Global Energy Advisory - 12th September 2014

Geopolitical & Conflict Updates

Ukraine

•    Ukraine has only about 20% of its oil demand filled at this time, with only 2 of its 6 refineries operating. Typically it buys oil from Belarus, Lithuania, Poland and Russia but is now in talks with Azerbaijan

•    Poland has stopped reverse-flow deliveries of natural gas to Ukraine, claiming that Russia has reduced flow of its gas to Poland. The Polish oil and gas corporation (PGNiG) claims that deliveries of Russian gas had fallen 20% to 24% in the past two days, but Gazprom insists that flows remain unchanged. This cat and mouse game has to do with the EU’s deliberation over a new round of sanctions on Russia over Ukraine.

•    Authorities in Kiev say that Russian troops have largely withdrawn and a wall is now being built on the border to staunch the cross-border flow of weapons and fighters. Kiev is building a 60-kilometer non-explosive barrier with trenches and communication lines.  

Iraq

•    Iraq’s new prime minister formed a new government this week, appointing Adel Abdul Mahdi from the Islamic Supreme Council of Iraq to the post of Oil Minister. The overall goal of the new government is to lure in Sunni’s who would potentially take a stand against the Islamic State (IS) in return from more rights and power. The bottom line is that IS will not be defeated until those jockeying for position after their defeat are assured of what they want. This is the game right now. Each group with a vested interest in a “new” Iraq could, arguably take on IS defensively, and win. This includes the Kurdish peshmerga, the Shi’ite forces and Sunni militias not bound to IS. None will make a decisive move until they get what they want out of Baghdad. They don’t need US air strikes.

•    In terms of oil, the IS advance on parts of Syria and Iraq have not affected production in southern and central Iraq, but Iraqi (not Kurdish) exports from a pipeline to Turkey and via road to Jordan have been cut off.

Yemen

Yemen’s main oil export pipeline in central Marib province was attacked earlier this week and the flow of crude oil was halted entirely. The state-run pipeline was fed by the Wadi Abida oil field, and led to the Red Sea, in its heyday transporting 110,000 bpd. For a year now, these pipelines have been under frequent attack by tribal militias and the average flowing through this pipeline has been about 70,000 bpd. We expect this to continue and to escalate as tribes target the oil facilities to force concessions from the government. An escalation is likely as the Yemeni capital Sana’a, is facing an uprising led by the Houthi movement, which has managed to secure support from a wider group of protesters in the capital. The government ended fuel subsidies in July, lending the Houthi movement wider popular support. Protesters are demanding the government’s resignation and the revival of subsidies.

Discovery & Development

•    Russian LukOil has announced a discovery at Ghana’s offshore Cape Three Points project. There is now a 90-day evaluation period, but if this is proved a commercial find, it will be Ghana’s fifth offshore field. Tullow Oil Plc and Anadarko Petroleum Corp are also in Ghana

•    TransGlobe Energy has announced a new oil discovery in Egypt, encountering 42 feet of net oil pay at a third exploratory well at Lower Nakhul. The well was drilled to a depth of 1,633 meters. With this find, TransGlobe has been awarded a new concession in Egypt’s Western Desert. The concession will have a seven-year exploration term, which will commence when it has been passed by the Egyptian government. TransGlobe also operates in Yemen

•    A discovery last year offshore Norway by Lundin Petroleum is now being downgraded. Earlier estimates of the North Sea find were at 25-120 million boe, but new estimates coming in now are 27 million to 71 million boe in gross contingent resource for the Luno II discovery. This means that it may be too small for a stand-alone development

•    Amid the chaos that has consumed northern Iraq and threatens central and southern Iraq, a consortium led by Kuwait Energy has announced its first oil discovery at Block 9 in Basra (southern Iraq). This was the consortium’s first target in the Mishrif formation. The Faihaa-1 exploration well was drilled to 2,700 meters, with a flow rate of 2,000 bopd. The consortium is 70% owned by Kuwait Energy, with Dragon Oil holding 30%.

•    Shell has launched production from a Gulf of Mexico subsea development, Cardamom, discovered in 2010, expecting to produce 50,000 boepd

•    Natural gas production in Ohio’s Utica shale play increased 32% in the second quarter compared to the first three months of the year, with drillers producing 88.7 billion cubic feet of natural gas from April to June, up from 67.3 billion from January to March—or more than all of 2012. Oil production from Utica also jumped 32% from the previous quarter—coming in at 2.5 million barrels

Corruption, Compliance & Transparency

As Brazil heads into October presidential elections, a corruption scandal surrounding state-run Petrobras is skewing the campaign. Two of the leading presidential candidates have been implicated in the scandal, which allegedly involved a scheme to receive a 3% kickback from Petrobras contracts with third parties between 2004 and 2012. Former Petrobras executive Paulo Roberto Costa gave up the names of those involved after he was arrested in March 2014 during a police investigation into money laundering. Those implicated include Energy and Mines Minister Edison Lobao, Congressional lower house president Henrique Eduardo Alves, Senate president Renan Calheiros and former governor and presidential candidate Eduardo Campos, who died in a plane crash in August.

Regulatory Alerts

•    This fall, the Canadian New Democratic Party is gearing up to table a bill to pressure oil and gas companies to add value to crude before exporting it, which would negatively affect the Kinder Morgan Canada and Enbridge projects to export raw diluted bitumen to Asian refineries. They key provision here is a ban on large crude oil tankers on British Columbia’s north coast

•    Gambia has created a new national oil company to take over state-owned Gambia National Petroleum Company Limited. The new company, Gambia National Petroleum Corporation (GNPC) will continue to do business in the upstream and downstream petroleum sub-sectors. GNPC will have a percentage of share in all petroleum exploration and production licenses signed by the government. GNPC owns 7% of the Gampetroleum fuel storage facility at Mandinary and operates 9 petrol stations.

Deals, Mergers & Acquisitions

•    Private equity firm TDR Capital to buy fuel retailer Delek Europe B.V.

•    Hungarian oil and gas group MOL to acquire Italian company Eni's Czech, Slovak and Romanian units

•    Private equity firms KKR & Co LP and Riverstone Holdings LLC to form an oil and natural gas joint venture Trinity River Energy LLC

•    TransAtlantic Petroleum Ltd (NYSE-MKT:TAT) (TSX:TNP) has agreed to acquire Stream Oil and Gas Ltd. (TSX-V:SKO)for $41.2 million in common shares of TransAtlantic. The boards of directors of both companies have approved the transaction. The acquisition is expected to close in November. Stream operates in Albania, with three oil fields, one gas field and one exploration license

•    Azerbaijan's State Oil Company (SOCAR) is expected to complete the deal on purchasing a stake in the Greek gas operator DESFA by the end of this month, following approval by the European Union