Inside Intel on Global Energy Developments: Iraq/Kurdistan

Global Energy Advisory – 28th November 2014

by Inside Intelligence with Southern Pulse - OilPrice.com

Politics, Geopolitics & Conflict

Iraq/Kurdistan

Islamic State (IS) fighters have failed to seize control of the Northern Iraqi giant oil field at Kirkuk, after a tense battle on Wednesday. The Iraqi army and Kurdish peshmerga forces, with help from coalition air strikes, pushed back the IS attack on Kirkuk, though there has been damage to oil facilities.

IS is still attempting to take control of the Kirkuk oilfields. Kirkuk is a highly strategic location, which lies in the disputed northern territories between the Kurdistan Regional Government (KRG) and the central authorities in Baghdad. When IS originally launched its attack on Iraq, Kurdish forces took advantage of Baghdad’s weakened position to take control of the disputed territories; however, in August, IS refocused its offensive on the northern territories, partly pushing back Kurdish forces.

Thanks to air strikes, Kurdish forces have regained a fair amount of control over these disputed territories, but IS clearly is eyeing oil-rich Kirkuk, at the heart of the area.

In the meantime, the Kurds continue to make headway in their designs for economic independence through oil exports and their battle to this end with Baghdad. Last week, we noted positive movement in a deal between Erbil and Baghdad to resolve the Kurdish export question.

There has been further development over the past week. The KRG has now received most of the promised oil payment from Baghdad in this temporary oil deal. An installment of $500 million was released by Baghdad earlier this week and has arrived in the KRG.

At the same time, Iraq’s state oil marketer, SOMO, will sell its first oil cargoes from the Turkish port of Ceyhan since March. This cargo should go out in November and is a direct result of the temporary Erbil-Baghdad deal. Italy’s Eni will load some 600,000 barrels in this deal.

Meanwhile, the International Energy Agency (IEA) is warning that the conflict in Iraq could threaten future oil production and drive up prices.

The IEA notes that Middle East supplies were expected to meet the bulk of increased global demand over the next 25 years; however, Iraq was expected to contribute about half of the region’s oil growth, which it cannot do without $15 billion in investment per year and as long as IS is terrorizing the region.

Deals, Mergers & Acquisitions

• Following news earlier this month of a merger of US oil services giants Halliburton and Baker Hughes, France’s Technip SA made a preliminary takeover offer of $1.83 billion in cash for smaller French oil services company CGG SA, but the offer was rejected. Technip had said it would break up CGG and sell its underground data-collection unit, which accounted for some 60% of the company’s revenue in 2013.

• Italy’s Eni has sealed a $6-billion deal with the government of Ghana to launch oil and gas exploration at the Offshore Cape Three Points block in the country’s western region. Eni will also deploy a third floating production storage and offloading (FPSO) vessel to help boost production. Parliament still has to approve the deal, but if it goes through production on the block should begin in mid-2017. Eni is a major player in Ghana, where it has been in business since 2009, operating two additional offshore exploration blocks, OCTP and Keta.

• Malaysian SapuraKencana Petroleum (SKP) plans to acquire state oil firm Petroliam Nasional’s entire interest in three blocks offshore southern Vietnam for $400 million. SKP, via its wholly-owned unit SapuraKencana Energy Sabah Inc, will operate the blocks with participating interest of 70%, while Sabah’s O&G investment vehicle M3nergy Bhd will own up to 25% of the equity and Petronas Carigali Sdn Bhd the remaining 5% stake.

• Genel Energy Plc, the largest producer in Iraqi Kurdistan, predicts a flurry of mergers that will reduce the number of producers in the area by three-quarters within in five years.

• Oil and gas firm San Leon Energy is extending its licenses to explore for shale gas in northern Poland, while other majors have pulled out due to challenging geology and a strict regulatory environment. San Leon’s results from three vertical wells near the Baltic Sea coast have largely been behind the decision to extend exploration licenses. It expects to complete its license renewals next year. Poland will see a new law take effect on 1 January 2015, simplifying license procedures. Another bill that will ease exploration taxes is also expected to be implemented mid-next year. Poland remains the leader in shale gas exploration in Europe, hosting 12 exploratory firms, nine of them foreign, operating 59 concession areas. An additional 40 companies are waiting for their license applications to be processed.

Discovery & Development

• Repsol has begun exploring for oil in the waters off the Canary Islands, amid a high level of opposition from environmentalists and the local government. Exploration is being conducted some 50 kilometers from the islands of Lanzarote and Fuerteventura, off the west coast of Africa. Repsol plans to invest $438 million in exploration here, estimating its chances of striking oil at around 17-19%. Environmental concerns are centered around possible harm to dolphins and other flora and fauna, which could impact the tourism industry.

• Israel’s Leviathan gas reservoir (621 billion cubic meters, 130 kilometers west of Haifa) will likely begin flowing by the beginning of 2018. US-based Noble Energy owns a 39.66% stake in the basin, along with Israeli partners Delek Drilling (22.67%) and Avner Oil Exploration (22.67%). Ratio Oil Exploration has a 15% stake. The partners plan to develop Leviathan in two phases, and the first gas will feed the domestic market through an FPSO. First-stage production capacity is expected to be around 18 billion cubic meters per year.

• Russian Lukoil plans to spend $14 billion in 2015, down from $16 billion this year, to improve its cash position amid a 30% drop in oil prices. This will mean less drilling in mature fields in Serbia, reduced exploration outside of Russia and downsized infrastructure projects.

• Ecopetrol and Canadian Talisman Energy have announced a discovery at the La Esperanza well in the eastern Colombian state of Meta, with initial tests showing an average production of 910 barrels of crude oil a day. Earlier this month, the two companies received permission to drill two more wells in the area.

• China’s CNOOC Ltd has announced a mid-sized oil discovery in the Lufeng 14-4 structure in the eastern section of the South China Sea. The Lufeng 14-4-1 well was drilled to a depth of 13,445 feet and encountered oil pay zones with a total thickness of 492 feet. Testing was around 1,320 boe/d. This is in the Pearl River Mouth basin.

Regulatory Updates

• We are unlikely to see a vote on Nigeria’s new Petroleum Industry Bill before general elections in February 2015. The bill is already five years in the making due to vast disagreements. It is a massive undertaking that would ostensibly overhaul the state-run Nigerian National Petroleum Corporation and reform oil taxes and licenses.

• The parliament of emerging gas giant Tanzania will hold a debate on allegations of corruption in the energy sector, though the country’s prime minister has tried to block the session. Parliament has received a report on an investigation into allegations of corruption made by opposition MPs who claim that government officials fraudulently authorized payment of more than $120 million in public funds.

• An advisory body to Oman's government (the Shura Council) has suggested sweeping spending cuts and tax rises, including a levy on liquefied natural gas exports, to deal with declining state revenues as a result of slumping oil prices. Even if oil prices average $80 next year, Oman will likely see a deficit of $7.9 billion. The Shura Council suggests reforms that would expand non-oil tax revenues, including an expansion of tax categories, a review of tax rates, the addition of new tax sources and improvements to the efficiency of tax collection. The council is also recommending an increase in royalties paid for mineral exploitation to the maximum percentage (10% of sales revenues) stipulated in Oman's Mining Law. The council has also suggested a "fair tax" on LNG exports.