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Global Energy Advisory – 26th March 2017

Politics, Geopolitics & Conflict

• Violence in South Sudan has further spiked after the announcement of a $500-million oil exploration deal between the government and Nigerian Oranto Petroleum. Rebel forces loyal to former Vice President Riek Machar have kidnapped two groups of oil workers over the past couple of weeks. One of the kidnappings involved employees of Oranto, while five others, including an engineer with the DAR consortium, were also kidnapped. The DAR consortium includes Chinese Sinopec and CNPC, and Malaysia’s Petronas. The rebels are vague on the reasons for the kidnappings. One group has said they are trying to prevent DAR from operating in South Sudan, while a separate group said it would not allow any drilling in territory they control until they are victorious over government forces. As the civil war rages on, the government still plans—unrealistically—to double its current oil production to 290,000 barrels per day in fiscal year 2017/2018, up from current output of around 130,000 barrels per day. Since its independence, South Sudan has relied on oil for all income—a situation that has significantly compounded ongoing political and economic instability due to the fall in crude oil prices. According to South Sudanese officials, production in the past reached as high as 350,000 bpd but fell after a dispute with Sudan over fees for pumping South Sudan’s crude through Sudan’s export pipeline, which led South Sudan to halt production in 2012. South Sudan got the lion’s share of the oil when it split from Sudan in 2011, but it’s only export route is through Sudan, giving Khartoum leverage and leading to ongoing pricing disputes.

• Britain is expected to evoke Article 50 next Wednesday, starting the process of separation from the European Union, with a 2-year countdown. Emotions are heated both in the EU and in London, with PM Theresa May having said that Britain could walk out on the EU without a deal if the proposed terms are unfavorable. For their part, EU officials are warning London to be careful and settle its bills with the union before it moves on. When Article 50 is invoked, stock markets, forex, and oil prices are bound to react, although the extent of the reaction would depend on whether a deal is agreed or not. In the process, it might lose Scotland, which has consistently demonstrated a pro-EU stance and is now preparing for a second independence referendum. Should it vote yes this time, the UK oil industry could be plunged into chaos. The Brexit vote has not shaken up forecasts for North Sea oil and gas production, but a successful second bid for Scottish independence could slash output in the region. However, if the referendum is passed it would create at least two further years of uncertainty for the sector from 2019 and could push production to below 864,000 bpd in the next decade. Scotland’s parliament is set to resume its independence referendum debate next Tuesday.

• Libya’s crude oil production has recovered to 700,000 barrels daily after control of two key oil export terminals was retaken by the Libyan National Army (LNA). The National Oil Corporation (NOC) has plans to boost this to 800,000 bpd by the end of next month, and to 1.1 million by August. Output had previously declined by roughly 35,000 barrels due to the ports’ instability – which now appears to be restored. Es Sider and Ras Lanuf ports had been in the hands of the NOC in Tripoli since General Khalifa Haftar’s LNA captured the area in September. But, the Benghazi Defense Brigades (BDB) wrested control of the key facilities earlier this month. Reports later showed that the LNA has regained lost ground. Last Tuesday, the LNA claimed to have retaken the country’s key oil ports from the rival faction, and as of later that day, the resurgent group’s soldiers were still in pursuit of a handful of BDB fighters, who were on the run after they lost control of the ports. At any moment, yet another group or coalition could surface to challenge Haftar’s growing power, rendering the NOC’s targeted production levels fragile at best.

Deals, Mergers & Acquisitions

• BP has sold 10% of its 20% interest in New Zealand’s single crude oil refiner, New Zealand Refining Company Limited. The $56.2-million deal is part of a global portfolio review, BP said. This has been described by a BP official as a “regular event” in an attempt to head off potential speculation that the company is in trouble. Separately, the company has confirmed reports it is negotiating the sale of its Forties pipeline in the North Sea with Ineos. The pipeline can ship 450,000 bpd, which is equal to 40% of the crude oil output of the UK.

