The state of the UK North Sea

• Tax incentives have encouraged capex spend
• ...but this has led to an overheated OFS market
• and rising costs have caused some marginal projects to be postponed or even cancelled (Bressay (Statoil) and Rosebank (Chevron) being well known examples)
• Production decline continued in 2013...
• Increase in planned and unplanned shutdowns
• Ageing infrastructure
• ...compounded by few large field start-ups and poor exploration success
• WM estimates UKNS average discovery size in 2013 to be c.11.3mmbbl, which struggle to meet commercial thresholds in current high cost environment
• Most discoveries have been tie-back opportunities
• This concerning state of UKNS will impact OFS providers; UKNS represents c.20% of global offshore spend
• Poor exploration results in recent years will lead to lower levels of future project development
• Laggan and Tormore start-up in 2014 - accounted for significant portion of UKNS capex previously
• Current backlog will support 2014/15, but backlog growth looks challenging
• Focus of oil companies has shifted to completing existing projects
• Brownfield may be a bright spot for UKNS OFS
• Drivers: increasing recovery, maintaining ever ageing infrastructure, expansion of platforms to accommodate tie-backs
• Seismic may or may not be a growth area
• Poor exploration results may lead to greater spend on seismic, but the UKNS unlikely to be seen as region with further significant potential
• With the industry in a state of strict capital discipline, cash is likely to be spent on regions where exploration is seen as more prolific
• Declining M&A reflects the downside risk perceived by buyers of the UKNS

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Thoughts around using a high discount rate

Higher discount rates may be used to reflect the greater risk averseness adopted by a company/project manager. This may also be used as a screening tool, with lower NPV projects rejected. In O&G, and other fields, higher discount rates should be used in conjunction with other tools to evaluate projects.

At the planning level, the use of higher discount rates has its own limitations due to conflicting interests between the project team (e.g. staying in the job) and management.

• Encourages projects with near term and/or higher levels of early production 
• Implication: capex spent on projects with shorter lives at expense of a developing longer life assets; capex is accelerated
• Capex is low-balled to get projects/wells approved
• Implication: actual costs are inevitably higher leading to under-performance of project; capital not deployed efficiently
• Riskier exploration may be undertaken
• Implication: more optimistic view taken on reserves and costs to push projects forward

The above actually leads to projects that are inherently more risky being undertaken and increases the exposure of the business to risk, countering the original intentional of using a higher discount rate!

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Global upstream review - 2014

Transaction activity declined sharply in 2013

• Record M&A in 2010-12, companies switched focus to developing acquired acreage
• Corporate activity weak – NOCs faced hurdles in NAM, public companies weary of overreaching with strict capital discipline and own paper cheap
• In NAM, prime acreage now leased up; valuations mixed as drilling results and understanding of plays have progressed
• Asian NOCs bidding aggressively on global assets as large corporate opportunities limited or more difficult to transact – have seen spending from this group of buyers up

M&A buyer/seller landscape evolving

• Asian NOCs remain largest buyer group
• Chinese NOCs competing with Asian NOCs who are heavily reliant on import and with mandated overseas growth targets
• Pertamina, PTTEP, CPC and Indian NOCs have focus on Africa
• KNOC has, in contrast, spend USD20bn in past 3 years with poor returns and underperformance
• High debt, looking to downsize portfolio

NAM E&Ps largest sellers of overseas assets

• Retrench to NAM, divest wider international portfolio to focus on core regions, capital discipline
• Financial investors/PE increasing O&G footprint outside of NAM

 
LNG market shifted to emerging basins

• Australia market crowded with competing projects and escalating costs
• East Africa attracting huge Asian NOC investment
• East Med gas in early stages, welcoming experienced LNG players
• Arbitrage opportunity for NAM LNG to APAC/Europe, competing with Middle Eastern basins

 
US conventionals spending falls with shift to liquid plays

• Top performing liquids rich plays have grown market share (Eagle Ford, Bakken); Gas plays (Marcellus) have lost market share
•  PE seeks bargains in nat gas; more efficient tax structures; can wait for gas price to recover

