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Global Energy Advisory July 22nd 2016

Politics, Geopolitics & Conflict

• Turkey took center stage this week after an attempted military coup that was quickly crushed, resulting in what can only be described as a major purge. As of the time of writing this, tens of thousands of public servants, military officials and teachers have been either sacked, arrested or rounded up for investigation. More than 20,000 teachers have had their licenses withdrawn.

The official stance as expressed by President Erdogan is that he is cleaning “the virus” that led to the coup attempt, claiming former ally Fethullah Gulen – a U.S.-based Islamic scholar who manages an international network of Muslim schools – was behind the attempt and asking for his extradition from the U.S. only to be told by Secretary John Kerry that the U.S. side needed hard proof Gulen was behind the coup.

Concern about the situation in Turkey reached a new high on Thursday when Erdogan declared a three-month state of emergency, which gives him virtually unlimited powers. Turkey is a major international energy hub – 3 percent of global maritime oil shipments pass through the Bosphorus strait, which was temporarily closed over the weekend, during the coup. With his new unlimited authority and his tendency to completely disregard (or prosecute) any kind of criticism, President Erdogan has put a huge question mark over the security of oil shipments through the Bosphorus.

European leaders have cautioned Turkey’s president to be careful during the state of emergency and avoid compromising democracy and human rights. In his usual way, Erdogan has responded by literally telling these same leaders to mind their own business. Russia has been more pragmatic in its reaction, resurrecting plans for a new pipeline between the Bulgarian port of Bourgas and the Greek port of Alexandroupolis that was supposed to bypass the Bosphorus and that was shelved five years ago due to financial issues with the Bulgarian side.

Turkey will continue to be a hot spot in the coming months, there’s no doubt about it, and it’s likely the full extent to which president Erdogan can influence the policies of the EU will become completely obvious. Europe’s energy security has clearly become a hostage of Erdogan’s political agenda.

• Libya’s recovering oil production and exports have been hit with a protest by the country’s Petroleum Facilities Guard, who claim they have not received their salaries for five months. The protesters occupied Libya’s only functioning export terminal, Hariga, and forced a sharp cut in output in the region. The strike has ended after the intervention of the president of Libya’s House of Representatives, but production at the Sarir field will remain suspended for several more days.

These events have once again demonstrated that, despite the progress made recently in uniting the two parts of the country’s state oil company with a view to restoring its oil industry, there is still a long way to go.

Deals, Mergers & Acquisitions

• Pan American, a unit of BP, is ready to invest US$14 billion in Cerro Dragon, Argentina’s biggest oilfield. Pan American is the operator of the field and also has stakes in three other deposits across Argentina. The South American country is currently not the most stable place on Earth, being rocked by social unrest and strikes because of rising inflation and an increase in utility prices.

• Iran has signed an agreement with Russia’s Zarubezhneft for the development of two fields in western Iran. The deal will see the Russian company study ways of increasing output at the West Paydar and Aban fields. Its proposal will be implemented by the National Iranian Oil Company. This is in addition to an earlier announcement by Zarubezhneft that it’s ready to start developing another Iranian field, with investments of US$2.2 billion.

• Iran has shipped a 2-million-barrel cargo to China, to be used by teapot refineries. The cargo was sold to Trtafigura under the express condition that the crude is supplied to Chinese teapots in a sign that Tehran is well aware of the growing importance of these small independent refineries.

Discovery & Development

• Marathon Oil has produced first gas from it’s Alba B3 offshore compression platform, which is located off the coast of Equatorial Guinea. This will allow the company to convert some 130 million barrels of oil equivalent into gas. The amount represents a twofold increase on Marathon Oil’s proved and developed reserves in the country.

• China posted a 4.6 percent decline in crude oil output over the first half of the year, to 101.59 million metric tons, the lowest first-half output since 2012. In June alone, crude oil production fell 8.9 percent. Coal output also fell, to 1.63 billion tons in the six-month period, down 9.7 percent. In June, coal production was down 16.6 percent.

• Lebanon has tendered ten offshore oil and gas blocks after the country’s two main political parties reached an agreement for the development of its hydrocarbon resources. A deal that was driven by the growing worry that Israel may be siphoning Lebanon’s oil and gas from an area in the Mediterranean that’s been disputed by the two neighbors for years.

Company News

• Noble Group is exiting natural gas and electricity trading in Europe as it seeks to slim down operations. The Hong-Kong based commodity trader recently had to make an emergency equity placement raising US$500 million to avoid going under amid the prolonged slump in commodity prices. European power and gas operations are considered non-core and too capital-intensive to continue to maintain.

• Chevron on Tuesday received a 72-hour ultimatum from several Niger Delta communities to ensure the release of five oil workers, who were arrested by the military last Friday on suspicions that they are members of the Niger Delta Avengers militant group. The chairman of one of the communities, Sheriff Mulade, said that if the U.S. company fails to release the workers, the communities will withdraw all their workers from the local operations of all oil companies with operations in the region, including Shell, Chevron, NPDC and Neconde. The continuing attacks and low oil prices have prompted the IMF to revise down its GDP estimate for Nigeria. Now the international body expects the Nigerian economy to contract by 1.8 percent this year.

Regulations & Litigation

• BP has put the total cost of the 2010 Deepwater Horizon disaster at US$61.6 billion. The sum includes penalties and settlements already agreed on by the company and various plaintiffs, as well as some US$5.2 billion in provisions to be booked in the company’s financial report for the second quarter of 2016. Any further charges relating to the biggest oil spill in the history of the industry will not have a material impact on financial performance, BP said.

• The UK’s Serious Fraud Office has launched a probe into Unaoil, a Monaco-based intermediary that has helped international energy businesses including Halliburton and Petrofac, to enter new markets around the world. The company has been implicated in corruption practices in the course of conducting its principal activity, to secure contracts for its clients.

• Turkmenistan’s President has closed the Ministry of Oil and Gas along with the State Agency for Managing Hydrocarbon Resources. The move is part of a wider government shuffle that, observers say, aims to consolidate the president’s power and redirect the blame for the economic crisis that the Central Asian has been thrown into during the commodity price slump and its problems with exporting gas to Russia and China.

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