Global Energy Advisory February 5th 2016

Politics, Geopolitics & Conflict Report

• Yemen: Fighters from al-Qaeda in the Arabian Peninsula (AQAP) have retaken the Yemeni town of Azzan in the Shabwa province after a several year hiatus. They were forced out in 2012 by tribesman loyal to the Yemeni president, and reportedly retook the town this week with little to no resistance. That there was no resistance speaks volumes as to the destabilization of Yemen amid the proxy war being fought here between Iran and Saudi Arabia. This destabilization will backfire on Saudi Arabia, which shares a border with Yemen. The Saudis are fighting the Shi’ite Houthis (Iran’s proxy) in Yemen, and Saudi officials on the ground say that the conflict near the border has killed 375 civilians in Saudi Arabia since March. The deaths have largely resulted from mortars and rockets fired by Houthi forces loyal to former Yemeni president Saleh. Riyadh has had to evacuate villages and displace thousands because of this conflict. The vacuum created by the fighting makes it easy for AQAP to step in.

• Syria: UN peace talks in Geneva have officially been launched, but the opposition delegation threatened to walk out if Assad’s forces failed to make good on a temporary deal to lift sieges on a handful of rebel-controlled towns in the meantime. The rebels were particularly concerned with Assad (and the Russians) closing in on one of its key supply routes near Aleppo. Don’t expect any outcome from the UN peace talks, particularly since 4 February saw the Syrian army enter two pro-government Shi’ite towns outside of Aleppo and then advance against rebel forces in the north, with the aim of encircling the opposition-held parts of Aleppo. This is leading to a massive movement of refugees as people flee Aleppo. Turkey is panicking that they will attempt to find refuge across the border—which has accusations against Russia flying.

• Afghanistan: A suicide bombing outside a police headquarters in Afghanistan has left 20 police dead at the hands of the Taliban, which is enjoying a resurgence.

• Russia/Turkey: Russia will conduct observation flights over Turkish territory from 1-5 February, according to the Turkish government, which noted that this is in line with an existing treating between the two countries. The observation flights will be tensely monitored. According to Turkey, on 29 January, a Russian SU-34 jet violated Turkish airspace despite warnings.

• Turkey: The political power show continues this week with the launch on 1 February of the first court hearing in a case against 122 people—including powerful U.S.-based Islamic scholar Fethullah Gulen—for the alleged creation of a ‘terrorist organization’ to overthrow the government. President Erdogan (former prime minister) owes his current power to an alliance with the Gulenists that went sour when Erdogan attempted to usurp too much power. The souring of that alliance led to the leak last year of documents and recordings of corrupt activities of Erdogan and his circle. So far, Erdogan has won this fight and weathered the massive corruption scandal. He is not, however, completely invulnerable. Gulen is being tried in absentia.

• African oil: Facing a $15 billion budget deficit for this year, oil-rich Nigeria is looking to borrow up to $5 billion from the World Bank, with possible additional help coming from the African Development Bank. Angola—which is gunning for the future top position among African oil producers—is also on the World Bank’s lending radar as crude prices prompt major fiscal pressure.
Discovery & Development

• Norway’s Statoil will join French Total to drill the very first deep water exploration well offshore Uraguay. Statoil has agreed to take a 15 percent stake in Block 14, a frontier block in the deep water Pelotas basin, about 200km offshore. This is the South Atlantic Ocean. Total won the block back in 2012 and will retain a 50 percent working interest, with ExxonMobil holding 35 percent. The deal still requires government approval. The planned well will be the deepest in history and will cost some $200 million to drill. Water depths here are 1,850-3,500 meters, and 3D seismic data has already been acquired. Total retains a 50 percent working interest, with ExxonMobil holding the remaining 35 percent. The well will cost nearly $200 million and be the world's deepest.

• Tullow Oil Plc—the force that put Kenya on the energy map with a superstar discovery—has sent a new, massive floating production, storage and off-loading vessel (FPSO) to its TEN (Tweneboa-Enyenra-Ntomme) offshore field in Ghana. The TEN Project is now more than 80% complete and production should launch this summer. Tullow’s FPSO has an 80,000-bpd production capacity. It should arrive in Ghana in March. Tullow has a 47% interest in the TEN project.
Deals, Mergers & Acquisitions

• As Russia considers its final list of state-owned companies slated for privatization—including oil producer Rosneft—the question is how private would these partial privatizations actually be, and would they be attractive to foreign investors? If state banks remain entrenched in Rosneft, then even a partial privatization is partial—and because of sanctions, Western banks are not allowed to lend to Russian companies. The Kremlin is not really prepared to do this the way it needs to be done to be effective.

• Talk has been circulating for a while, but now Shell has definitively confirmed that it will lay off some 10,000 workers once it merges with BG Group in the coming weeks. Shell is coming off a disastrous report for Q4, which showed a 44 percent drop in earnings and a 56 percent drop in profits.
Regulatory Updates

• Financial authorities in Singapore have seized bank accounts over alleged money laundering tied to Malaysia's debt-laden 1MDB state investment fund. This scandal has now gone international and will hit hard at investor confidence.

• Peru’s energy authority, Perupetro, will lower royalty payments it receives from oil companies by this summer in order to help them cope with low oil prices. Also, it might allow some to postpone part of their payments. At stake are some 29 companies with exploratory contracts in Peru who have declared 'force majeure' amid major profits cuts thanks to sliding oil prices. Perupetro said it will offer new royalties tied to prevailing conditions on each block.This is Perupetro’s second move to ease the situation for producers. Earlier in November, it pledged to cut royalties from 20 percent to around 5 percent on average in future contracts awarded. Colombia has made similar gestures, offering a 25 percent discount on taxes for producers.

• An Algerian court has sentenced six people to prison terms in connection with a corruption scandal involving state-run energy company Sonatrach. A former VP for Sonatrach and a former bank executive are among those sentenced. Three local subsidiaries have also been fined for their role in the scandal, which involved corruption, money-laundering and abuse of power in awarding contracts. Suspicions of inflated contract prices and millions of dollars in bribes emerged in 2009, but the case took years to come to trial. Related to the case, some foreign-owned subsidiaries were fined symbolically: Germany's Funkwerk Plettac was fined $47,000, Italian Saipem Contracting Algeria was fined $37,000, as was German-Algerian company Contel-Funkwerk.

• Jorge Luiz Zelada--former director of Petrobras International Business Division—has been sentenced to 12 years and two months in prison on charges of corruption and money laundering. The court ruled that Zelada embezzled illegal money in exchange of contracts with Petrobras for the construction and chartering of drill ships for the pre-salt exploration. A total of $31 million in kickbacks is said to have been paid out in connection with these fraudulent transactions.

• Canada’s provincial government of Alberta is preparing to offer up to $357 million in royalty credits over 10 years to kick start the flailing petrochemical sector. Alberta is hoping to encourage new investment of up to $3.5 billion of in the sector. Alberta’s chemical industry has annual sales surpassing $14-billion. The trick here is that these credits could reportedly be sold to oil and gas companies …

• Italy’s Saipem oilfield services company is suing Russia’s Gazprom for $820 million over Moscow’s 2014 decision to scrap the South Stream project and thus Saipem’s contract for laying pipe under the Black Sea. This is how much Saipem claims it has already done in terms of assessment work on the pipeline.