Global Energy Advisory – 18th September 2015

Politics, Geopolitics & Conflict

Good news this week for gas-starved Jordan and US discovery darling Noble Energy in Israel. Israel's national planning and construction committee has approved a route for an underground gas pipeline that will transport Israeli natural gas to Jordan. At the eastern end of the route on the border with Jordan, an underground valve will be built between the transportation systems of the two countries. The pipeline is designed to make it possible to transport gas to Jordan within a year, in accordance with the agreement signed between the two countries. In a deal that could be worth $15 billion but has not yet been signed, Jordan has agreed to take gas for 15 years from Israel's Leviathan offshore natural gas field that has still to go on line.

And for Noble Energy, the long-term drama over its potential monopoly hold on Israeli gas after two major discoveries in the Levant Basin is closer to being resolved. Earlier this week, Israeli lawmakers voted in favor of a draft plan that would allow the Leviathan field (the supergiant gas field that was the largest of Noble’s discoveries in the basin) and two smaller fields to be developed by a consortium led by Noble Energy and its Israeli partner, Delek Group.

The tradeoff here for maintaining ownership of Leviathan and the two smaller fields is the already-producing Tamar field. Tamar was another big discovery, but much smaller than Leviathan. According to the draft outline, the consortium would have to relinquish its stakes in Tamar. While this is forward movement on the question, it’s by no means a done deal.

Critics of the plan accuse the government of giving into Noble and Delek demands and still allowing them too much control over Israel’s precious gas reserves—a very sensitive subject at the highest political levels .After weeks of talks over the government's initial proposal in June, the vote took place after the US administration urged Israeli lawmakers to support a proposal that would benefit an American company. Noble and Delek have invested a total of $3 billion into exploration and development of the Tamar and Leviathan fields.

Indeed, it’s all about Israel this week—and the Pandora’s Box opened by the country’s discoveries. Earlier this week, Israeli explorer Afek Oil & Gas announced the discovery of an oil reservoir in the Golan Heights. The company is now requesting an extension of its exploration license, citing evidence of a large liquid oil reservoir. Exploration in the Golan Heights is a tricky business. Afek is a subsidiary of US-based Genie Energy, which has had plenty of problems drilling in this controversial location. Numerous environmental organizations—such as the Israel Union for Environmental Defense and the Society for the Protection of Nature in Israel, as well as governmental bodies like the Nature and Parks Authority--opposed the initiative, saying drilling could endanger water sources and cause environmental damage to the Golan Heights. However, in 2014, the company won a temporary victory when the Israeli Supreme Court rejected a petition challenging Genie’s permits for exploratory drilling in the Golan Heights
. The Supreme Court’s decision led to a lifting of an injunction on the exploratory program over environmental concerns, which has ultimately led to this ‘discovery.’ We expect a rough road ahead and plenty of controversy in winning approval to drill more wells.

Regulatory Updates

• Canada’s National Energy Board has approved exports of LNG for the Saint John’s LNG Development Co. The Atlantic coast project will be awarded a 25-year license to export as much as 8.12 billion cubic meters per year. The project is an indirectly owned subsidiary of Spain’s Repsol, which has partnered with Irving Oil in the existing Canaport LNG import terminal, where liquefaction facilities would be built. A permit has also been granted to the company to import nearly 900,000 Mcf/d of gas from the US via the Spectra Energy-operated Maritime and Northeast Pipeline. The point of gas imports will be St Stephen, on the Canada-US border. Last month, the Canadian energy board also approved a 25-year license for the export of as much as 19.4 billion cu m/year of LNG from the Bear Head LNG project.

• The Ministry of Petroleum and Energy in Norway has approved plans for Wintershall’s $1.8-billion offshore Maria development. This development is estimated to contain 180 MMboe of recoverable resources, largely oil. The offshore development is in the Halten Terrace area of the Norwegian Sea, east of the Kristin field and south of the Heidrun field. Partners in the license are state firm Petoro, UK-based Centrica and UK-based Sequa Petroleum. The Maria reservoir will be linked via a subsea tieback to the Kristin, Heidrun and Asgard production platforms. Total investment is estimated to be $1.8 billion, including development drilling. Production is scheduled to go online some time in 2018.

• Partly state-owned Oil Search of Papua New Guinea has rejected Australian Woodside Petroleum Ltd.’s $8 billion takeover bid, saying the proposal undervalued the company’s ongoing projects. Oil Search is holding out now for higher offers—which is difficult in this depressed market. Nonetheless, Oil Search is a good prospect demonstrating increased output from a large-scale LNG project in Papua New Guinea. The government owns one-fourth of Oil Search, while the other key partner is Abu Dhabi's International Petroleum Investment Corp. What will happen with Woodside now? Well, rumor is that the company may be prepared to offer more, but Exxon is also said to be eyeing Oil Search. Other contenders could include France’s Total SA, Japan’s Inpex, and Malaysia’s Petroliam Nasional.

Deals, Mergers & Acquisitions

• France’s Total SA has signed an agreement to sell 50 percent interest plus one share in France’s Geosel hydrocarbon storage facility to a 50/50 consortium composed of EDF Invest and Ardian in a deal valued at around $300 million. Geosel’s underground liquid hydrocarbon storage facility has a capacity of nearly 9 million cubic meters, making it the largest in Europe. For France, the facility represents about 20 percent of total hydrocarbon storage capacity; furthermore, the facility is largely used to store around 40 percent of France’s strategic oil reserves. Total has a 53.4 percent stake in Geosel and will remain a minority shareholder of the company following the conclusion of the deal, with an interest of 3.4 percent. The sale is part of the company’s program to sell $10 billion in assets by 2017.

Investment & Tenders

• Mexico is slashing public spending by $13 billion for next year and the sacrifice will be a much lower rate of investment in oil and gas exploration. Now that new oil and gas reforms have opened up the market to foreign investors, the Mexican authorities feel free to reduce the state’s investment in this area, hoping foreign companies will pick up the slack. The government will reduce its investment in Pemex by 20 percent next year. As such, look for Pemex to work harder and faster to lure in private investment. So far, so good. This year alone, Pemex has established 10 joint ventures with private companies at declining fields and has high hopes of increasing production here. The state-run company has $86 billion in debt as of June 2015. The authorities also increased the attractiveness of terms for its September auction of oil fields, setting minimum bids lower than for the exploratory blocks offered in July, which generated little interest given the weak price environment for oil and gas. The Ministry set the minimum value of pre-tax profits for the five offshore extraction contracts up for grabs at a range of between 30.2 and 35.9 percent. Among the 14 companies and consortiums qualified to bid in the auction are major oil companies such as Chevron and Shell, along with Mexican upstarts Carso Oil & Gas and Petrobal.

• Thirty-seven companies, 22 international oil firms and 15 Brazilian companies, have so far qualified to take part in Brazil’s 13th licensing round to be held in October this year. The bidding round will offer 266 blocks in 22 sectors, covering 125.000 square kilometers in 12 states. The ANP will offer seven onshore blocks in the Amazonas basin and 22 in Parnaíba. In mature basins, 71 blocks will be included in the Potiguar Basin and 85 in the Reconcavo basin. A total number of 185 onshore blocks will be available for bidding. Offshore, the bidding round will offer areas in basins off Brazil’s eastern shore.