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Global Energy Advisory - Ukraine Commits Financial Suicide

Regulatory/Management Alerts

During the first week of August, the Ukrainian government has moved to double tax for private gas producers, signaling the first move by key Ukrainian political-business elite to stymie any chance for reform of the energy sector and energy independence. According to our key source in Kiev--Robert Bensh, a partner in Pelicourt LLC, the majority shareholder of Cub Energy, the third-largest private gas producer in Ukraine: “This law is dangerous to the long-term security of Ukraine. It adds little to the budget and discourages drilling and investment in the upstream oil and gas sector as well as calls into question the ability to invest in Ukraine at all. No one will invest in a country that arbitrarily punishes investors that are increasing reserves and adding production value, as well as paying taxes and employing hundreds of thousands of people. No one will invest in an industry with the risk that taxes will be double or triple within a few months. This was a highly political bill. It favored Rinat Akhmetov and Ihor Kolomoyski, who either own oil or mining assets that were taxes immaterially an punitively taxes gas producers.” Contact OP Tactical for more information on the situation in Ukraine.

In Nigeria, President Goodluck Jonathan has fired the managing director of the Nigerian National Petroleum Corporation (NNPC) and the managing director of the NPDC, the NNPC’s exploration arm. Fired NNPC director Andrew Yakubu will be replaced by Joseph Dawha. Anthony Muoneke will take over the exploration arm. The reshuffling was due to disagreements with Oil Minister Alison Diezani-Madueke, but also follow a year of policy arguments at the highest of levels and allegations of corruption.

A new report from Amnesty International accuses Nigeria and Shell of having done nothing to ease oil pollution in the Ogoniland area of the Niger Delta, three years after the UN called for a $1 billion clean-up. The new report is called Shell: No Progress. Shell stopped pumping crude from Ogoniland after 1993, forced out of the area due to unrest. However, last year, Shell staff returned to the area to assess the process of decommissioning assets there.

At the same time, the Nigerian Oil Ministry is considering offering upstream assets with considerable gas deposits to investors in the country's power sector in order to boost electricity generation and halt chronic power shortages. Despite the fact that Nigeria owns the world’s ninth largest gas reserves, its power sector operates in a state of gas deprivation. The Ministry plans to put 31 marginal fields up for auction. Other opportunities include assets being divested by Shell, Chevron and Petrobras onshore and in the shallow waters of the Niger Delta.

Additionally,

•    In Peru, the Energy and Mining Ministry (MEM) on 4 August approved the Environmental Impact Study for the Tía María copper mining project. The project, operated by the Southern Perú Copper Corporation (SPCC) in the Arequipa region, will require an estimated $1.3 billion in investments. During the construction phase it will require as many as 3,500 workers, and as many as 764 workers during the operation phase in order to generate about 120,000 metric tons of copper a year.

•    South Africa’s Mineral Resources Ministry has announced that draft regulations on oil and gas exploration will be ready within weeks. The new regulations represent changes to the 2002 Mineral and Petroleum Resources Development Act. The proposed changes include: 1) giving the state the right to a free 20% stake in all new energy ventures; 2) giving the state the right to buy an unspecified additional share at an agreed price.

•    Having received approval to flare gas at the giant Jubilee field in Ghana, UK/Ghana-listed Tullow says it is now on track to reach its average production target of 100,000 bpd for 2014. Tullow won approval in June to burn 500 million mmscf of gas monthly. Lack of approval to flare meant that Tullow was forced to re-inject gas into oil wells, which threatened to reduce output by 5,000 bpd.

Deals, Mergers & Acquisitions

•    Lukoil, Russia’s second largest oil producer, has signed an agreement to sell a network of gas stations across Hungary, Slovakia and the Czech Republic. The agreement for the sale was signed with Hungarian oil and gas company MOL Plc and Norm Benzikut and announced on 4 August. Last week, Lukoil also announced it would sell 240 service stations in Western Ukraine to Austria’s AMIC Energy Management GmbH. Lukoil is divesting assets in Central Europe and will focus more energy instead on Russian projects, though analysts say the sales are meant to reduce exposure to sanctions in Europe. Lukoil is not targeted by US or European sanctions as it is not owned by the Russian state.  

•    Mexico’s state-run Pemex oil has announced a deal to import US natural gas from a Swiss trading house to secure a cheaper, long-term alternative to fuel oil for power plants. Pemex subsidiary Mex Gas Supply will form a joint venture with Geneva-based Mercuria Energy Group and JPMorgan Chase to manage the imports. (JPMorgan is also in the process of selling its physical commodities business to Mercuria for around $3.5 billion.) The new JV is scheduled to begin operations in the fourth quarter of this year, at the same time that the 1,200-kilomter Los Ramones pipeline is due to come online to bring US gas from Texas to central Mexico. (This deal comes along with the Tuesday approval by Mexico’s Congress of the secondary legislation for sweeping energy industry reforms that open up the market to foreign oil and gas companies and end Pemex’s monopoly. The first contracts for oil and gas development under this liberalization will likely be awarded next year).

