Global Energy Advisory – 7th August 2015

Geopolitics

Good news this week for oil producers in Iraqi Kurdistan, with a promise by the Kurdish authorities to start monthly payments in September. It has been a rough road not just for key Kurdistan producers such as Genel, Gulf Keystone and DNO, but also for the Kurdistan Regional Government (KRG), which has not only had to deal with the Iraqi Central government's withholding of the Kurds' portion of the national budget but also with funding its Peshmerga fighters to push back the Islamic State in northern Iraq. This has left the KRG in arrears to major producers to the tune of hundreds of millions of dollars, and has also forced with withdrawal of some smaller producers. We continue to see this as an excellent venue because we're looking at a lot of oil that is very cheap to drill, which is the big selling point. Genel certainly understands this. Not only will these producers start seeing payments in September-against all odds-but as Kurdistan's crude exports continue to rise through next year, the Kurdish authorities will also make additional revenues available.

According to a U.S. Treasury Department official, it will take six to nine months to lift sanctions on Iran once the conditions of the nuclear energy agreement are met. The same official said that under sanctions, the Iranian currency has declined more than 50%, ultimately costing the country an additional $70 billion in oil revenues. Once sanctions are lifted, the official estimated that it would take Iran until at least 2022 to get back to a pre-sanction situation.

Regulatory Updates

• By far the biggest energy news of the decade-though not unexpected given the market forces at play-is the U.S. Senate panel approval of legislation that would lift the 40-year-old ban on the export of crude oil from the U.S. and open parts of the Outer Continental Shelf to oil and gas exploration. The bill-approved by the Senate panel in a 12-10 vote--would also provide for revenue sharing for offshore drilling in Alaska, off the Atlantic Coast, and in the Gulf of Mexico. So what does this Senate panel vote really mean? It's really just a barometer that tells us that eventually the crude export ban will be lifted. However, it doesn't mean it's going to be lifted now. The legislation now has to be passed by the full senate, later in August. This vote largely goes along partisan lines, with Republicans primarily supporting the bill and Democrats on the fence, concerned that crude exports would lead to higher gas prices at home.

• The U.S. Federal Energy Regulatory Commission has granted Texas Excelerate Energy authorization to build and operate the proposed Aguirre Offshore GasPort Project offshore Puerto Rico. The terminal will be off Puerto Rico's southern coast near the town of Salinas and would provide fuel to the Aguirre central complex; more significantly, the terminal will be the basis for switching power generation from imported oil to natural gas. With this authorization, Excelerate Energy has passed its final environmental impact statement. The proposed project will be a floating LNG terminal that will consist of a floating storage and regasification unit (FSRU), minimal infrastructure to moor the vessel, and a subsea pipeline to deliver the gas onshore.

• UK producer Cuadrilla will appeal a Lancashire county council decisions from July to refuse planning consent for two applications for temporary shale gas exploration sites in northwest England. Councilors rejected planning consent for Cuadrilla's application to drill and frack a total of eight wells at two sites on the Fylde, on the grounds that they would have an unacceptable visual impact and create too much noise. If Cuadrilla wins the appeal and exploration goes ahead, it will be the biggest round of fracking ever in the UK. Fracking was suspended in the UK in 2011 following earth tremors in Blackpool where Cuadrilla previously drilled.

Tenders, Auctions & Opportunities

• Houston-based Marathon Oil and Austrian OMV have returned seven offshore oil and gas exploration licenses to Croatia. The consortium had only been formed for the license in January 2015. The reason behind the withdrawal is an unresolved border issue between Croatia and Montenegro. Four of the seven exploration blocks are in the southern Adriatic, with three in the central Adriatic. Croatian authorities said the new licensing round for both onshore and offshore exploration would be called in September. Two other licenses in the January round had gone to INA and one to a consortium of Italy's ENI and London-based Medoilgas.

• The Bureau of Ocean Energy Management (BOEM) is offering up some 21.9 million acres offshore Texas for oil and gas exploration and development. This is Western Gulf of Mexico Lease Sale 246 scheduled for mid-August. We're looking at approximately 4,083 blocks located from nine to 250 nautical miles offshore, in water depths ranging from 16 to more than 10,975 feet. This will be the eighth sale in line with BOEM's five-year lease program. So far, more than 60 million acres have been put up for lease, netting some $2.9 billion.

• There are still opportunities in Mexico for the first round post-Pemex monopoly, but time is running out fast. Mexico's state-run Pemex is submitting the remaining requests for farm-outs with private companies in five deep water blocks in the Gulf of Mexico this month. By our count there are five more-out of 16-to be submitted to the Energy Ministry. With these five requests the Kunah and Piklis gas fields are on the list from the southern Gulf of Mexico, along with the Trion, Exploratus and Maximino fields which lie in the Perdido region near the U.S. border. Earlier this month, the first part of the initial round of shallow-water oil field auctions had an inauspicious start, with only two of 14 fields taken up by investors. At the same time, Mexico will delay auctions for deep-water oil E&P contracts and amend the terms of upcoming tenders after the preliminary shallow water tender failed to meet expectations. The government said it will change rules that scared off potential bidders earlier this month, when it was able to auction only two out of 14 blocks in a pivotal oil and gas tender. It required that consortia bidding on oil parcels must have one member act as a guarantor and hold shareholder equity of at least $6 billion to protect the state's interest in the event of a major accident. It will also tweak rules prohibiting a consortium from selecting a new company to replace a pre-selected operator that pulls out.

• The UK Oil and Gas Authority (OGA) has announced 41 new licenses to explore the UK Continental Shelf in the North Sea. This follows the additional award of 134 licenses in November 2014. The latest awards were primarily in the northern and southern sectors of the UK North Sea, but included fields in the west of the Shetland region. Shell was awarded one license, covering ten blocks, Italy's Eni was awarded three licenses, covering 23 blocks, and OMV was awarded one license, covering nine blocks. Other companies that were awarded licenses include Total, BP, Nexen and UK independents Parkmead Group and Hurricane Energy.

Discovery & Development

• Nigerian oil and gas firm Seven Energy has secured a $495 million loan from a consortium of national and international lenders to facilitate its plans of selling gas to the local market. The company has plans to sell gas to the domestic market for power generation through the purchasing of gas fields, the necessary infrastructure and gas pipelines. Accugas Limited, wholly-owned subsidiary of Seven Energy, processes and distributes gas in Nigeria with $1 billion already invested in similar power projects in the southeast region of the country. Nigeria privatized its electricity sector 18 months ago in a bid to end decades of blackouts which have hampered economic growth. Demand for gas in Africa's biggest economy is expected to rise to 3 million standard cubic feet (scuf) per day by 2017.

Deals, Mergers & Acquisitions

• Hungarian MOL has completed its acquisition from Eni of retail outlets in the Czech Republic and Slovakia. Earlier this year, the group acquired Eni's retail assets in Romania, including 42 service stations, under a 2014 agreement covering the three countries. The latest acquisition includes 125 service stations in the Czech Republic and 41 in Slovakia. MOL will rebrand the Agip stations mostly to the MOL brand in the Czech Republic and to the Slovnaft brand in Slovakia.