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Global Energy Advisory April 22nd 2016

Politics, Geopolitics & Conflict

• Oil fields in northern Syria are now nominally under the control of the Syrian Kurds. Most of these resources are in Deir ez-Zor, in the Rojava region. The Islamic State stepped in around mid-2014 to attempt to take over these oil resources, whose control was ambiguous and in many cases tribal and individual (smugglers). The Kurds largely kept ISIS from destroying or assuming full control. Earlier this month, the Kurds seized the Rweshid oil field after pushing ISIS out of the Abu Khashab district in northeastern Hasakah province.

This area remains very important to the Assad regime. Before the conflict it was producing about one-third of Syria’s oil. The Kurds’ key complaint before the conflict was that their territory contributed substantially to the national oil production, but at the same time suffered from a shortage of oil after the regime’s distribution. Now that the Kurds have largely managed to secure control of the oil production here, there is talk that it’s being put to better use than it was before the conflict.

That’s the background …. to the next phase in the Syrian conflict, which pits the Syrian Kurds decidedly against the regime, and it’s all about oil. Clashes broke out on Wednesday and had intensified by Thursday between the two sides in the country’s northeast. And now that ISIS has largely been sidelined (with Russia’s help), the regime is honing in on the Kurds, who declared an autonomous zone in late March, and now have control of their oil and probably aren’t keen on letting those revenues return to the regime. The city of Qamishli is the flashpoint for this new phase of the conflict, and this is the de facto Syrian Kurd capital. Most of Qamishli is controlled by the Kurds, but some outlying neighborhoods and an airport to the south of the city are controlled by regime forces and militias allied with the regime. Late on Thursday, Kurdish media were reporting that nearly 70 regime fighters had surrendered to the Kurds, but we have no independent confirmation of this and we expect this next phase in the conflict to have only just begun, and it will be an even trickier game of alliances than the fight against ISIS.

• Kuwaiti oil and gas workers ended a three-day strike that had reduced the country's oil production by 60% (1.7 M/bpd) to 1.1 M/bpd. The strike came to an end after the government refused to negotiate while the strike was still on. Members of Kuwait’s Oil & Petrochemical Industries Workers Confederation protested cuts in their pay and benefits amid some government austerity measures due to low oil prices.

Regulations & Litigation

• The government of Mexico will give state-run energy company Pemex $4.2 billion in aid to make up for massive losses and declining production amid low global oil prices. Pemex lost $10 billion in the last three months of 2015 alone, and a total of $32 billion for the entire year. In the aid deal, Pemex will get a capital injection of $1.5 billion, plus $2.7 billion to cover the bill for worker pensions. Pemex had over $87 billion in debt at the end of Q3 2015, and now owes an estimated $7 billion to service providers. In late February, Pemex pledged to meet the government’s request that it trim its 2016 budget by $5.5 billion. It also said it would cut up to $3.6 billion in spending by delaying projects, including expensive offshore wells. Last year, the Mexico’s National Hydrocarbons Commission offered 25 contracts for onshore oil fields for the first time since major energy reforms launched in late 2013. Mexico plans to auction 10 blocks of deepwater oil and gas resources in December this year. Twenty-one companies, including Exxon Mobil, BP and Chevron, have asked for data related to this auction.

• In the Netherlands, The Hague District court has overturned a 2014 order from the Permanent Court of Arbitration (PCA) that Russia pay $50 billion to former shareholders of the Yukos oil company. In its initial ruling, the PCA had said that the Kremlin had used massive tax claims to seize control of Yukos in 2003 and silence its CEO, Mikhail Khodorkovsky. The Hague District Court, however, has now ruled that the PCA did not have jurisdiction to make its ruling. The former shareholders immediately vowed to continue their legal battle for compensation and to appeal the decision.

