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Global Energy Advisory 8th January 2016

Politics, Geopolitics & Conflict

This week, there is nothing more critical than the extension of the Sunni-Shiite conflict into a much more significant proxy war between Saudi Arabia and Iran. As many will have already noted, the outlook for oil prices in light of this is bearish because for the first time in decades, OPEC has no chance of coming together in a unified position and we cannot get past the supply glut for now. But on a conflict level, this proxy war indicates more than anything that things have spiraled out of control. We have noted in previous briefings that while the Shi'ite radical groups can largely be controlled by Iran, the Sunnis can be controlled by no one--they have no real master at this point, which makes them the more dangerous. Saudi Arabia is panicking because it cannot control its own monster, but also because it has run out of friends, with the Americans having largely cut them off, Russians applying immense pressure and Iran far too strong to go to war with in any other way than through proxy manners and venues.

This will add another grueling element to the already catastrophic Syrian conflict, which is one of the key venues for this proxy war--and also a topic that Oilprice will be covering in-depth in the coming weeks in its news section. The beheadings of key Shi'ite figures by the Saudis--after languishing in prison for about a decade--shows the Saudis weak hand in this conflict, and the Iranian response will be much stronger indicatively.

Also keep a close eye on Libya, another conflict venue that has become much bloodier as the Syrian conflict expands and intensifies. On 7 January, more than 50 people were killed and scores of others injured in a suicide bomb attack at a police training camp in Zliten, on the coast. At the time of writing, bodies were still being pulled from the rubble and no claim of responsibility had been made.

We are also monitoring the wider geopolitical fallout from the Russian-Turkey spat, which this week has led to some interesting developments--all of which hold great significance for the future map of oil and gas and particularly oil and gas exports. Russia's Tartarstan regional government is not happy with Moscow's decision to cut ties with Turkey following the Turkish downing of a Russian jet over airspace on the Turkish-Syrian border. Tartarstan President Rustom Minnikhanov is now openly opposing the Kremlin on this issue, and this is highly significant as the tendency is for no one to defy Putin. Minnekhanov has gone as far as to state that Turkish businesses many continue to operate in Tartarstan. The Tartars are close to the Turks, speaking a Turkic language and being predominately Muslim. There have always been close ties between this Russian republic and Turkey and investments from Turkey have been sizable.

One can also read much into the fact that on 1 January 2016, the Central Asia nation of Kazakhstan--a former Soviet country--effectively banned Russian channels from its cable TV networks.

And in Ukraine, Ukrainian electricity to Russian-annexed Crimea has been cut off again, right before the New Year. This is the second time in three months and the cut-off was likely caused by activists fighting against the Russian annexation. This is not an official move. In November, activists succeeded in temporarily cutting off Ukrainian power to Crimea by blowing up a power transmission line tower on the provincial border. After the November incident, power was restored fairly quickly, but this time around that may not be the case because Kiev is under no contractual obligation to supply Crimea with power. The contract has expired and there is no reason to believe the Moscow and Kiev will be able to come to any terms for a new agreement under the current frozen conflict conditions.

Discovery & Development

• Royal Dutch Shell has started natural gas production from its offshore Corrib field in northwestern Ireland. At peak production, this field is expected to reach 260 MMscfd of gas, or 45,000 boe/d. Also at its peak, Shell notes that the production potential could meet as much as 60% of Ireland’s gas needs. Six wells have been drilled at the field so far. Gas is being transported via pipeline to the Bellanaboy Bridge gas terminal. This is a joint venture with Shell serving as operator with 45%. The other partners are Norway's Statoil with 36.5% and Vermilion Energy Ireland with 18.5%. Corrib was discovered by Enterprise Oil in 1996, and was acquired by Shell in 2002. Shell became the operator in 2004.