•    After delays, China’s state-run PetroChina oil says it is preparing to pay $1.23 billion to complete the takeover of Canadian Athabasca Oil Corp’s Dover oil sands by the end of September. PetroChina will be acquiring Athabasca’s 40% stake in the project in June but a corruption investigation into PetroChina delayed the deal. The acquisition will be made by PetroChina unit Phoenix Energy Holdings Ltd.

•    China has agreed to grant Venezuela a new $4 billion US credit line to be repaid by oil shipments. The money will go into the Joint Chinese-Venezuela Fund, which focuses on infrastructure and economic development in Venezuela.

•    According to our partners at Southern Pulse, Brazil’s state-run Petrobras on 1 August announced it would only continue to sell oil to Electrobras in cash after the electricity provider accumulated a debt of $376.19 million. Since then it has been reported that the suspension of oil sales have begun to impact the Electrobras System. One thermal electric production facility had an output of less than half its previously estimated 320 Megawatts over the weekend of 2 August.

•    Indicative offers are being prepared for the Spanish assets of Germany’s E.ON utility, with bids expected to value the set at about $2.7 billion

•    There are unconfirmed rumors that South Africa is considering a partial privatization of the state’s Eskom utility, though rumors are contentious.

Profit & Loss Spotlight

•    According to our partners at Southern Pulse, Colombia’s state-owned oil company Ecopetrol said that its net profit for the first six months of 2014 was $3.6 billion, a 10% decline from the same period in 2013. Ecopetrol produced an average of 750,000 barrels per day in the first half of 2014, 4.4% less than in 2013. The fall in production that drove the decline in profits is attributed to blockades and attacks on oil infrastructure, as well as protests.

•    EOG Resources INC has seen oil production spike at its Texas and North Dakota shale holdings, prompting quarterly profits that beat estimates. EOG posted net income of $706.4 million, or $1.29 per share, compared with $659.7 million, or $1.21 per share, for the same period the previous year. EOG earned $1.45 per share for the quarter, excluding a $229.3 million loss on natural gas, oil derivatives and other one-time items.

•    DNO International has experienced the largest fall as output dropped 11% due its heavy reliance on Kurdish oil production. Genel Energy Plc—the darling in Iraqi Kurdistan—has fallen by around 6.6%, and Gulf Keystone Petroleum has fallen 3.1%. However, we note that Genel—the largest producer in Iraqi Kurdistan—posted a 50% rise in first-half oil production on output from Iraqi Kurdistan. Revenue rose 20% to $192.1 million as production grew to 63,000 boepd from key fields, up from 41,500 a year earlier.

Political & Geopolitical Developments

The Islamic State (IS) has advanced into northern Iraq, taking control of oilfields and prompting a slump in the stock markets in Oslo and London for oil explorers in Iraq. Two oil fields—Ain Zala and Batma—are under the control of IS now, along with their combined production of around 30,000 barrels per day. Occupation of these fields in northern Iraq came after IS took control of the Qayyara oil field north of Baghdad. But it is necessary to clarify here that the two towns housing these oilfields—Zumar and Sinjar—are in northern Iraq and were being defended by Kurdish forces but are not on the territory of the Kurdistan Regional Government (KRG), nor are they anywhere near Kurdish oilfields. This is where the mainstream media headlines are misleading. For investors in Iraqi Kurdish oil, investments are still safe, and Iraqi Kurdistan is still secure.

We expect more altercations in the South China Sea as China accelerates the expansion of its offshore oil fleet, with a significant endeavor to provide maritime protection for offshore rigs exploring in this area. Chinese companies have ordered more ships and rigs for offshore exploration in the first half of this year than in any full year since 2010. China is also planning to additional 30,000-ton deep¬water drilling rigs, after the first was deployed last year.  

Discovery & Development

•    Iran’s gross natural gas production is set to increase to 10.6 trillion cubic feet in 2020, according to new figures from the EIA. The figures make some assumptions about the pace of development of the South Pars gas field, Iran’s largest, located in the Persian Gulf and shared with Qatar. South Pars reserves account for roughly 40% of Iran's total gas reserves. The field is also estimated to hold 17 million barrels of condensate in place. Iran's gross natural gas production totaled almost 8.2 trillion cubic feet in 2012, up 3% from 2011.

•    Italian Eni SpA has announced a natural gas and condensate discovery in Gabon, in the Nyonje Deep exploration prospect (Block D4).The discovery was made in the presalt, with the NFW Nyonje Deep 1 well, which was drilled in 28 m of water to a total depth of 4,314 m. The well encountered a thick (320-m) hydrocarbon-bearing section in the presalt clastic sequence of Aptian age. The structure, which extends more than 40 sq km, covers two offshore exploration blocks, both operated by Eni with a 100% stake. The potential in-place estimate is 500 million boe.




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