Deals, Tenders, Mergers & Acquisitions

• Egypt will launch international bids for oil exploration in 11 blocks in the Western Desert and the Gulf of Suez by April. Keep in mind, though, that arrears owed by the government to oil firms stood at $3.2 billion at the end of March. It’s a tough environment to work in and political instability and three regime changes in recent years have not helped, leading to significant delays in oil and gas field development. Domestic natural gas production has fallen some 16 percent since 2013 and exports are down roughly 70 percent since 2009. Despite grave mismanagement of this sector, there are substantial gas reserves—most notably in the Mediterranean (Zohr Prospect)—waiting to be developed. In March, Shell and Apache announced their local joint venture was ready to start work on a pilot project in the Western Desert, which would require fracking.

• Devon Energy has agreed to sell its noncore assets in northern Oklahoma for $200 million. The company is seeking to divest $2 billion to $3 billion of its non-core assets by the end of this year. The deal includes 210,000 largely contiguous net acres primarily in Payne, Lincoln, Logan and Garfield counties in Oklahoma. In first-quarter of this year, net production from the acquired assets averaged 12,800 barrels of oil equivalent per day. The buyer is said to be White Star Petroleum. Note that White Star Petroleum was just created by renaming American Energy-Woodford (AEW), a subsidiary of the late Aubrey McClendon's American Energy Partners.

• Carlyle Group is reportedly planning to acquire several oilfield services businesses from Halliburton and Baker Hughes that could be valued at more than $7 billion. According to the media report, the company is competing against General Electric , which was already in discussions to buy many of the assets. Halliburton and Baker Hughes are currently trying to overcome a Justice Department challenge to their planned $35 billion deal merger. Last week the DOJ filed an antitrust lawsuit challenging the deal, arguing it would threaten higher prices and reduce innovation in the sector.

• Osaka Gas of Japan is poised to expand its LNG trading in order to sell off LNG it has no need for at this time, eyeing short-term opportunities. However, it will also be seeking long-term sales deals. Right now, there is a surplus of LNG, as demand stalls. That surplus is most significant with Australian LNG. (Osaka has a minor stake in Chevron’s Australia Gorgon LNG project).

Discovery & Development

• Exxon Mobil has launched oil production at its $4-billion Julia oil field in the Gulf of Mexico. Furthermore, a second well is expected to come online in the next couple of weeks. A third well is also being drilling and slated to begin production in early 2017. In total, the field is estimated to have some 6 billion bbl of resources in place. ExxonMobil is the operator of the field discovered in 2007, with partner Norwegian Statoil. Each hold 50% interest.

• Statoil and partners Spanish Repsol, Chinese Sinopec and Brazilian Petrobras, has announced an oil discovery in the Campos Basin, offshore Brazil. Gávea A1, located in Block BM-C-33, was successfully tested, producing some 16 MMcf/d of natural gas, and 4000 b/d of oil. The project is controlled by state-run Petrobras, but Statoil holds a 35 percent interest and will assume the role of operator later this year.

• The fourth deepwater appraisal well has been spudded offshore Senegal. Cairn Energy is the operator is the will. The fourth well (SNE-4) is about 3 miles southeast of the first discovery well (SNE-1). The partners here are trying to intersect a potentially significant reservoir in the oil leg and determine variability and connectivity to increase the contingent resource base of the field. Drilling and logging should take around four weeks to complete.

• Polish and Danish companies will join efforts to build a natural gas pipeline running between Poland and Denmark, in a project that is considered strategic, particularly from Warsaw’s perspective, which is desperate to diversify its gas supplies away from Russia. This Baltic pipeline will bring natural gas from Norway to Poland via Denmark.

• Texas-based Noble Energy seeks to sell up to 15% of its 40% interest in the Israeli Leviathan gas field—a giant discovery that has been languishing in the red tape of Israeli bureaucracy. The sale of this 15% should help to appease the Israeli public and authorities who have viewed Noble and its partner, Delek, as having a monopoly on Israeli gas.

Incidents

• A large explosion at an oil facility in Veracruz state, in south-east Mexico, has killed 24 people and wounded some 130 others. This was a Pemex-owned facility in the port city of Coatzacoalcos. Hundreds of people were evacuated, and the fire was said to be under control by late on Thursday.




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