• Myanmar-based MPRL E&P and its partners, Woodside Petroleum and French Total SA, have made a natural gas discovery in a well offshore Myanmar (formerly Burma). The Shwe Yee Htun-1 exploration well, located off Myanmar’s west coast in the Rakhine Basin, encountered approximately 49 feet of net gas pay. MPRL has a 20% stake in the block. Woodside and Total each have 40%. Myanmar has estimated proven gas reserves of 10 trillion cubic feet and proven oil reserves of 50 million barrels. The government opened up the country to foreign investors only in 2010. This is still a very risky venue.

• Abu Dhabi National Energy Company (TAQA) has produced its first oil from the new Cladhan field development in the UK's North Sea. The field is located in the northern North Sea, approximately 100 kilometers north east of the Shetland Islands in a water depth of approximately 150 meters. TAQA expects an initial production rate from Cladhan at around 10,000 barrels of oil equivalent per day. TAQA is operator of Cladhan, with a 64.5% interest. Its partners are Sterling Resources (UK) Ltd (2%) and Hungary's state-run MOL Group (33.5%).

• Valeura Energy has made a natural gas discovery in its first exploration well in Turkey's Thrace Basin. This is the Bati-gurgen-1 well in the Banarli licences. The well flowed at an initial restricted rate of 3.4 million cubic feet per day, and is currently shut-in awaiting completion of the pipeline tie-in to the dehydration facility near the well. Valeura owns a 40% interest in the facility, which is located approximately three km to the southeast on the joint venture lands acquired from Thrace Basin Natural Gas (Turkiye) Corporation (TBNG) and Pinnacle Turkey. We do, however, caution against energy investments in Turkey presently due to the geopolitical situation that is significantly complicating exports and Turkey's ambitions of becoming an energy hub.

• Oil explorer Cairn Energy has recorded its first successful production test at its SNE oilfield in Senegal. The company reported high-quality oil at a rate of 8,000 barrels per day. Cairn owns 40% of the SNE field, along with its partners: ConocoPhillips 35%, FAR 15%, and Senegal's state-run Petrosen 10%. Cairn got the green light last year to start drilling on the site. Data from the appraisal well will be used to update the resource estimates for the SNE field, near its previous FAN-1 discovery.

Deals, Mergers & Acquisitions

• Iranian shipbuilder ISOICO and Russian yard Krasnye Barrikady will jointly build rigs for oil and gas exploration and production in the Middle East Gulf waters. Russian Krasnye Barrikady shipyard will build rigs for exploration and production of oil and gas. The deal was signed in December in Tehran. That same month, Iran's ISOICO also signed a preliminary agreement with South Korea’s Hyundai Heavy Industries and MoU with Nordic Yards Wismar, Germany’s biggest shipbuilder. The idea would be for this to take off once international sanctions against Iran are lifted--hence the preliminary nature of the agreement. So where are we with Iran sanctions? Right now, we're waiting for the International Atomic Energy Agency (IAEA) to confirm that Iran has met its obligations, and you should be prepared to read a great deal of geopolitics into this decision rather than focusing on the technical aspects of whether Iran has met its obligations or not. Iran and the six international mediators signed a deal last July to settle the standoff over Iran's nuclear program. Iran has already announced a package of contracts and plans of increasing oil exports to pre-sanctions level of 2.2 million barrels per day once the sanctions are lifted.

• Shell has agreed to sell its New Zealand natural gas pipeline transmission system, the Maui Pipeline, to two Australian infrastructure funds managed by First State Investments for $228 million. Shell's minority partners in this are Austria's OMV and Todd. The Maui Pipeline has been in business for over 35 years and transports 78%of New Zealand's natural gas. So why is Shell selling? Well, the supergiant is actually considering divesting across the board in New Zealand as it attempts to streamline its global portfolio in the aftermath of the $70-billion takeover of BG Group. In terms of the Maui Pipeline deal, regulatory approval is still underway, but the deal is expected to be completed mid this year. First State Investments recently agreed to purchase 100% of Vector Gas Ltd., which owns the Vector gas transmission network and distribution assets in New Zealand, so this buy makes sense for the Australians.

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