Global Energy Advisory – 18th July 2014

Pipeline Updates

A new pipeline is being proposed from North Dakota’s Bakken oil fields through 17 Iowa counties, ending in Illinois. The proposal for the 1,100-mile underground crude pipeline comes from Texas Energy Transfer Partners, which faces plenty of regulatory hurdles across states. The existing plan is to have the pipeline operational by the end of 2016. The “Bakken Pipeline”—as it is already being named—would have the capacity to transfer 320,000 barrels of crude oil per day.

Canada’s Enbridge is starting talks with the authorities in Alaska for the construction of a proposed $8 billion natural gas pipeline that could become a reality if plans for a much larger pipeline fall through. The larger pipeline — a $65 billion project by TransCanada Corp, Exxon Mobil, BP and Conoco Phillips — also includes an LNG plant for exports from Alaska. The smaller Enbridge pipeline would be 722 miles long and would carry natural gas from the North Slope to Fairbanks and other southern Alaskan communities. If approved, Enbridge is eyeing 2020 for operational launch.

Regulations and Compliance

New tax rates unveiled in Ireland for discoveries offshore will reduce monetary returns for firms and result in a reduction in overall investment in Irish waters, according to industry representatives. There is concern that the new fiscal regime could scupper development of viable Irish oil fields. Last week, the government raised the top rate of tax on profits made from any future oil find in Irish waters from 40 to 55 percent. It also introduced a 5 percent royalty revenue from each year of a producing field’s lifespan.

A group of experts is calling for radical fiscal and regulatory changes in the oil and gas industry to make sure the remaining resources in the North Sea provide the greatest economic benefits. The Independent Expert Commission on Oil and Gas has called for drastic change to encourage more investment and production because the industry has reached a critical crossroads. The commission was set up by the government of Scotland and tasked with exploring how the total value of the whole industry can be maximized, and how the future for the UK continental shelf (UKCS) can be secured, ahead of the independence referendum. Specifically, the report calls for a change in "stewardship philosophy" by overhauling the tax and regulatory regimes which are currently in place. The experts believe the government should adopt a stable, predictable and internationally competitive tax regime, and note inadequate returns for operators, reduced income for the Treasury and the “loss of the added value through the supply chain and into the wider economy... Lower tax rates with modified allowances could incentivize new developments whilst producing a simpler system."

State legislators in California have approved a bill authorizing the delay of new regulations for hydraulic fracturing for six months. The new regulations were scheduled to take effect on January 1, 2015, and will now begin on July 1, 2015 —  assuming they are finalized by the end of this year. The new regulations will require operators to obtain a permit for fracking from the state’s department of conservation and to write a groundwater-monitoring plan specifying methods for testing water quality in drilling areas that have usable groundwater.

Our partners at Southern Pulse report that Venezuela’s Petroleum Minister Rafael Ramírez on 3 July paid debts to 17 contracting companies in Zulia that were nationalized. Ramírez said that 75 percent of the companies nationalized in the sector would be compensated in a similar manner, and that he would work to form agreements with the remaining 25 percent. He also reported that so far $1.83 billion had been paid out to nationalized businesses.

They also report that under the possible future Law of Conciliation and Arbitration, contracts between the Bolivian government and foreign, private or national firms in the areas of hydrocarbons, mining and energy will be resolved by a special procedure governing disputes under Bolivian law. On July 3, 2014, Legislative Development Assistant Attorney Erika Chávez submitted the newly proposed law to the private sector for technical analysis. The goal of the law is to provide foreign investors recourse within the country’s legal system to dispute any controversy, while still protecting the interests of the state.

Geopolitical & Conflict Alerts

As the Islamic State (IS) solidifies its Caliphate from Aleppo in Syria to Mosul in Iraq, watch now as a chaotic geopolitical drama unfolds of funding and arming as many groups (no matter who they are) as possible to fight back against the IS. As in Syria, other Sunni groups are against Iraq, where they have other plans in mind for some Sunni-dominated territories, most notably in Ninevah province. At the same time, external forces (both the U.S. and Iran) are attempting to unseat Shi’ite Iraqi Prime Minister Nouri al-Maliki, and there are dangerous rumors in Washington that Ahmed Chalabi—a corrupt ghost from the past—is being bolstered to this end, which could very well be a coup made possible with help from a military ‘friend’ in Baghdad. Saudi Arabia is finally meeting the monster it helped create and growing worried about its borders.

On the oil front, IS forces claim to have surrounded Iraqi troops in the Baiji oil refinery, which serves the domestic market only. We cannot at this time confirm the veracity of this claim, which has been refuted by other Iraqi sources. In Syria, reports are emerging that IS is shipping oil from the fields they control there. They appear to be selling off this crude to Iraqi smugglers to raise funds for the new Caliphate, though the amounts they are reportedly selling off are much likely lower than being reported (reports suggest they are making $1 million a day on oil sales).

In the disputed city of Kirkuk, Kurdish security forces have definitively taken control of two major oil fields, the Bai Hassan and Kirkuk oil fields, making their planned independence referendum that much easier. The justification for the takeover given by the Kurdish Regional Government (KRG) was intelligence indicating that Iraqi Oil Ministry officials were planning to sabotage the pipeline servicing these fields. Production will continue, but now it’s all under Kurdish management. These two fields produce about 400,000 barrels per day.

Back in Libya, which has largely been forgotten in the IS chaos, protesters (mostly state oil guards) in the east have again closed down the oil port at Brega, only days after it was re-opened for the first time in nearly a year.

Discovery & Development

Kenya, Uganda and Rwanda have invited bids for a single consultant to oversee a feasibility study and initial design for the construction of a 807-mile oil pipeline to transport crude to the Kenyan coast. The consultant will also oversee the construction of a fiber optic cable from Hoima in Uganda through the Lokichar basin in northwest Kenya to Lamu, and tank terminals in Hoima, Lokichar and Lamu. The project will also involve the construction of a 5.5-mile pipeline from the Lamu tank terminal to offshore mooring buoys.

Deals, Mergers & Acquisitions

•    Oil India, India’s second largest oil company, is scouting for new assets after it lost the bid for Shell’s Nigeria assets.

•    BG Group has completed the sale of its 62.78 percent equity interest in the Central Area Transmission System (CATS) gas pipeline in the UK North Sea and associated infrastructure to Antin Infrastructure Partners. Total proceeds from the transaction are approximately $960 million.

•    Amid the chaos in Iraq and the looming independence referendum in Iraqi Kurdistan, Oryx Petroleum Corporation Limited has announced the sale of its first offtakes of crude oil into the domestic market from the Demir Dagh field in the Hawler license are in the Kurdistan Region of Iraq. Oryx is the operator with a 65 percent working interest in Hawler.