discovery in the deepwaters of the Gulf of Mexico is looking very promising, but more testing is still needed to determine the real potential here. Chevron says that early results suggest that the prospect may be big enough to be classified as a ‘hub’—on par with Chevron’s Jack/St. Malo fields in the Gulf of Mexico. As of yet we have no word on when Chevron will drill more exploratory wells to test Anchor, which is about 140 miles off the coast of Louisiana in 5,180 feet of water in the Lower Tertiary Wilcox. Last year, Chevron struck 690 feet of net oil pay here and conducted appraisal drilling in June, finding 694 feet of net oil pay. So far, Chevron has confirmed a hydrocarbon column of at least 1,800 feet in the Anchor reservoirs.

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