Global Energy Advisory December 16th 2016

Politics, Geopolitics & Conflict

• U.S. President-elect Donald Trump has nominated Exxon CEO Rex Tillerson for Secretary of State, sparking outrage on all sides of the political spectrum. What unites the opponents of Tillerson’s nomination is the belief that he has uncomfortably close ties with Russian President Vladimir Putin and will work to end sanctions against Russia because of his loyalty to his current employer, Exxon. Others, however, argue that if Tillerson becomes Secretary of State, Trump will use him to convince Russia to back down from its strengthening alliance with Iran. This latter suggestion6 is unrealistic. Trump is not equipped to convince Putin of anything, and he will not be successful in any battle of wits with the Russian president.

• Brazil’s government has been shaken by another corruption scandal that could see investment-friendly President Michel Temer lose his job. The scandal is part of an ongoing investigation against a number of politicians and large business leaders accused of graft practices that brought down the senior management of state-owned energy giant Petrobras. Yet Petrobras was not alone in the corruption: construction firm Odebrecht has also been implicated in participation in the bribery network. Now, one Odebrecht executive is accusing Temer and members of his party of collecting millions of dollars in exchange for defending the company’s interests in Congress. The news has caused a fresh wave of protests among Brazilians, who were already pretty agitated by a bill aimed at capping public spending that the country’s Senate passed earlier this week. It is still not known whether any international company was involved in this new scandal. Just in October, international oil companies were hoping to see a huge benefit from the change of government in Brazil. The Brazilian Congress voted to open up the country’s oil sector to significantly more investment from international oil companies, liberalizing the lucrative pre-salt plays particularly. Foreign companies, under new legislation, will now be allowed to be pre-salt operators. All eyes will be on the risk to this new liberalization from continuing political instability.

• The battle for Syrian Aleppo is largely over and the evacuation of civilians and members of rebel groups has begun, according to various sources in both camps. A ceasefire was negotiated by the Syrian army, Russia and Iran with the rebel groups still holding parts of the city, but according to media reports, the initial deal collapsed and the rebels and the army exchanged fire. The Syrian regime and Iran were not satisfied with some of the details of the ceasefire, brokered nominally by Russia and Turkey. A revised version of the deal was negotiated later and evacuation started. Assad’s win in Aleppo will strengthen his control over the country and could very slightly tip the scales of Middle Eastern geopolitics in favor of Iran and away from Saudi Arabia. More than 3,000 people have been evacuated in buses and ambulances from the city.

Deals, Mergers & Acquisitions

• Kinder Morgan is working on the sale of its Permian assets, which could bring in some $10 billion as the shale play in Texas continues to gain prominence in the energy industry as the most lucrative one in the U.S. Barclays is advising the midstream major, according to unnamed sources. Kinder Morgan itself declined to comment on the possible sale.

• Italy’s Eni has sold a 30 percent stake in the offshore license block that contains the giant Zohr field in Egypt to Russian Rosneft. The Russian company will pay Eni $1.125 billion and will reimburse it for past expenditures, which, for the 30 percent stake, amounts to about $450 million. Rosneft also has an option to acquire a further 5 percent in the project.

• China’s Sinopec, the world’s largest refiner of crude, is mulling over the purchase of Gulf Keystone Petroleum, an energy firm operating in the autonomous Kurdistan region in Iraq. The target has run into financial problems because of delayed payments for exports from the Kurdistan Regional Government (KRG), on top of the oil price crash that brought it to the brink of insolvency. At the moment, Gulf Keystone’s value is around $360 million. Meanwhile, Sinopec is also considering the listing of its retail business in Hong Kong. The IPO could fetch as much as $10 billion for the company.

• Statoil is selling its oil sands operations in Alberta to local energy company Athabasca Oil Corporation. The value of the deal is around US$625 million and includes a yet undeveloped deposit plus a demonstration plant. The Norwegian company will pay 80 percent of the price in cash and will also buy shares in Athabasca, which will give it a 20 percent stake. The deal will result in a writedown of $500-550 million for the seller.

• Independent energy firm Gulfport Energy is buying acreage in the SCOOP region in Oklahoma for $1.85 billion. The seller is Vitruvian II Woodford, a portfolio company of Quantum Energy Partners. The acreage at the moment produces 183 million cubic feet of natural gas equivalent.

Tenders, Auctions & Contracts

• PDVSA, Venezuela’s troubled state-owned energy firm exported an average 742,535 bpd of crude to the U.S., a 23 percent increase on October. Still, compared to a year earlier, the daily rate of exports was lower. The biggest buyer of the heavy crude was PDVSA’s U.S. business unit, Citgo Petroleum. Valero Energy, Phillips 66, and Chevron were also among the buyers. There has been no improvement in Venezuela on the economic, humanitarian and political front since the opposition and the government launched a dialogue mediated by the Vatican and UNASUR. In fact, the crisis has only worsened.

• Brazil’s Petrobras has signed definitive terms for a $5 billion, 10-year financing agreement with China Development Bank Corp and an oil supply accord with Chinese companies. This will help somewhat to secure more stable revenue streams. It also agreed to sell 100,000 barrels of oil per day for the next decade to China National United Oil Corp, China Zhenhua Oil Co Ltd, and Chemchina Petrochemical Co Ltd subject to "market conditions"

• Russia’s Yamal LNG project, led by Novatek, Russia's largest independent gas producer, says it has received almost $800 million in funding from Italian bank Intesa Sanpaolo in a 14.5-year credit line. This will enable the company to launch production next year. Earlier this year, Yamal LNG obtained $12 billion in financing from Chinese lenders. The total value of the project has been calculated at $27 billion. Japanese and French funding is also a possibility. However, some of Novatek’s moves may put it at odds with state-run giant Gazprom. Novatek’s expansion plans on the Yamal peninsula, which is currently controlled by Gazprom, as such may run into some roadblocks and the Kremlin may not allow Novatek to obtain four licenses there it is seeking.

Discovery & Development

• Anadarko has dropped an exploration license for the shallow waters off the coast of New Zealand’s North Island but it has not given up completely on the country. The company said it will continue to reprocess seismic survey data from another license block, in the Canterbury Basin, in the eastern part of the South Island. For this license block, Anadarko has asked for a delay from the New Zealand government.

• Israel’s giant Leviathan gas field could start producing commercial amounts of gas late in 2019, according to a development plan just approved by the project partners, which include Noble Energy as operator, and three Israeli firms: Delek Drilling, Avner Oil, and Ratio Oil. According to the plan, initial production from Leviathan should be 12 billion cu m a year, with investments in this first phase of production seen at $3.5-4 billion.

• GDF Suez has delivered Turkey’s first floating LNG plant, Neptune, to the coast of Izmir, where it will be stationed. The facility has a capacity of 5.3 million tons of LNG and should feed into Turkey’s gas network some 20 million cu m of gas on a daily basis.

Company News

• An internal report from BP leaked to Greenpeace has revealed the company, which had to pay over $60 billion in fines and compensations for the Deepwater Horizon disaster from 2011, is sub-par in safety at its downstream operations. The report lists at least two almost critical occurrences that could have caused deaths and calls for urgent attention to improving BP’s engineering data management practices to avoid further accidents of a critical nature.