Key themes for 2014

• Majors continue to rationalise portfolios amid shareholder pressure for better returns and weak growth/high capex
• E&Ps - pressure for discipline rather than grow (inorganically); reluctance for large corporate deals unless compelling 
• NAM E&Ps expensive, trades with oil despite gas weighting
• Emergence of Asian private buyers - financial, industrial, OFS and private money looking to diversify into E&P (e.g. Brightoil)

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Repsol hit with further delays offshore Namibia: Welwitschia

• Welwitschia prospect being drilled on PEL0010: Repsol (44%*), Tower (30%), Arcardia (26%)
• Welwitschia-1 spud last month
• Due to issues with wellhead housing, well was plugged and abandoned
• Decision made to drill Welwitschia-1A 50m away, which was spud 1 May 2014
• Welwitschia-1A now at 1,879m but problems with blowout preventer system has halted drilling
• Prospect estimated to have multi-billion bbl potential and is being drilled to test the Maastrichtian and Aptian-Albian reservoir sequences

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Libya update: co-ordinated militia attacks against Islamists

• On 16 May, forces loyal to Colonel Haftar attacked the bases of two Islamist militias in the eastern Libyan city of Benghazi: Ansar al-Sharia and 17 February Martyrs Brigade
• Haftar commands the "national army"
• Aim of attack to remove Islamist militias from Benghazi
• Ansar al-Sharia aims to impose Sharia law in Libya
• Allied with 17 February Martyrs, who report to the Government
• In Western city of Tripoli, militias allied with the Zintan Brigade also moved in support of Haftar's actions and attached the General National Congress ("GNC")
• Colonel Obaidi, the chief of staff of the Libyan Army, has said the army will support the GNC and branded the move by Haftar as a coup attempt
• Increasing number of former Libyan Islamic Fighting Group ("LIFG") have taken up senior Government security positions
• LIFG as similar ideology to Ansar al-Sharia
• Two groups rumoured to be working with the Muslim Brotherhood to takeover the governance of Libya
• Haftar and his affiliates have called for further forces to support his cause, but us unlikely to have the funding and resources to oust the Islamist militants; in Western Libya, the Sintan Brigade is also unlikely to have the resources to capture Tripoli - most likely outcome is protracted fighting and stalemate

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Lekoil acquires 40% WI in Otakikpo Marginal Field

• 20 May 2014: Lekoil announced acquisition of 40% participating and economic interest in Otakikpo, a Nigerian onshore Marginal Field; located within OML11
• Vendor: Green Energy
• Consideration: USD7m upfront, plus USD4m contingent on production and ministerial approval
• Lekoil will also fund work programme for re-entry of existing wells and all costs up to production (estimated c.USD67m); this is recoverable from enhanced share (88%) of production cash flow
• Lekoil expects to bring Otakikpo into production within 12-18 months
• Acquisition and work programme partly funded by placing; 70-80% of the work programme expected to be funded through RBL
• 2C estimate: 36mmbbl + 31 bcf (gross)
• Otakikpo has partial 2D and 3D coverage; 3 wells to date, with h/c encountered in multiple intervals; field is close to existing infrastructure
• Lekoil's other assets are:
• 30% economic interest in OPL310 (17.14% WI) which contains Ogo. Partners are Optimum (30% economic interest, 60% WI), Afren (40% economic interest, 22.86% WI)
• 1% in OPL241
• 77.5% in exploration Blocks 2514A and 2514B, Namibia

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Oryx: Appraisal drilling update for Demir Dagh, Kurdistan

• Oryx holds 65% WI in Hawler licence (Operator), KNOC (15%), KRG (20%)
• On 19 May 2014, announced test results for Demir Dagh-3 ("DD-3") and Demir Dagh-5 ("DD-5") wells
• DD-3: all four tests flowed successfully; crude quality similar to that at DD-2 and -4
• Spudded in November 2013, 3km south-east of DD-2
• Will now be completed as producer with DD-2 and -4
• DD-5: Logging data and drilling fluid losses during drilling, only small amount of hydrocarbons recovered to surface
• First production from Demir Dagh Area expected Q2 2014
• DD-6 plus a further 4 appraisal/development wells to be drilled in 2014 to:
• further increase production capacity
• delineate reservoir
• DD-6 well now spudded
• Oryx also holds a 50% WI in Wasit, Kurdistan
• Wasit is close to the super-giant East Baghdad field
• 5 leads identified with 404mmbbl gross unrisked prospective resources
• Seismic has been planned on the licence in 2014

