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Global Energy Advisory – 9th October 2015

Politics, Geopolitics & Conflict

Iraq/Iraqi Kurdistan Update

• Moody’s Insurance is putting out dire reports that Iraq’s oil revenues for the state could decline by 35% his year, in comparison to last year, while Iraq’s deficit could climb 18%. This is all helped along by a whopping $30 million per day that it needs to fund the battle against the Islamic State. At the same time, the government has reduced the funds available to the Oil Ministry, which in turn means that there are reduced funds to reimburse petroleum costs to contractors.

• The US Court of Appeals for the Fifth Circuit in New Orleans has dismissed the case between the Iraqi central government in Baghdad and the Kurdish Regional Government (KRG) over the latter’s unilateral oil exports in yet another victory for the Kurds in this long-running battle for oil autonomy.

• But it’s not all roses for Kurdish oil. KRG Natural Resources Minister Ashti Hawrami is facing an investigation into mismanagement and corruption that could threaten his control of the ever-important ministry. This is part of the fallout from an ongoing political stalemate that has sparked widespread protests in Iraqi Kurdistan as demonstrators bemoan the political stalemate and the lack of an official president since July—a situation that has also led to a delay in public service salaries. Protests have turned into clashes with police in some cases. There is not enough money to go around. Like Baghdad, the Kurds also have to fund a war against the IS, which is increasingly difficult to do with low oil prices and as the Kurds have been cut out of the Iraqi federal budget. On top of this the Kurds are taking in hundreds of thousands of refugees from the conflict that has spread from Syria. The presidential stickler has to do with current (outgoing) president Marsoud Barzani, of the Kurdistan Democratic Party (KDP), who is attempting to have his term extended due to the crisis with IS. Barzani has been president since 2005 and has already had one extension since 2013. The parliament is already splitting apart at the seams and this attempted extension is adding more pressure, particularly between the two traditional leading parties, the KDP and the Patriotic Union of Kurdistan (PUK). The renewed polarization has now hit the streets and threatens instability at a time when Iraqi Kurdistan can ill afford it. Investors here should be carefully monitoring developments on all fronts.

• The Islamic State continues to launch attacks on the oil facilities in Kirkuk, in northern Iraq, but outside of the KRG’s official territory. The Kurdish Peshmerga fighting forces managed to push IS back last week, but their forces keep regrouping for new assaults. The front line here is moving forwards and backwards with no reprieve. 

Discovery & Development

• Scotland’s Bowleven has announced a hydrocarbon discovery at its Moambe exploration well, onshore Cameroon, at the Bomono Permit. The well was drilled to a total depth of 5,803 feet, with hydrocarbons encountered in Paleocene (Tertiary) aged target reservoir intervals. For Bowleven, this find comes only two months after another discovery at the company’s Zingana well. This earlier find has not yet been quantified, though we are keeping a close eye on the wires for updates. The good news here for investors or potential investors is that the two finds back to back in the same area significantly increase the chances that Bowleven is sitting on a viable development in which fields could share production facilities. Bowleven has said it was working closely with Actis and Eneo in Cameroon on a plan to deliver gas for a gas-to-power development scheme in the event of a successful outcome to testing. Any associated liquids produced would be trucked for sale at the local refinery at Limbe.

• Hungarian oil and gas group MOL has announced a new crude oil, condensate and natural gas discovery in the Karak Block in Pakistan. This is the 10th discovery for MOL in the Karak reserve area since it launched exploration in the country in 1999. The Karak block is operated by Mari Petroleum Company Limited (MPCL) with a 60% working interest, while MOL Pakistan has 40%.

• Shell Nigeria has launched production offshore Nigeria from the Bonga Phase 3 project. This is an expansion of the Bonga Main development, with peak production expected at 50,000 boe/d. Resources will be transported through existing pipelines to the Bonga facility, which can produce more than 200,000 b/d of oil and 150 MMscfd of gas. The main Bonga project—Nigeria’s first deepwater project--saw production launch in 2005. To date, the full project has produced more than 600 million barrels of oil. Shell operates the Bonga project as contractor with a 55% interest under a production-sharing contract with Nigerian National Petroleum, which holds the lease for OML 118 where Bonga field is located. Partners are Esso, Total and Agip Exploration.

