Global Energy Advisory May 27th 2016

Politics, Geopolitics & Conflict

• Niger Delta: This is only the beginning
• Libya: Division of oil spoils hasn’t been decided yet …
• South Sudan: Oil production will resume in July

In the Niger Delta, where supermajor oil installations are under all-out attack, production has fallen to 1.4 million barrels per day as of mid-May. It was supposed to be around 2.2 million barrels per day. This is the lowest level of production Nigeria has seen in 27 years. Chevron, Italian Eni and Shell have all been forced to take production offline and evacuate non-essential staff due to a series of attack launched by a newly formed group, the Niger Delta Avengers (NDA). But in this dynamic setting, we will probably see a secondary conflict among rival militant groups as NDA attempts to stake its claim here. These rivalries generally lead to even more attacks as one group attempts to claim the top position and outdo the other. The most vulnerable here are the onshore facilities and those operating in shallow waters. Shell and Exxon both have considerable onshore and shallow water facilities and infrastructure in the Niger Delta.

In Libya, General Haftar and the Libyan National Army (LNA) of the east are said to be only 10 kilometers outside of the capital, Tripoli, and are warning that they will infiltrate. This is far from over. Libya needs Haftar to fight back ISIS and Ansar al-Sharia; Haftar isn’t pleased that the Government of National Accord (GNA) is taking on Islamic members whom he says were supplying ISIS in Benghazi. He also isn’t going to sit back and be shut out of the oil. Libya’s ramping up production to 300,000 bpd after re-launching exports from the eastern Hariga port may be short-lived. That’s the message Haftar is sending.

Coming off a two-year civil war that shut down oil production in South Sudan, unity government officials are now saying that production will resume by July, but the damage to infrastructure and the lack of money to do anything about it will keep production levels far below capacity.

France is now being forced to use its strategic reserves amid widespread blockades of refineries and depots by union activists. Refineries have either halted or slowed production. The country has oil reserves worth some three months of consumption on which it can draw in emergencies. It is estimated that one third of the country's 12,000 petrol stations are out of fuel or running low. Now strikes have spread to the nuclear sector, with 16 of France's 19 nuclear stations, which supply 75 percent of the nation’s electricity, affected. In two weeks, France will host the Euro 2016 championships, which could now be severely impacted by these developments.

Discovery & Development

• In Egypt’s Eastern Desert, the Al Amir SE 24 development well in the Northwest Gemsa Concession has hit “significant oil-bearing reservoir sections in both the Kareem Rahmi and Shagar formation,” according to SDX Energy Inc. The well flowed on a test light 43.6 degree API oil at an average rate of 1,714 bbl/d with 3.062 MMscf/d of associated gas. The well is tied to existing facilities and production will begin immediately. The well was drilled to a depth of 3,025 m (9,925 ft).

• A €1.75-million grant from the European Union will get plans underway for the construction of seven massive underground natural gas storage facilities in North Ireland. The project is spearheaded by oil and gas exploration company InfraStrata, and the storage capacity will be 500 million cubic meters.

• Wintershall Norge AS has met disappointing results in its two wildcat wells in the North Sea, 5 kilometers from the Vega field. The first well encountered a poorly developed reservoir in the Heather formation, the well is dry. The second encountered a 3-meter oil column in the Heather formation with poor reservoir quality. Preliminary estimates concerning the size of the discovery range between 0.2 and 1 million m3 of recoverable oil, as such extensive data collection and sampling have been undertaken. The wells have now been permanently plugged and abandoned.

Deals, Mergers & Acquisitions

• Venezuela and Trinidad and Tobago have signed agreement to exploit gas resources shared by the two countries. The agreement means that the consortium that have the license to operate the fields will have 3 months to put forward a development plan to the two governments and then proceed and develop the massive gas fields. Venezuela will buy US$50 million in goods from Trinidad and Tobago, which in return will purchase natural gas from Venezuela. Venezuela is currently in a state of emergency, as low oil prices have left the country unable to pay for basic imports, resulting in strikes and protests against the government and a deep economic crisis. Analysts estimate that irregular power outages could lead to a daily decline in oil output of between 100,000 and 200,000 barrels.

• The Russian government has chosen Italian bank Intesa Sanpaolo as an investment consultant for the planned privatization of a Russian government stake in oil company Rosneft, country’s largest oil producer. Russia is selling 19.5 percent stake. In April, the government chose US-based White & Case to serve as a legal adviser in the sale. According to the media reports from last month, China National Petroleum Corp. is interested in acquiring a stake. The company's largest shareholder (69.50% of the equity) is Rosneftgaz JSC, fully owned by the Russian Government. BP PLC increased its stake in Rosneft to nearly 20% in 2013.

• China's state-owned investment holding company State Development and Investment Corporation has acquired Spanish energy firm Repsol's offshore wind power business in the UK for 238 million euros.

• South African-based Sasol has begun drilling its first well in Mozambique. This is a four-reservoir drilling campaign that envisions 13 production wells in the initial phase. This first phase will cost an estimated $1.4 billion. The production-sharing agreement was approved by the Mozambique government in January.

• The Zidane natural gas field in Norway is expected to begin production in the second half of 2020, with contract awards expected to be handed out later this summer. The operator is privately held DEA, with a 40% stake. Austria’s OMV, Danish Maersk Oil and Edison each hold 20%. The development is expected to cost around US$1.2 billion.

Tenders, Auctions & Contracts

• Subsea 7 has been awarded a major offshore contract worth up to $750 million, but is mum on the details. The company’s net income dropped from $151 million in the first quarter of 2015 to $147million in the first three months of this year. Reported revenue was $746 million in the first quarter 2016, 37% lower than the same period in 2015.

Regulations & Litigation

• Kazakhstan's authorities announced that its $1.6 billion dispute with oil majors developing the Karachaganak gas condensate field may escalate to arbitration if negotiations on the matter fail. Last month, Kazakhstan government has filed a claim against a group led by BG Group and Eni which is developing the field. The dispute relates to a formula which determines how profit from the development is split between the companies and the government. The field is one of the largest fields in the world, with reserves estimated at over 1.2 billion tons of liquid hydrocarbons and 1.3 trillion cubic meters of gas. Eni and BG, recently acquired by Shell, each own 29.25% of the Karachaganak project in north-west Kazakhstan, which they jointly operate. State-owned KazMunayGaz owns 10%, Chevron 18% and Lukoil 13.5%.

• The up to $65-billion Alaska LNG project may meet with delays as the project holds off on applying for construction authorization from the federal government. The delay is expected to add another three months onto the project at the least. The cause of the application delay is delays preliminary engineering work. The project ill include an 800-mile pipeline that will transport gas from the North Slope in Alaska to a planned terminal in Nikiski. Exports were tentatively scheduled to begin in 2025 or 2026. The project is looking increasingly uncertain in this depressed oil price environment. Partners include ExxonMobil, BP, ConocoPhillips and the Alaska Gasline Development Corp.