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Global Energy Advisory December 2nd, 2016

Politics, Geopolitics & Conflict

The biggest news of the week, of course, is that OPEC reached an agreement to cut its output by over a million barrels per day, to a target level of 32.5 million bpd in a bid to support the rebalancing of international oil markets. The cut will take effect at the start of 2017 and will be in place for six months, under supervision from a monitoring committee comprised of OPEC oil ministers. Russia will join the effort, having pledged to reduce its output gradually over the six months by some 300,000 bpd. This will effectively mean delaying plans for production expansion rather than an actual cut.

The OPEC deal can be regarded as an indication of the shift in the balance of power in the Middle East because Saudi Arabia, the group’s unofficial leader and largest producer, was forced to make the biggest concession, at the same time yielding to Iran’s insistence to continue pumping at current rates, which are close to 4 million bpd. Saudi Arabia tried the peaceful way and then it resorted to threats, saying it could further increase production but Iran – and Iraq, for that matter – held their ground.

Despite the good news, which immediately boosted international crude benchmarks, skepticism remains rife, with some observers noting that a production cut does not equal an export cut, so OPEC, which has been amassing crude, could continue to export at current rates with a view to maintaining market share, effectively curbing the upward potential of oil prices. It’s worth noting that the post-announcement jump in Brent and WTI was nowhere near the $55 a barrel forecast by some analysts. In fact, the two main benchmarks did not even get to $53 a barrel before slipping back down to $50 and below.

One thing seems to be clear, though. Up until now Saudi Arabia has been able to lead OPEC in any direction it wants, but with a budget deficit the size of which has never been seen before in the desert kingdom, and with Iran back in the game, it might find itself following rather than leading. Also, the situation could deepen the political tension between the Middle East’s archrivals with unclear consequences. Throw a new U.S. president into the mix, and the uncertainty is palpable.

Deals, Mergers & Acquisitions

• Greece has failed to sell its gas grid operator DESFA to Azerbaijan’s state oil company SOCAR. The deal fell through after the prospective buyers asked for a lower price for the 66-percent stake in the company. The Greek government said anything less than 400 million euros would make the deal unfeasible legally.

• The owners of Russian oil company Russneft have sold 20 percent in the company at 550 rubles per share, valuing the whole business at around $2.5 billion. The majority of buyers were locals. According to the majority owner of Russneft, billionaire Mikhail Gutseriev, the issue was 30 percent oversubscribed. This is the first IPO of an oil company in Russia in a decade and the fact that 90 percent of the buyers were Russians highlights the difficult situation for foreign investment in the country, with EU and U.S. sanctions still in effect and President-elect Trump’s position on these sanctions unclear.

• DONG Energy and Moller-Maersk are negotiating a $10-billion tie-up of their oil and gas operations. The Danish logistics giant was suggested as the most likely buyer of local DONG’s oil and gas business, after the company said it would prefer to focus on wind energy. Maersk, for its part, earlier announced it was considering a spinoff or a sale of its oil and gas operations in a bid to streamline its core business.

• Shell is mulling over an exit from Iraq, as it seeks to offload $30 billion worth of assets to pay down debt accumulated with the acquisition of BG Group. Shell has had a presence in Iraq for over 100 years but the local government’s recent policy on royalties has seen its financial returns from this presence dwindle. Iraq operations accounted for 4.4 percent of Shell’s total oil and gas output last year. The company has no plans to sell its gas operations in the Middle Eastern country, however.

• BP has bought two stakes in Statoil-operated oil and gas fields in the North Sea. The British major bought a 25 percent stake in two licenses that make up part of the Jock Scott prospect, and 40 percent in another two licenses in the neighboring Craster prospect. The Norwegian company will remain operator of the licenses. In addition to the acquisitions, BP said it planned to raise its UK production to 200,000 bpd over the next four years.

Tenders, Auctions & Contracts

• Noble Energy and Delek Group, the operators of the giant Leviathan offshore gas field in Israel, have sealed a $2-billion deal with Or Energy, to supply the utility with 8.8 billion cu m natural gas over a period of 20 years. The gas will fuel Or Energy’s new power plant, soon to begin construction.

• Thailand plans to hold a tender for several oil and gas license plots where current licenses are about to expire. The tender is scheduled for 2018, a postponement on the previous plans to start receiving bids in March 2017. The current holders of the expiring licenses are Chevron and PTTEP, a subsidiary of the local state-owned oil company, PTT Public Company Limited.

• Canadian firm Africa Energy Corp has bought a 10 percent stake in an exploration license off the shore of Namibia. The seller is Pancontinental Oil & Gas NL, an Australia-listed exploration company with a focus on operations in Kenya and Namibia. The value of the deal is $6.5 million, of which $1.7 million to be paid upon the signing of the contract and the remainder when the first exploration well is spudded.

• Greek Greka Drilling has been awarded a contract by PetroChina to drill five wells at a field in the Shanxi province in Northern China. The region is home to one of the biggest oil deposits in China, the Huabei Oil Field complex. Greka has already drilled 13 wells for the Chinese giant.

Discovery & Development

• Statoil is moving forward with exploration at an offshore oil discovery in Canada, in the Bay du Nord. The Norwegian major plans to conduct a subsea and marine study of the plot, including a design of a floating production, storage and offloading vessel. This is encouraging for the local economy as the discovery could prove to be economical enough to motivate the start of commercial-scale production.

• Greek Energean plans to spend $50 million on the development of an offshore oil and gas field near Thassos, the West Katakolon, raising its production from 5,000 to over 10,000 bpd by 2018. The investment is part of an ongoing $200-million investment program.

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