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Petroceltic successfully completes USD100m placing

• Joint book-runners are Davy, HSBC and Mirabaud
• Proceeds will be used to "provide financial flexibility to pursue growth opportunities across Petroceltic's existing portfolio and also through new ventures"
• Dovenby Capital will be a new strategic shareholder, subscribing to USD50m of the placing
• Dovenby Captial is an investment company led by Dato' Ahmad Fuad, a Malaysian oil and gas industry specialist

Update on assets

• Algeria
• Ain Tsila / Isarene PSC - tender for FEED at end 2013, farm-out to Sonatrach (pre-empted) - post farm-out Petroceltic (38.25%), Sonatrach (43.375%), Enel (18.375%)
• Egypt
• Award of El Qa'a Plain, North Thekahm South Idku ratified
• Commenced drilling on South Dikimis in May 2014; gross mean unrisked prospective of 7.6mmboe
• Kurdistan
• Shakrok-1 TD reached in April 2014; four zones selected for testing - 2 flowed formation water and no hydrocarbons, remaining 2 zones still being tested
• On Dinarta licence, preparation for drilling Shireen-1 well, targeting gross mean unrisked prospective of 706mmbbl
• Petroceltic holds 16% WI in the above two licences, Hess (64%*), KRG (20%)
• Other assets in Bulgaria, Romania and Italy

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Keystone kills bipartisan energy bill

• The Energy Savings and Industrial Competitiveness Act was proposed by Rob Portman, a Ohio Republican
• The bill had aimed to reduce energy needs and cut emissions by offering incentives for adopting energy-saving technology such as water heaters with smart meters
• More importantly, the bill had bipartisan support
• As the bill neared the vote, some Republicans tried to attach amendments to the bill to approve Keystone
• Harry Reid (Democrat), Senate Majority Leader, refused the amendment and the amendment's supporters retaliated by blocking the main bill
• TransCanada submitted plans for Keystone six years ago for the US to review
• The pipeline was proposed as a conduit connecting Alberta's oil sands with US Gulf Coast refiners
• TransCanada's Energy East project which would export the oil sands crude to the Atlantic Coast (New Brunswick) may be an easier option as US approval would not be required
• Proponents argue that exporting from the east coast is a valuable option with access to the growing Indian markets and the crude would also support Canadian jobs by supplying refineries in Eastern Canada
• It is also clear that the US no longer needs Canadian crude to help achieve energy independence, a big change since the Keystone plans were submitted

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Statoil divests its 5% WI in 15/06 Angola to Sonangol

• Statoil announced on 12 May 2014 that it is divesting its 5% WI in Eni-operated Block 15/06 to Sonangol for USD200m
• Statoil's remaining licences in Angola are Blocks 17, 15, 31, 4/05, 22 (pre-salt), 25 (pre-salt) and  40 (pre-salt)
• Statoil is also operator of pre-salt Blocks 38 and 39
• In April 2014, Statoil also farmed down a 15% WI in Block 39 to WRG, a 50/50 JV between White Rose and Genel. Post transaction, interests will be Statoil (40%), Sonangol (30%), Total (15%) and WRG (15%)
• WRG also acquired, concomitantly, a 15% WI in Block 38 from China Sonangol. Post transaction, interests will be Statoil (55%), Sonangol (30%) and WRG (15%)
• Exploration on Blocks 38 and 39 will commence during 2014 with the first prospect
• Dilolo-1 is the first high-impact prospect that will be drilled on Block 39; this will be followed by the second commitment well on Block 38
• Angola is Statoil's largest contributor to production outside of Norway with 2013 production of c.200mboepd, c.28% of total international output

