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Global Energy Advisory 8th July 2016

Politics, Geopolitics & Conflict

The Brexit Fallout

We’ve been ignoring Brexit largely on the Global Energy Advisory because, well, no one on this side of the Atlantic really cares about the European Union in and of itself. However, what they DO care about is Russia, and the UK’s exit from the European Union leaves a bit of a gap in Brussels when it comes to Russia. It basically leaves the French and Germans in charge (with the latter being great bed fellows with the Russians) and removes Washington’s talking head there. The immediate question is what will happen to EU sanctions on Russia with the UK gone? Now there is a bit of a panic going on as to how to fill this gap, with NATO immediately seizing the day to bolster its presence in the region. Because what Washington loses tangibly is the TTIP, the Transatlantic Trade and Investment Partnership. This EU-US trade deal has long been controversial, and now it’s highly unlikely to happen, especially in 2016. There’s a concerted effort, lead visibly by John Kerry, to pretend it never happened and slowly hit the reverse button and bring the UK back into the EU fold. But the EU, in the meantime, is already on the divorce path in full force, adopting the attitude that if you’re out, you’re out fast and the details can be dealt with after the divorce papers are signed.

The Terror Surge, Washington and Moscow

On late Monday/early Tuesday, three terrorist attacks in Jeddah, Qatif and Medina in Saudi Arabia killed around a dozen people. Four guards and at least four civilians were killed in the Medina and Qatif attacks at major Islamic holy sites, while in Jeddah, a suicide bomber killed himself and two security officers across from the U.S. Consulate. In the last days of June, eight suicide bombers attacked a Christian village in Lebanon on the border with Syria, killing five people before blowing themselves up near a church. On the same day, terrorists attacked the Istanbul international airport in Turkey. One can chalk it up to Muslim Ramadan holiday fervor, or the American 4th of July independence celebrations as a good enough reason to step up the attacks a bit, but at the end of the day, this surge in attacks is likely related to a deal brewing over the Syrian conflict between Russia and the U.S. It’s a deal that will be seen (for obvious reasons) as a complete betrayal by the U.S. of Islamic forces that have been fighting the Assad regime since this conflict began. Washington and Moscow are talking major military cooperation over Syria, and in return—according to mainstream media reports—the Russians would get the Assad regime to stop bombing U.S.-supported rebels. That’s the official line. So, while some U.S.-supported ‘rebels’ might get a bombing reprieve, the Russian and Americans would coordinate attacks against the Al Nusra Front (al-Qaeda, Syria), which is, like the rebels, fighting Assad. Expect more to come as the U.S., in particular, takes on forces armed to the hilt under earlier deals to get weapons to them by any means possible to take on Assad.

Libya Glutting Market? Not so Fast…

Once the conditions are stabilized, Libyan officials say the country could double production to over 700,000 bpd. Before the 2011 revolution, Libya was producing 1.6 million bpd. This optimistic scenario is coming on the back of an agreement reached to unite the two rival Libyan National Oil Companies (NOCs), the Tripoli-controlled NOC and the eastern Tobruk/Benghazi-controlled NOC. It sounds great, but the reality is that the oilfields remain controlled by powerful military factions who are being dangerously sidelined, and they won’t have anything to get to the ports if these factions don’t play ball.

No Surprise with the Chilcot Report

For all intents and purposes, the UK entered the Iraq war to secure a place for BP (and Shell), and there were (gasp) no weapons of mass destruction, according to the Chilcot report. It’s not mind-blowing information. Anyone in the intelligence industry has known this from the beginning. The only thing of interest in this report (outside of its detailed story of UK military unpreparedness) is the timing. It’s taken this long for this report to come out, but with situations such as this, the MO is to wait until enough time has passed for sentiment to have dulled and for the results to be considered no longer relevant—water under the bridge.

Discovery & Development

• Shell will begin dismantling its Brent Delta platform in the North Sea next year, after four decades in operation. The dismantling process was delayed for a year. The massive platform, comparable to the Eiffel Tower in height, is one of four that will be dismantled, and the first project of this scale to be decommissioned in a depleted oilfield in the North Sea.

• BP will move forward on a project in Indonesia that could annually turn natural gas into 3.8 million tons of liquid energy, with a price tag of $8 billion to $10 billion—under initial cost estimates of $12 billion. The company is planning to build a third facility at its Tangguh facility to sell more LNG to buyers in Indonesia and Japan. The existing facilities have produced 7.6 million tons of LNG a year there since 2009. According to the project, Indonesia's state-owned electricity company Perusahaan Listrik Negara (PLN) is the largest buyer of the Tangguh expansion project's output. The company will buy 75 percent of LNG produced by expanded facility. The remaining output of the additional facility will be sold to Japan-based Kansai Electric Power Company.

