The Kurdish Crush

The Kurdistan producers are in a tough spot brought about by COVID-19 and the collapse in oil prices. Earlier this year, the KRG said it would delay payments in respect of October 2019 to February 2020 deliveries as its cash to pay producers was stuck in a Lebanese bank account with the bank itself facing liquidity issues.

The KRG had struck a deal to pay producers for the backlog later in 2020. Payments in respect sales from March 2020 were not affected and continue to be paid. However at the current low oil prices, payments to producers have slumped.

Tawke: Received USD8.5 million for April deliveries split between partners DNO and Genel. This compares to the March payment of USD34.6 million.

Taq Taq: Received USD1.9 million, down from USD4.6 million in March with Genel's net share of the payment being USD1.1 million.

Shaikan: Gulf Keystone had submitted an invoice to the KRG for a nil amount as the realised price was negative with the Shaikan crude/transportation discount being below Brent.

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Mubadala enters Zohr - acquires 10% from Eni

Mubadala has agreed to acquire a 10% interest in Zohr from USD934 million. Mubadala will acquire an interest in the Shorouk concession which contains the Zohr field. The super giant field came onstream in December 2017, 28 months after its discovery. The field is currently producing 400mmcfpd and planned to reach plateau by the end of 2019.

For Mubadala, this adds a world class asset with long term cash flows into its investment portfolio. Musabbeh Al Kaabi, Chief Executive Officer of Petroleum & Petrochemicals, Mubadala Investment Company, and Chairman of Mubadala Petroleum said: “This is an important and attractive investment for Mubadala, adding a world-class asset to our portfolio with long-term cash flows. We are joining a strong partnership with Eni as operator, who have delivered the project in record time and with the full support of the Egyptian authorities.”

For Eni, the deal is consistent with its strategy of monetising development and producing assets to recycle cash flows for exploration. It also reduces Eni’s portfolio weighting more towards OECD, a long term shift that the company continues to pursue. Claudio Descalzi, Chief Executive Office of Eni, said: “We are pleased to be working with Mubadala and welcome them into the partnership for the Shorouk concession. This represents a further signal about the strength and quality of this world class asset developed by Eni”.

The deal follows Eni’s farm-out of Zohr to BP and Rosneft in November and December 2016 prior to development spending. At the time, BP acquired 10% for USD525 million and 30% to Rosneft for USD1.125 billion. This compares with Mubadala’s current buy-in price of USD934 million for 10%.

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OVL to bid for South Azadegan oil development in Iran

Indian oil giant ONGC Videsh Limited ("OVL") will bid for the development rights of the giant South Azadegan in Iran. There is strong competition with the likes of Gazprom, Lukoil, Rosneft, Shell, Total, Eni Petronas, Inpex, Sinopec and CNPC. of Malaysia and Russia’s Gazprom. OVL is one of 34 companies that pre-qualified last year for development of the field which is estimated to contain 6bnboe recoverable and currently produces 80mbbl/d - with the right investment, this could reach 320mbbl/d.

The National Iranian Oil Co ("NIOC") will issue a tender for the development shortly.

Separately, OVL will also rework the Farzad B gas field at a cost of USD6.2 billion, which it had discovered a decade ago and is trying to get Iran to award rights of the field to it. Sources say that OVL had last year made its ‘best’ offer to invest USD11 billion in developing the Farzad-B field and building export infrastructure but Iran has deterred awarding the rights of the field to OVL owing to differences over pricing of the fuel. OVL has now instead offered to do just the upstream part of bringing the field to production while leaving the marketing of the fuel to Iran, which will cost USD6.2 billion.

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Zohr record breaker

In record time for a deepwater gas development of this scale, Eni has announced first production from Zohr. The field was discovered in August 2015 and FID taken in early 2016 - Eni achieved first gas from discovery in 2.5 years.

Zohr is the largest gas discovery ever made offshore Egypt and is located in the Shorouk block. The field has begun production at 350mmcfpd and is expected to grow to 1bcfpd by mid-2018. The speed of development is a testament to Eni's "Dual Exploration Model" which was adopted in 2013. Under this model, Eni works the exploration, appraisal and development planning and phases in parallel while bringing in minority partners at the same time to help fund the costs.

Zohr has >30tcf of GIIP and forms an important piece of the jigsaw to solving Egypt's short gas problem. The new production will help feed the hungry and growing domestic gas demand which Egypt has been trying to manage by raising domestic prices on the one hand and incentivising further gas exploration/development on the other.

The Zohr partners are Eni (60%), Rosneft (30%) and BP (10%). Eni is co-Operator of the project through Petrobel, which is jointly held by Eni and EGPC.

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Kurdistan: The Rosneft connection

Rosneft provided a much welcomed source of funding for Kurdistan in February 2017 when it entered into an off-take contract for crude oil. Under the contract, Rosneft will purchase Kurdish crude until 2019 – the volume commitments were not disclosed. In April 2017, Kurdistan received USD1 billion for the first cargo of 600,000 bbl.

The was an important landmark deal for the KRG, being the first time that crude was sold directly to a government-linked oil company. Up until then, all crude was sold to traders. The first cargo was landed at Italy and then transported to Rosneft’s refineries in Germany.

The Rosneft connection was deepened in June at the St. Petersburg International Economic Forum with the signing of a series of agreements supporting the expansion of cooperation between Rosneft and the KRG “in exploration and production of hydrocarbons, commerce and logistics”. The agreements paved the way for the full entry of Rosneft into Kurdistan with the company signing PSCs for five blocks, which were selected from the 22 blocks that the Ministry of Natural Resources put out for licensing at the beginning of the year.

Baghdad has mostly been quiet around Kurdish crude exports and there were no signs of Federal Iraq aggressively pursuing legal cases around the sale of crude by Kurdistan which it viewed as illegal. However, in a surprise turn of events, Baghdad procured a warrant from the Canadian courts to block a Kurdish crude cargo from being offloaded in Nova Scotia on 29th June. The warrant for the arrest of c.722,000 bbl on board the M/T Neverland is a reminder that the dispute between Baghdad and Erbil remains unresolved.

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Eni: Bringing in successive partners for Zohr

On 28^th November, Eni announced the divestment a 10% interest in Zohr to BP for USD375 million plus pro-rata reimbursement of past costs (c.USD150 million net), bringing total consideration to USD525 million. BP also has an option to acquire an additional 5% interest on the same terms before the end of 2017.

On 12^th December, Eni announced that it had divested a further 30% interest in Zohr to Rosneft for USD1.125 billion and USD450 million of back costs - i.e. on substantially the same terms as BP. Rosneft also has an option to acquire an additional 5% interest on the same terms.

The transactions reduce Eni's exposure to the Zohr development by 40% from 100% to 60%; this could fall to 50% if BP and Rosneft exercise their options for additional interests. The divestment will also reduce Eni's capex by c.USD900 million in 2017 ahead of first gas at the end of 2017. A similar capex saving is expected to be made in 2018.

Eni has successfully demonstrated its ability to monetise large resource finds. The farm-out significantly derisks the upcoming development and it is promising to see buyers for good quality assets despite the current oil price environment.

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