Regulations, Litigation, Rulings & Arrests

• Nigeria's former oil minister—who also happens to be the current OPEC president--Diezani Alison-Madueke, has reportedly been arrested in London along with four others for offenses related to corruption, bribery and money laundering. Alison-Madueke was one of the closest Ministers to President Goodluck Jonathan, who lost out to Muhammadu Buhari in March presidential elections. The typical politics is at play here; corruption is rampant and comes to call with a change in power—always with a new leader promising to root out corrupt (among opponents, at least). Alison-Madueke has been under very public scrutiny for some time—accused of everything from oil sector mismanagement to using public funds for luxury jets. She was indicted by the Nigerian Senate in 2009 for an alleged transfer of $6 million into a private account. Earlier investigations had also sought to find enough evidence to prosecute her for other alleged illicit activities. Her opponents say that under her watch, the Nigerian National Petroleum Corporate stole billions of dollars from government coffers. Of course, Buhari promises to end this corruption. Keep in mind, however, that he also covets the position of petroleum minister, which he is apparently hoping to assume alongside the presidency.

• The US Pipeline and Hazardous Materials Safety Administration (PHMSA) has fined ExxonMobil Pipeline more than $2.6 million in connection with the 2013 rupture that led to a crude-oil leak from its Pegasus Pipeline in Mayflower, Arkansas. PHMSA said the line failed because the ExxonMobil subsidiary violated federal pipeline safety regulations for integrity management and operations and maintenance procedures. Exxon will also have to update its pipeline monitoring systems to better identify potential seam failures. In March 2013, some 3,100 barrels, down from the original estimate of 5,000 barrels, spilled from a 22-foot rupture in the Pegasus pipeline. The northern portion of the pipeline remains closed. The agency granted a request to return the southern segment of the line to partial service with reduced pressure in July 2014.

• The US government has reached a proposed $20.8-billion settlement with BP to resolve civil claims arising from the 2010 Macondo spill. The highlights of the settlement include $8.1 billion in natural resource damages, including the $1 billion BP agreed to pay earlier; $5.5 billion plus interest for Clean Water Act penalties; and $5.9 billion under a separate agreement to cover state and local government claims. The settlement does not include the $4 billion that BP agreed to pay earlier to settle criminal charges or the billions more it has spent cleaning up the oil spill and settling separate civil claims with private individuals.

• New Hampshire scored a victory with the state Supreme Court when it upheld a $236 million verdict against Exxon Mobil over widespread groundwater contamination caused by the gasoline additive MtBE, which was banned in the state in 2007. The court also ruled that New Hampshire is entitled to tens of millions of dollars in prejudgment interest in addition to the $90 million that it previously received in settlements from several other gasoline suppliers who settled with the state out of trial. The court also ruled that the state does not have to put $195 million of the damages award into a court-supervised trust fund. New Hampshire sued Exxon and several other petroleum companies in 2003, claiming that more than 1,000 wells in the state are contaminated. Every defendant other than Exxon eventually settled with the state, and case finally went to trial in 2013.

Deals, Mergers & Acquisitions

• Statoil has purchased a 24% interest in the license containing the UK section of transborder Alfa Sentral natural gas and condensate field in the North Sea. Unitization negotiations should begin soon. Statoil paid $15 million for the stake in license P312 to Scotland’s First Oil. The 60Mmboe Alfa Sentral field located in blocks 15/8 and 16/18a is planned to be developed as a tie-back to the existing infrastructure for Sleipner on the Norwegian Continental Shelf (NCS) operated by Statoil. The others include JX Nippon Exploration & Production (UK) Ltd., operator, 45%, and Talisman Sinopec North Sea Ltd., 31%.

• Saudi Aramco reportedly is in discussions to acquire a stake in a China National Petroleum Corp refinery. The target here would apparently be downstream assets with an estimated value of $1 billion to $1.5 billion. Aramco is looking to buy at least one CNPC refinery as well as 300 retail outlets. Saudi Aramco is expanding into refining and petrochemicals and seeking to boost ties with Asia and planning to spend between $70 billion and $80 billion on overseas acquisitions and investments during the next five years.

• Egypt has awarded a total of four new oil and gas exploration licenses off its Mediterranean coast recently. One has gone to Britain's BP and one to Italy's Edison. A consortium involving BP and ENI's Egyptian subsidiary have also picked up a bloc, as has another consortium involving ENI, BP and France's Total. In August, ENI discovered the largest known gas field in the Mediterranean off the Egyptian coast. ENI predict Zohr field could hold 30 trillion cubic feet of gas, covering an area of about 100 square kilometers.

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