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Politics, Geopolitics & Conflict – 30th October 2015

• Iraq has surpassed Saudi Arabia as the world’s top crude exporter to India for the third time this year. This is based on Reuters tanker data. There is a constant back and forth battle between these two largest OPEC producers in terms of Asian market share. This is bad news for Saudi Arabia, which also saw Russia beat it out for the top exporter to China in September. Iraq continues to expand its market share in India because while the Saudis sell oil at OSP under term deals, Iraqi oil is also sold in the spot market so can be found at discounts. India shipped in about a fifth of its imports from Iraq in September, while Saudi Arabia's share dropped to 17% from about 22% in August. Keep an eye out for Saudi Arabia’s attempts to break further into new markets to make up for this loss in Asian market share.

• Syrian officials say the oil and gas industry has now suffered more than $50 billion in industry losses since 2011 due to terrorist attacks and US-led air strikes—both of which are blamed for seriously damaging infrastructure. Syria was producing some 385,000 bpd before the conflict broke out. Officials now put production at under 9,700 bpd and 14.8 million cubic meters of natural gas per day.

• The energy industry is banking on a victory in Argentina’s presidential elections for Conservative pro-business candidate Mauricio Macri who made an unexpectedly strong showing in 25 October elections, setting the stage for a run-off vote on 22 November. Macri is the leading candidate now, and will run against President Cristina Fernandez de Kirchner’s chosen successor, Buenos Aires province governor Daniel Scioli in the run-off. Macri—a former Shell president--is the leading candidate now in this race. Macri’s party, Cambiemos, has called for the continuation of the fixed price initiative in Argentina, which has kept oil prices at around $77 per barrel—defying the market. These fixed oil prices under the current government were set to expire at the end of this year.

Deals, Mergers & Acquisitions

• Santos has rejected a $5.2 billion takeover bid from Scepter Partners--an Arab-Asian investment syndicate. According to Santos, among other things, the bid did not fairly reflect its underlying asset value. Santos has $6.2 billion in debt largely associated with its 30% stake in the $15.5 billion GLNG project in Gladstone, but also has a high-value asset collection. The Gladstone project is Santos’ key growth asset, which also happened to make its first LNG shipment to Asia last week. Santos also has a 13.5% stake in the PNG LNG project operated by Oil Search. For its part, Scepter has more than $14 billion in discretionary assets, with a focus on natural resources, infrastructure, real estate, media and telecommunications. Scepter investors include members of the Brunei and Dubai royal families and the syndicate has been referred to as a leading merchant bank and direct investment syndicate for sovereign wealth. It is led by the former Blackstone Advisory Partners Asia team.

• BP is shifting gears substantially in China. The market is closely watching the potential for closer cooperation between BP and state-owned China National Petroleum Corp. after a visit to the United Kingdom by Chinese President Xi Jinping. A new cooperation deal would allow BP to jointly work with CNPC and develop new projects in China and elsewhere. The two companies entered into a framework agreement on strategic cooperation covering potential shale gas exploration and production in the Sichuan basin, and future fuel retailing ventures in China along with other international partnerships. The deal is expected to add several billion dollars in future trade to BP’s business with China. At the same time, BP has also signed an agreement with China Huadian Corp., which will see BP sell Huadian as much as 1 million tons of LNG per year—a volume worth about $10 billion over the next 20 years. Huadian is one of China’s five largest state-owned electric power generation companies and its largest gas-fired power generator. Last year, BP quit a number of exploration ventures in the South China Sea and wrote off $112 million related to exploration in China. Also, ICBC Financial Leasing Co, China's biggest leasing company by assets, said on Thursday it had signed an $869 million agreement with BP Shipping to lease 18 oil vessels.

• Shanghai-listed Yantai Xinchao plans to acquire oil assets in the western Texas Permian Basin that are currently owned by Tall City Exploration and Plymouth Petroleum for a total of $1.3 billion through a limited liability partnership. The company would be purchasing oil lands in the Texas counties of Howard and Borden as part of the proposed acquisition, already approved by the US Committee of Foreign Investment.

• The authorities of Russia and Kazakhstan have agreed to jointly drill in the Caspian Sea, sharing sovereign rights for subsoil exploration and exploitation. This deal will allow both countries to begin development of the large deposit at Tsentralnaya, which is located in the Russian waters of the Caspian Sea, 180 kilometers east of Makhachkala. In May 2008, an oil and gas condensate deposit with 169.1 million tons of fuel reserves was discovered there. Maritime boundary disputes between five littoral states—Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan—have kept exploration here off the books.

• Spain’s Repsol will sell $7.1 billion in non-core assets over the next five years as part of cost-cutting efforts that have also included a significant cut in exploration spending. Repsol is looking to reorganize following its $8.3 billion takeover of Canadian Talisman in May. Also on the books is a new efficiency plan that seeks to squeeze supplier costs and defer expenditures on new projects to save $2.3 billion per year. In its ongoing streamlining process, Repsol already said it would cut 1,500 positions, which represents about 6% of its workforce, over the next three years. In September, Repsol sold part of its piped-gas business to Gas Natural Distribution and Redexis Gas for $700 million. It also sold its 10% stake in oil pipeline operator Compania Logistica de Hidrocarburos for $350 million.

Discovery & Development

• Sweden's Lundin Petroleum has announced an oil discovery at its two appraisal wells at its Alta discovery in the Arctic. We do not yet have a resource estimate, but original estimates were between 125 and 400 million boe. The two wells (7220/11-3, 7220/11-3 A) are located at Alta, which is northeast of Lundin’s Gohta discovery in the Barents Sea South (near the Norwegian coastline). Lundin Norway is operator with a 40% interest, while Norway’s DEA and Japan’s Idemitsu each have a 30% interest.

• Norwegian Statoil’s Troll field is poised for a natural gas increase of about 83 Bcm this month after the $1.2 billion installation of two giant compressors at Troll A, offshore Norway. The addition of the two new compressors to the two already on this field will ensure 120 MMcm/d, which totals to 30 Bcm/d. The Troll field is in the northern part of the North Sea, and holds some 49 trillion cubic feet of natural gas. Last year, production was around 1 trillion cubic feet, and this gas was transported through three different pipelines to a processing facility at Kollsnes, an island off the southern coast of Norway.

Regulations & Litigation

• Chevron has lost a battle with the Australian Tax Office (ATO), with an Australian federal court ordering the US company to pay more than US$232 million in back taxes, in addition to fines. The court ruled that Chevron had wrongly shifted profits offshore through transfer pricing, which minimized profits in Australia through the use of more than $2.5 billion in loans between Chevron’s US and Australian businesses. The ATO said Chevron created a Delaware registered subsidiary of its Australian company that borrowed about $2.45 billion at an initial interest rate of 1.2% and then lent the money to an Australian entity at a 9% interest rate. Chevron, which is developing one of the world's largest natural gas plants at Gorgon off the West Australian coast, may appeal the decision.

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