Global Energy Advisory December 9, 2016

Politics, Geopolitics & Conflict

• The Petroleum Facilities Guard (PFG) of Libya is fighting the Libyan National Army (LNA) to regain control over the country's export terminals, which LNA took over in September. The PFG, which is affiliated with the UN-backed Government of National Accord, had suspended shipments of crude from the ports for two years, using the facilities as a bargaining chip in its financial disputes with government agencies. The LNA, on the other hand, which reports to the rival government, the House of Representatives, handed control of the ports to the National Oil Corporation and exports were restarted. The move is widely seen as a quest for power by the LNA's leader, Khalifa Haftar. The latest from the Oil Crescent is that NOC had evacuated some personnel from the El Sider port because of the LNA-PFG clashes in the area. General Haftar is largely responsible for the relaunch of Libyan oil exports, while the PFG had been holding them hostage. Alliances here are tricky with respect to the PFG, which is largely militia for hire. While Haftar definitely had the upper hand in this equation, the PFG has managed to regroup to some extent-enough so to try to take on the LNA forces once again. We believe Haftar retains the upper hand, but nonetheless it's getting bloody once again and Libyan oil revenues may suffer.

• Russia and Turkey are working on mending their relations after the freeze following the Turkish army's downing of a Russian plane last year. Turkish PM Binali Yildirim this week visited Moscow to discuss bilateral relations, with special attention paid to gas pipelines and nuclear power. One pipeline project, Turkish Stream, has already been ratified by Turkey and is expected to soon get the green light from the Russian Duma, too. The warm-up between Russia and Turkey is a clear indication of both countries' move away from Europe, which should reinforce the EU's efforts to diversify its energy sources. But it's more complicated that this, and the Russian-Turkey détente is fragile at best, not the least because Turkey is still meddling in Syria in a way that is at odds with Russia's agenda here.

• The political situation in South Sudan continues to deteriorate, according to the latest from the UN Commission for Human Rights. The oil-rich country is the arena of a brutal fight between President Salva Kiir and his former first Vice President Riek Machar and there are external forces meddling here. Ethnic cleansing is being carried out, the UN Commission warned and as many as 3.6 million people are faced with serious food insecurity. South Sudan won its independence in 2011 and a civil war promptly ensued, largely for control over its oil reserves, which constitute 3/4 of the greater Sudan's reserves. Plans were to resume production in July this year but given the continuing instability, this is unlikely to happen on any meaningful scale anytime soon.

Deals, Mergers & Acquisitions

• Glencore has teamed up with Qatar's sovereign wealth fund to buy a stake worth $11 billion in Russian state-owned oil giant Rosneft. Glencore will contribute $324 million to the total value of the deal, which some see as its CEO Ivan Glasenberg's return to what he does best: making potentially game-changing deals. The Swiss-based company is the world's second-largest oil trader after Trafigura and the stake purchase will, for starters, give it access to 220,000 bpd of crude plus various other "strategic opportunities".

• Chesapeake Energy has agreed to sell part of its land in the Haynesville shale for $540 million. The buyer is a private company. With the divestment, Chesapeake said it has accumulated a total $2 billion in proceeds from asset sales made in 2016. The asset sales are part of efforts to slim down a $9-billion debt load.

• Repsol has sold a 3% stake in an LNG project in Indonesia to BP for over $300 million. The acquisition will boost BP's holding in the project, Tangguh, to over 40%. The UK company is operator of the project, which comprises two liquefaction trains with annual capacity of 3.8 million tons. Earlier this year, BP approved an investment of $8 billion to build a third train.

• Nigeria and Morocco have set up a joint venture for the construction of a gas pipeline to Europe. The pipeline will connect Nigeria to Morocco and several other African countries before reaching Europe. One of the purposes of the project is to develop the regional electricity market, making it more competitive.

• Greek Energean has been cleared by the Israeli Petroleum Council to acquire in full two offshore gas fields, Karish and Tanin, for a total consideration of $148 million. The sellers are Israeli Delek Drilling and Avner Oil, two units of Delek Group, which has been targeted by regulators for its close-to-monopolistic position on the Israeli energy market.

Tenders, Auctions & Contracts

• Shell has signed a preliminary, non-binding agreement with the National Iranian Oil Company for the development of three fields: South Azadegan and Yadavaran along the border with Iraq, as well as gas field Kish. This makes Shell the second Western energy company to enter Iran after the lifting of economic sanctions in January.

• Mexico has awarded development licenses for nine offshore blocks that together could add 900,000 bpd to its current 2-million-bpd production. This will make the country a bigger producer than Venezuela and Brazil, based on current production rates in the three countries. The blocks will be developed by Exxon, Chevron, BP, Statoil, CNOOC, Ophir Energy, Murphy Oil, Total, BHP Billiton, Petronas, and local Sierra. Former energy monopoly Pemex will partner with some of the winners.

• India plans to splash $100 billion on its natural gas industry, including the expansion of current gas supply infrastructure, to include 228 cities hitherto unconnected to the nationwide grid. The investments are planned for the period until 2022, making up the bulk of a $136-billion gas investment program that will run until 2025.

• PDVSA is seeking fuel imports as its refineries struggle with insufficient inputs. Company documents leaked to the media revealed that Venezuela's largest refinery, Paraguana, which can process 955,000 bpd, was operating at less than 50% of capacity last week, and the 645,000-bpd Amuay refinery was working at around 50% of capacity. Over the last month, PDVSA has sought to buy about 3.3 million barrels of gasoline and diesel on the open market.

Discovery & Development

• BP has started drilling in a new field in the North Sea, which could turn into a commercial-scale source of natural gas. The drilling operation should confirm or reject the economic viability of the field, which is part of a block that is already being developed by Perenco, the Ravenspurn field.

• Australian energy company Melbana, which exclusively focuses on Cuba, said that it is moving closer to beginning drilling around the island. At the moment, a Melbana team is discussing next steps with Cuban regulators and international oilfield service providers, as well as local contractors. Melbana is partnering with Cuba's energy company CUPET, on an offshore block estimated to contain some 8.2 billion barrels in place.

• An oil sands development project in Utah has been suspended until its operator gets further financing from its parent company. US Oil Sands, the operator, said it had laid off its Canadian and U.S. workers as the start of operations at its PR Spring oil sands mine has been delayed until the company gets $7.5 million from its parent, ACMO.

Regulatory Updates

• The Energy Ministers of the EU member-states agreed that every long-term contract that supplies natural gas enough to satisfy 40% or more of the needs of any single member needs to be reported to the relevant authorities in that member. The European Commission also has the right to request information about these contracts, except details about price. The EC can request additional information on gas supply contracts even if they don't reach the 40% threshold.

• Energy Transfer Partners, the company behind the Dakota Access pipeline, has taken matters to a federal court, after the U.S. Army Corp of Engineers refused to grant it a permit to construct the controversial section that should have passed through Standing Rock Sioux lands and the tribe's main water reservoir. The Corp said it will carry out an environmental impact study and look into rerouting possibilities, although Energy Transfer Partners said earlier it was not going to reroute the pipeline.

• Lakes Oil, an Australian energy company, is suing the state of Victoria for a fracking ban that the local government approved recently. According to the company, which is demanding $2 billion in compensation, the ban had deprived it of utilizing its exploration licenses issued previously.

• Mozambique's government has amended a contract for natural gas production and marketing with Anadarko and Eni to allow them to sell the government's share of the gas the companies extract in the country's Rovuma Basin.