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Global Energy Advisory February 3rd 2017

Cushing OK

Politics, Geopolitics & Conflict

• The White House has put Iran “on notice” following ballistic missile tests in the country. According to Trump’s National Security Advisor Michael Flynn, who announced the measure, Iran’s support for the Houthi rebels in Yemen was another reason for the decision, though this is a direct move of support for Saudi Arabia and its waging of a proxy war with Iran in Yemen. The announcement immediately lifted oil prices as worries grew that the tension between the two countries may escalate into a conflict that would affect one of the main global oil routes, the Strait of Hormuz, controlled by Iran. While empty threats to block the Strait of Hormuz have been circulating for an eternity, the Trump presidency may be the event that pushes this over the edge. The strait sees a fifth of the oil traded globally on a daily basis. This is not the first ballistic missile test Iran has carried out since it struck a deal with six Western powers that led to the lifting of most economic sanctions against Tehran. An open conflict between Saudi Arabia and Iran—while it could essentially spark World War III—would initially be a boon for oil companies.

• More tension is emerging between the U.S. and Iraq, after Donald Trump’s executive order effectively banning hundreds of thousands of legal Iraqi resident of the U.S. to enter the country. The Iraqi parliament struck back with its own ban on U.S. nationals, which, although a symbolic move, does not bode well for bilateral relations. Iraq is one of the strongest U.S. allies in the Middle East against the Islamic State and the worsening of relations would not help with this fight. Again, much as Trump’s hasty and dangerously broad ban on immigrants from Muslim countries will exponentially aid in jihadist recruitment, so will a rift in relations with Iraq push it fully into the hands of Iran in a geopolitical backlash that will not benefit the US—or international oil companies operating in Iraq’s oil-rich south.

• Clashes between pro-Russian separatists and the Ukrainian forces in Ukraine are escalating, raising questions whether Russia would interfere, testing President Trump’s positive attitude to his Russian counterpart. It’s difficult to guess whether Putin will make such a move, especially now that NATO has sent a signal it is unwilling to provoke Moscow, by suspending a planned discussion with the Ukrainian government about the treaty’s missile defense system and more specifically about the possibility of debris falling on Ukrainian territory if the system is used. However, Russia’s most likely play here is to forego land and threaten Ukraine from the Black Sea, where it has usurped Ukrainian Crimea’s offshore oil territory. An incident in which a Ukrainian military plane flew two low passes over a Russian oil rig tower earlier this week suggests that Ukraine is aware of Russia’s deployment of radar systems that are used for missile guidance in this area.

Deals, Mergers & Acquisitions

• GE is preparing an investment in Nigeria’s three refineries, in partnership with the National Nigerian Petroleum Company. The company is competing with Eni for the rehabilitation of one of the refineries, in Port Harcourt. In addition to the refinery projects, GE is also willing to take part in power generations projects with a combined capacity of 4.4 GW.

• Shell offloaded assets in the North Sea and Thailand worth a combined $4.7 billion as part of its divestment strategy to reduce its debt load. Most of the assets were in the North Sea and were sold for $3.8 billion to indie producer Chrysaor, backed by private equity funds. The remainder came from the sale of Shell’s stake in a gas field in Thailand to Kuwait Petroleum Corp.

• Private E&P Silverback Exploration plans to sell assets worth $855 million. The assets are located in the Delaware Basin, in the Permian shale play and produce a daily average of 3,500 barrels of oil equivalent. The buyer is Centennial Resource Development, which said the acquisition will help it raise its production to 50,000 bpd by 2020, from 30,000 at the moment.

• Enbridge will take a subsidiary private in a bid to simplify its corporate structure. The subsidiary in question is Midcoast Energy Partners, which has an interest in another of Enbridge’s units, Enbridge Energy Partners. The parent will pay $170 million for the move.

Tenders, Auctions & Contracts

• Brazil’s national development bank will no longer have a vote on a committee set up to ensure local content for new oil and gas development projects. Instead, the vote will now belong to the country’s planning ministry, to which the bank reports. The move aims to encourage more foreign investment in the local oil and gas industry.

• Bulgartransgaz, Bulgaria’s gas transmission network operator, will later this year launch tenders for the construction of gas pipelines worth a total $23.5 million. Half of this will be provided by the company and the other half will come from the EBRD-administrated Kozloduy International Decommissioning Support Fund. The pipelines will connect five municipalities to the national gas grid.

• Algeria’s Sonatrach has invited bids for the construction of four petrochemical plants worth a combined $6 billion. The tender is part of Sonatrach’s efforts to boost revenues by focusing more on refining and chemicals production. At the moment, the company produces 30 million tons of refined oil products annually.

Company News

• The president of Venezuela has replaced the vice presidents at state-owned PDVSA and has created an executive vice president position in a stated attempt to curb corruption at the company. The company has a bad reputation, won through practices such as smuggling subsidized fuels, kickbacks and graft. Former Oil Minister Eulogio del Pino will remain President of PDVSA.

• Glencore has overtaken Trafigura as the largest buyer of Russia’s Urals blend of crude, following its acquisition, together with Qatar’s sovereign fund, of a 19.5% stake in Rosneft. Glencore’s chief, Ivan Glasenberg said last week that the commodity trader and Rosneft are discussing future cooperation projects including crude oil supply to India and China.

Discovery & Development

• Gazprom Neft said crude oil output from its Prirazlomnoye field, in the Arctic, more than doubled in 2016, to 15.7 million barrels, up from 5.8 million barrels for 2015. Prirazlomnoye is the only offshore oil field in the Russian Arctic in commercial operation.

• Pemex reported the lowest refinery output in 26 years for 2016. The reason for the slump was a budget cut by the government, which stripped the state-owned company of the funds needed for timely maintenance. As a result, Pemex’s six refineries experienced 88 unplanned unit stoppages over the 12 months. The average daily throughput stood at 933,062 barrels, down 12% on 2015.


• LNG imports to Turkey are seen to reach 9 million tons by 2025, thanks to wider use of the fuel in a range of industries. The expansion in mining activity is also a driver for growing LNG use, as is power generation, where LNG is replacing coal and oil as fuel.

• Independent producer Comstock reported that its production replacement rate last year reached 667% with proved reserves rising by 47%. At the end of 2016 Comstock had 7.3 million barrels of oil in its reserves books and 872 billion cu ft of natural gas.

• An audit by two U.S. firms has confirmed Saudi Aramco’s crude oil reserves at over 261 billion barrels. The audit is part of preparations for the initial public offering of the world’s largest oil company by output.

Regulatory Updates

• Congress is ready to start removing environmental regulation approved by the previous administration, starting with a requirement for the reduction of methane emissions in oil and gas fields. Methane emissions, most commonly unintentional, contribute significantly to climate change because of their greenhouse effect. The Obama rule would have not just curbed these but by doing this it would have saved money, some $330 million worth of the gas. However, the GOP-dominated House is planning to invoke a Bill Clinton-era piece of legislation, the Congressional Review Act that allows for legislation to be reversed in a matter of two months by a simple majority vote.

• The Scottish government has opened consultation on whether to allow fracking as a method of extracting oil and gas on its territory. The method was banned in Scotland two years ago, giving the government time to evaluate the pros and cons. Scotland has substantial tight gas reserves, it has been estimated, but these are inaccessible with conventional methods. Across Britain, fracking has met with fierce opposition from environmentalists.

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