• Marathon Oil is continuing with its Permian expansion with a fresh $700-million acquisition of 21,000 acres in the play from Black Mountain Oil & Gas. Earlier in March, Marathon paid $1.1 billion for 70,000 acres in the star performer of the U.S. shale patch. To finance the acquisitions, the company divested its Canadian business for $2.5 billion.

• Sinopec has struck a deal with Chevron to buy the U.S. company’s South African downstream operations for $900 million. Chevron has been looking for buyers for the business for a while now and it said that Sinopec’s terms were better than those of other suitors. The assets include a 75% interest in Chevron South Africa Proprietary Ltd and 100% in the Botswana business of Chevron. The South African operations include a 100,000-bpd refinery in Cape Town and a network of gas stations, convenience stores, and oil storage facilities in the two countries.

Tenders, Auctions & Contracts

• Britain’s Oil and Gas Authority said it had awarded 25 exploration licenses to 17 companies for new, untapped oil and gas blocks in the North Sea. The tender for these blocks was conducted last October, attracting the lowest interest in 14 years, prompting the OGA to reduce rental fees by as much as 90 percent. The authority plans another tender for May or June, where it will offer mature fields.

• Korea’s Kogas, Japan’s JERA, and China’s CNOOC have struck a deal to jointly purchase LNG, aiming to create a more favorable environment for the commodity in the region. South Korea is one of the world’s top natural gas consumers, with Kogas the fourth-largest LNG buyer globally.

Company News

• Tullow Oil is looking to raise over $600 million in a bid to slim down its debt burden and expand its exploration operations in Kenya and elsewhere in Africa. That’s what the company’s new chief executive Paul McDade said, adding that Tullow has a portfolio of low-cost assets whose exploitation should be accelerated and the fresh funds will do just that. The company’s debt is around $4.6 billion, with financial results for the last three years in negative territory.

• Solaris Oilfield Infrastructure has filed for an initial public offering, aiming to raise around $100 million, with $40-55 million destined to fund the company’s capital expenditure program for the current year. Goldman Sachs and Credit Suisse are underwriters to the deal. Solaris is the fifth oilfield services firm to announce plans for a listing this year, with another ten preparing to do the same, according to sources from the financial services sector, signaling a change in fortunes and investors’ eagerness to get back some of the money they poured into the troubled oilfield services sector during the downturn.

• Texas-based Ethos Offshore has filed for Chapter 7 bankruptcy, which will result in the liquidation of all the company’s assets, the proceeds from which will be transferred to lenders, whom Ethos was unable to pay. This inability to settle with lenders made it impossible for the company to go the usual way, with Chapter 11 bankruptcy protection.

• Petrobras reported a net loss of $4.2 billion for 2016 but said things were looking up, with the result for the last quarter of the year in the black, at $717 million. Still, the latest financial report makes 2016 the third year in a row when the troubled Brazilian giant has booked losses, which means it will have a hard going getting back on its feet. On the flip side, the company managed to shrink its humongous debt to below $100 billion.

Discovery & Development

• Shell and subsidiary QGC have announced a new stage in their Ruby Project – a natural gas operation in the Surat Basin in Queensland. The stage will involve drilling 161 new wells at the site, owned by QGC, this year and next, as well as potential expansion into adjacent plots. The news was hailed by local government officials – Australia is risking power shortages due to insufficient gas supply for electricity generation.

• TransCanada has applied for variance with Canada’s National Energy Board to go ahead with the construction of its $1-billion North Montney gas pipeline project. The variance is needed because TransCanada was supposed to start the construction only after it made a positive final investment decision on another major project: the Pacific Northwest LNG, where it has partnered with Malaysia’s Petronas.

• Norway’s giant state-owned Statoil has announced an offshore discovery in a wildcat well in a territory where reserves were not previously known to be, and close to the producing Gullfaks field. The discovery, while minor, bodes well for this region and is only some 4 miles from Gullfaks. The size of the discovery is estimated at between 6 million and 18 million barrels of oil equivalent.

Sent by Tom Kool

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