Global Energy Advisory 15th July 2016

Politics, Geopolitics & Conflict

• Iran has moved closer to the final approval of its new contract – the Iran Petroleum Contract – aimed to lure back international oil companies. The IPC has been subject to much opposition from political hardliners who see in it a danger of Iran relinquishing its control over its natural resources. However, it seems that the reformist camp around President Hassan Rouhani and Oil Minister Bijan Zanganeh has prevailed: The IPC has now been approved by the Resistance Economy Headquarters. The news is certainly important for Iran and the region but it’s also important for the world. After all, Iran used to be OPEC’s second-largest exporter of crude before Western sanctions came into effect. If the IPC lives up to expectations, it may very soon regain the #2 spot, which will have an immediate and significant effect on global prices, pushing back the moment when the global crude oil market rebalances, regardless of what Saudi officials are saying; namely, that the glut is over. It’s not over, and with oil revenue-hungry Iran it’s unlikely to be over any time soon.

• Meanwhile, tension is growing among neighbors in the South China Sea. China has claims to some 80% of the basin, which is a major waterway between Europe, Asia and the Middle East, while the Philippines, Vietnam, Taiwan, and Brunei are, naturally, opposing these claims. The latest episode in this saga was written by the Hague-based Permanent Court of Arbitration, which ruled that China’s claims have no solid ground. Beijing immediately said it does not recognize the authority of the court and a day later demonstrated that worries about a quick escalation in the area may not be completely hypothetical. The country unveiled on Wednesday its all-new guided missile destroyer, fourth in its fleet. Now, while it’s highly unlikely that China will initiate a hot conflict with its neighbors, the show of power shouldn’t go unnoticed.

• In Iraq, ISIS is blowing up wells to stop the advance of the Iraqi army and digging holes in the ground to store crude around Mosul. The terrorist group is also setting up portable refining units as its refineries, pipelines and tankers are being successfully targeted by the government forces. ISIS’s survival depends on oil and fuel revenues and its latest move suggest the Iraqi army is making some progress, however limited. That said, as long as ISIS has access to oil and to the black market, it will be able to support itself. In addition to targeting its oil producing and refining infrastructure, there should be a significant focus on cutting transport channels—something the Russians at least figure out in Syria. The group should be viewed—in terms of strategy to combat it—as an organized crime ring rather than a terrorism network if its activities are to be curtailed to a manageable extent.

Deals, Mergers & Acquisitions

• An E&Y survey of 100 private equity firms has revealed a returning appetite for investment in oil and gas. A quarter of the firms surveyed said they planned to invest in oil and gas by the end if this year and as much as 43% said they would do within the next 12 months. The driver if this returning appetite is the prospect of greater demand coming from emerging economies.

• Kinder Morgan has agreed to divest from its 50 percent stake in the Southern Natural Gas pipeline for US$1.47 billion. The buyer is Southern Company. The deal comes soon after another divestment, of the company’s 50 percent interest in the Utopia pipeline to Riverstone Investment Group. The Buyer has undertaken to compensate Kinder Morgan for whatever money it has already spend on the unfinished project and also shoulder the remaining expenses related to the construction and commissioning of the pipeline.

• French Total has acquired an interest in U.S. wind power company United Wind and will invest in its regional expansion into Colorado, Kansas and Minnesota. The move is in line with the French energy major’s strategy of expanding its footprint in renewable energy. Brooklyn-based United Wind leases wind turbines with capacities between 10 kW and 100 kW to households and rural businesses.

• Statoil has sold its non-core operations in the Marcellus Shale to EQT Corp. The deal is worth US$407 million and involves a net acreage of 62,500 in West Virginia. The area yielded 9,300 barrels of oil equivalent over the first quarter of the year.

• Repsol Sinopec has awarded two long-terms contracts to oilfield service provider Amec Foster Wheeler for developments in the North Sea. The deals include maintenance and construction work and engineering support services. The services will be performed at seven fields in the North Sea, operated by the Spanish-Chinese partnership.

Discovery & Development

• Lebanon will tender all of its 10 oil and gas blocks in the Mediterranean, after the two main political forces in the country turned their backs on political differences to advance the exploitation of Lebanon’s hydrocarbon reserves. International companies, according to Lebanese officials, will be able to cherry pick the best two-three blocks. However, these companies may be hard put to bid for blocks in disputed waters and Lebanon does have reserves in such water: an 870-km area that it’s disputing with Israel. According to Foreign Minister Begran Bassil, Lebanon has reserves of some 96 trillion cu ft of natural gas but this figure needs to be confirmed by fresh seismic surveys.

• Production at Chevron’s giant Gorgon gas field off the Australian shore is still on hold, two weeks after a leak forced the company to shutter production. Three months before that, production at the world’s most expensive LNG project was shut down again because of technical problems that arose soon after the first shipment of LNG left the Gorgon.

• A Shell-led consortium has delayed its final investment decision about the LNG Canada project for the second time, with the CEO citing the currently unfavorable price situation in liquefied natural gas. LNG Canada will involve the construction and operation of a liquefaction and export terminal on the coast of British Columbia, to ship its output to Asian markets. However, demand in Asia is slowing down as it is globally due to oversupply.

• Indian Oil and Natural Gas Corp has announced a 45-well drilling program for deposits in the Bay of Bengal, starting in the last quarter of the year. The drilling will focus on the KG-DWN-98/2 block. The state-owned company is also studying the reserve potential of another offshore block, the KG-OSN-2001/3 in the East Coast, which is owned by GSPC. The company, which is in talks to acquire a majority in the 1,850-sq m block, has hired U.S. certifier Ryder Scott to conduct an independent survey of the block’s reserves, especially natural gas because earlier estimates apparently put the figure too high.

• A renewal of violence in South Sudan is threatening the country’s oil production. The fighting, according to local government sources, has not yet reached the oil-producing regions but it might and this will severely damage the young nation’s oil industry. South Sudan produces about 160,000 barrels per day currently, vital for both it and its neighbor Sudan. It was slated to resume major production in July, but this goal is now threatened.

Regulations & Litigation

• A new law that just came into effect in Kenya could spell trouble for oil companies planning to start operations in the East African country. Under this law, any foreign company setting foot in Kenya is obliged to pass at least a 30% holding in its operations to Kenyan-born citizens. Fines of US$50,000 are in store for those who fail to comply but the good news for already present operators there is that the law will not have a retroactive effect.

• The Pennsylvania state Senate has approved a bill that could loosen reporting regulations for oil drillers. The bill, SB1229, is not specifically focused on the energy industry but it includes an amendment stating that operators in the Pennsylvania part of the Marcellus Shale are not obligated to submit waste reports more than twice a year. This is how often they are currently required to report on waste but the Department of Environmental Protection had pushed for monthly reports. The matter has now been turned to the House.

• BP has been fined US$20.2 million by the Federal Energy Regulatory Commission for manipulating gas prices in Texas over the two months following Hurricane Ike in 2013. The oil major, according to the charges, had a financial spread position that required prices to stay low in order to generate a profit, so BP conducted trades of large amount of gas to make sure prices stayed low. Initially, the FERC recommended a fine of US$28 million but that was later revised down. The next move for BP is to request a re-hearing of the penalty and then take the matter to federal court of appeals.