• Scotland’s EnQuest has announced an oil discovery at its 100 percent-owned North Sea Eagle exploration well. Preliminary analysis indicated an oil bearing reservoir with a vertical thickness of 67 feet. The company acquired the well in the second quarter of this year with a 100 percent working interest. EnQuest anticipates gross total recoverable reserves at the field to be similar in size to those in the nearby Gadwall producing oil field, estimated total gross recovery from Gadwall at about six million stock tank barrels.

• Tullow Oil has announced that it will not reach its production target of 100,000 bpd next year because it will be forced to shut down its Jubilee offshore field in Ghana for up to three months next year for repair work. Also this year, the company had to cut its oil production targets by some 12,000 bpd due to technical problems.

Contracts, Tenders & Concessions

• Energean Oil & Gas has reached an agreement with Montenegro’s Economy Ministry to explore and produce the Balkan country’s offshore blocks, 4219-26 and 4218-30. Parliamentary approval is still required for this deal to go forward. These blocks are in the prolific offshore Adriatic region, where there is already significant production in the western part, but where the eastern part remains relatively untapped, and this is where Energean’s blocks are situated. The company is also exploring offshore Greece.

Deals, Mergers & Acquisitions

• Brazilian Petrobras' is getting rid of what it calls its “junk” oilfields off the Brazilian coast in the states of Sergipe and Ceara. In all, the state-run company will sell nine shallow-water fields producing a total of 13,000 barrels per day. Substantial investment is likely to be required to ensure these fields can maintain commercially viable production.

• Colombia’s Ecopetrol SA has taken ownership of the Rubiales Field from Canadian Pacific Exploration & Production Corp. under the terms of a terminal contract. At one time, this was the largest producing oilfield in Colombia, reaching 214,000 bpd by 2013, or equivalent to 20 percent of the country’s total production, under Pacific Exploration’s watch. In the spring of last year, however, the Canadian company and Ecopetrol agreed that the Rubiales contract would not be extended. The contract was officially terminated on 30 June 2016, with the blocks reverting back to Ecopetrol with zero compensation, though Pacific Exploration invested over US$5 billion and drilled over 1,000 wells over eight years.

• Texas-based Noble Energy announced it will sell 3 percent of its Israeli Tamar natural gas field to Harel Insurance Investments and Financial Services and the Israel Infrastructure Fund (IIF) for $369 million. Noble reported a net loss of $2.03 billion for the last quarter of 2015. Noble Energy and its Israeli partner, Delek Group, control most of Israel’s gas fields, including Leviathan and Tamar. Talk of a monopoly on Israel’s gas has wreaked havoc with development plans in Leviathan, $6.5-billion natural gas project that holds an estimated 22 trillion cubic feet of gas. Tamar was discovered in 2009 with reserves of 10 trillion cubic feet and for the past two years fuels more than half of Israel's electricity generation. The U.S. company owns 36 percent of the field. As one of the conditions to let the Leviathan development move forward, the Israeli government struck a deal with Noble in December for the latter to sell 11 percent of its 36 percent holding in Tamar. The company plans to sell the remaining 8 percent over the next three years.

Regulatory Movement

• Nigerian President Muhammadu Buhari has approved a new Board for the National Petroleum Corporation (NNPC). Minister of State for Petroleum Emmanuel Ibe Kachikwu is the chairman of the new board, while Maikanti Kacalla Baru is the new Group Managing Director of the corporation. The new board also consists of the Permanent Secretary of the Federal Ministry of Finance and six others.

• Shell is seeking up to $2 billion from Saudi Aramco as part of the breakup of their U.S. joint refining venture, Motiva Enterprises. According to the split arrangement, Aramco will take control of Motiva's largest U.S. refinery in Port Arthur, Texas, and retain 26 distribution terminals, while Shell will become the sole owner of Motiva's Louisiana refineries in Convent and Norco as well as Shell-branded gasoline stations in Florida, Louisiana and the northeastern US. The split was announced in March and is expected to be completed in October but disagreements over the payment could postpone the final date. The $2 billion Shell is asking for would be compensation for the Saudi company retaining a larger share of the joint venture. The two companies joined together to create Motiva Enterprises LLC in 1998, a 50-50 joint venture that operated three refineries on the U.S. Gulf Coast. But Shell and Saudi Aramco have seen their interests head in different directions. The relationship started to fray after Motiva announced a $10 billion expansion of the Port Arthur refinery, doubling its capacity to 603,000 barrels per day, making it America’s largest refinery. It produced gasoline, diesel and jet fuel. Tensions have been high over this project for some time. A leak shortly after the expansion was completed in 2012 led to high costs, and a workers’ strike last year soured relations further. The split could also pave the way for the much-discussed potential of listing Aramco assets in a public offering.

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