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Egypt: the gas conundrum

• LNG exports have dwindled as domestic consumption has increased and upstream production has declined, primarily driven by the decline in the mature offshore fields in the Nile Delta which account for the majority of Egypt’s gas production
• The declines have been exacerbated by the IOCs moderating capex due to increased political uncertainty and build-up of outstanding payments from the Government
• Increasing investment in growing gas production is critical but unattractive fiscal terms have discouraged investment
• Although in 2010, BP and RWE secured better fiscal terms for the North Alexandria gas development (60%, 40% WI respectively) with a revised gas pricing structure incorporating a floor of USD3/mmbtu and ceiling of USD4.1/mmbtu
• Egypt has now become an LNG importer with an estimated USD1bn of imports estimated to be required to satisfy summer demand in 2014
• In October 2013, Egypt issued a tender for a floating regas terminal and this was awarded to Norwegian firm Hoegh LNG – however, the contract was not finalised as the financial guarantees offered by EGAS to underpin the project were not acceptable
• Aid has provided temporary relief for Egypt, but subsidy reform will form an important part of a longer term solution. However, any newly elected government will be unlikely to instigate radical subsidy cutbacks due to avoid increasing social unrest
• Aid packages includes:
• Qatar offered five LNG cargoes as a gift through the summer months of July-September 2013
• Saudi Arabia has announced a USD5bn package before the Egyptian elections on 26-27 May
• Egypt is currently receiving USD700m in petroleum aid every month from Arab countries

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Tunisia E&P activity to slow amidst increased regulatory scrutiny

• Tunisia's new constitution, passed in January 2014, includes Article 13 which requires natural resource agreements to be ratified by the National Constituent Assembly rather than the Industry Minister
• Proponents of Article 13 include President Marzouki's party, and is part of a trend towards growing scrutiny of decision making in the country's upstream sector
• This will add a new layer of approvals for investments, extension of permitting timelines and routine permission held back
• Tunisia's upstream industry is characterised by a large number of smaller companies and independents, often working in consortia - these are often reliant on farm-in and farm-out activity to manage exposure and costs
• These companies may be deterred from entering the country if permitting delays become worse and proposals for regulatory/contract reviews go ahead
• A number of approvals are currently outstanding including:
• EnQuest/PA in Didon and Zarat permits
• Extension of Sonde's Joint Oil licence
• ADX/Gulfsands asset transfer
• Cygam sale of Sud Tozour to YNG

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Further Kashagan delays

• Discovered in 2000; project partners are Eni, Total, Shell, XOM (each with 16.8%), KMG (16.9%), CNPC (8.3%), INPEX (7.6%)
• USD50bn spent on Phae 1; production originally expected to start in 2006 but has been plagued by delays and cost overruns
• Production commenced in September 2013, but subsequently shut down due to leaks of hydrogen sulphide from the extensive gas network
• Kazakhstan environment ministry will fine the Kashagan companies USD735m for burning gas emptied from the pipeline - the companies have said they will appeal the fine
• Production not expected to resume until end 2015/early 2016 as much of the pipeline network will need to be replaced due to corrosion
• Phase 1 proven reserves estimated at 3.3bnboe (c.80% oil). Including future phases, total recoverable estimates of 9-13bnboe
• Kashagan partners have said they will need extension to to PSC (expiring 2041) to warrant further investment to lift production to >1mmboepd - Phase 1 production is expected to be at c.450mboepd

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Cobalt makes Orca discovery in Kwanza Basin

• Cobalt has 40% WI in Blocks 9, 20 and 21 offshore Angola
• In the company's Q1 results (1 May 2014), Cobalt announced that it had successfully tested the Orca-1 well which flowed at a constrained rate of 3,700bopd + 460mcmpd
• Orca-1 lies in Block 20 and is the largest discovery to date in the Kwanza Basin; Orca is estimated to hold 400-700mmboe
• On Block 21, Cobalt recently began drilling the Cameia-3 well with the field expected to reach first oil in 2017
• The Cameia-1 discovery was drilled made in 2012 and the Cameia-2 appraisal was drilled in 2013
• On Block 9, Cobalt has received a two-year extension where it plans to drill the Loengo-1 exploration well after Cameia-3

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Libya plans "smart cards" to stop fuel smuggling

• Gaddafi introduced subsidies on items from fuel to bread and airline tickets to discourage opposition
• The subsidies, together with public salaries take up more than half of the national budget
• Citizens have been subsidised buying fuel and smuggling into Tunisia for resale at higher prices
• With shutdown of oil fields and ports since mid-2013, crude export revenues are drying up and the government is proposing a fuel card system to parliament that will limit the amount of subsidised fuel that can be bought
• Egypt has recently implemented such a fuel card system

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