Saudi Arabia: Consolidating power and austerity tested

Earlier this week, Saudi Arabia announced two pieces of news that the oil markets will be keeping a close eye on. In this latest episode of palace intrigue, King Salman has taken further steps to consolidate power in the Salman branch of the royal family and reversed some of the austerity measures implemented in 2016, the latter signalling tears in the fabric of the social contract with the Saudi public.

King Salman’s sons, Abdulaziz bin Salman and Khaled bin Salman, will become Minister of State for Energy and Saudi Ambassador to the US respectively.

• Prince Abdulaziz has held a variety of senior positions in the oil ministry through the years and was a proponent of abandoning the market share strategy
• Prince Khaled has served as an advisor to the Saudi embassy in Washington – his placement will be to help strengthen ties between the US and Saudi, consistent with the messages since the Trump and Deputy Crown Prince meeting in March 2017

Prince Abdulaziz and Prince Khaled are half-brothers; Prince Khaled is a younger brother to the Deputy Crown Prince, Mohammed bin Salman.

The other key decision this week was the reversal of civil service salary and benefits cuts. The austerity measures have caused discontent with the public, of which c.70% work for the civil service, leading to cries demanding the reversal of salary cuts, reinstatement of benefits, scrapping the planned IPO of Saudi Aramco and a change of the ruling system from an absolute to a constitutional monarchy – the latter being a key concern and threat to the Salmans’ power. The reversal of the cuts were well received and although undermines the economic outlook of Saudi Arabia, is clearly much more desirable than public revolt.

The temporary austerity measures reduced the spending deficit from USD97 billion in 2015 to USD79 billion in 2016. The target for 2017 was set at an ambitious USD53 billion, but this now looks unachievable with the announced reversals. The reversals place the Deputy Crown Prince in an awkward position within the family’s diverging aspirations for the Kingdom with the potential undermining of his Vision 2030 which aimed to scale back the public sector wage bill and civil service, with diversification of the economy. The durability and longevity of other Saudi measures and now being put to the test.

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More innovative investment from Schlumberger for Sound Energy

Sound and Schlumberger have agreed to extend their partnership under the existing Field Management Agreement. In an era where more innovative financing arrangements are being seen, Schlumberger will be granted 27.5% interest in the Meridja and Tendrara Relinquished Areas in exchange for providing services.

Schlumberger will carry out the upcoming geophysical programme which will include:

• 2,600km of new 2D seismic covering the Paleozoic across the Tendrara and Meridja areas; and
• 24,000km² of gravity gradiometry

The programme has an estimated value of USD27.2 million and will be completed over the next 12 months in stages, with an updated prospect inventory produced at each stage.

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Premier sells out of Pakistan

Premier has announced the disposal of its Pakistan business for USD65.6 million to Al-Haj General Trading Co. The sale process for these assets was initiated in 2015 after an unsolicited approach and culminates with today's announcement.The Pakistan assets comprise six non-operated producing gas fields which produced c.47mmcfpd and generated c.USD41 million in 2016.

Premier has been present in Pakistan since 1988 and in 1990, made the Qadirpur discovery. Since then, the company has acquired interests in five other fields, all located onshore. The fields are long-life assets with low operating costs. All production is sold to the government-owned gas utilities, SSGCL and SNGPL.

This disposal is in line with Premier's strategy to dispose of non-core assets to reduce net debt. The deal is expected to close at the end of the year and is pending government and regulatory approvals. The effective date of the transaction is 1st January 2017.

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FAR AMI with CNOOC in Senegal and The Gambia

On 31^st March, FAR announced that it had entered into an Area of Mutual Interest Agreement with Chinese state giant CNOOC for the joint co-operation on the evaluation of and entry into new opportunities across Senegal and The Gambia.

This follows on FAR’s farm-in to 80% of Blocks A2 and A5 in Gambia from Erin Energy earlier this week.

The announcement on the arrangement with CNOOC follows:

“FAR has signed an Area of Mutual Interest (“AMI”) agreement with CNOOC UK Limited (“CNOOC UK”). The AMI covers selected licences offshore Senegal and The Gambia within the designated area.

The AMI provides FAR and CNOOC UK with agreed arrangements to partner in evaluating, bidding, negotiating and managing joint ventures on farm-in and open acreage opportunities for oil and gas licences. The AMI agreement period is for two years.

In combination, FAR and CNOOC UK bring together expertise of the Mauritania-Senegal-Guinea-Bissau (“MSGB”) offshore basin and the capabilities of an international deep water operator.
FAR and CNOOC UK are committed to building long term strategic relationships with the host Governments of Senegal and The Gambia and their people.
This agreement positions FAR to further expand its portfolio and establish itself as one of the major players in the rapidly emerging MSGB Basin – a basin that is increasingly attracting the attention of the world’s oil “majors”.

CNOOC UK Limited is a subsidiary of CNOOC Limited which (together with its subsidiaries) is the largest producer of offshore crude oil and natural gas in China and one of the largest independent oil and gas exploration and production companies in the world.”

Related Links

• FAR signs strategic AMI Agreement with CNOOC UK Limited 
• FAR expands exploration portfolio in West African hot spot – Secures 80% stake in high potential offshore blocks in The Gambia 

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Shell sells onshore Gabon to Carlyle

On 24^th March, Shell announced the sale of its onshore Gabon assets to Assala Energy Holdings (a portfolio company backed by Carlyle Group).

Assala will pay USD587 million and assume debt of USD285 million, taking “enterprise value” to c.USD870 million. Shell will also receive up to a further USD150 million in contingent payments depending on oil prices and performance. This compares with a Wood Mackenzie NPV10 of c.USD600 million and implies that some value being placed on the gas resources.

The onshore portfolio comprises c.60mmbbl of oil (commercial) and c.160bcf of contingent gas. The gas is currently undeveloped due to a limited market, but could one day be used to supply local power generation. The portfolio produces c.35mbopd of and Shell Trading will retain lifting rights from the assets for the next five years.

The licences being acquired are a mix of PSCs and concessions with some of the concessions being converted into PSCs over the last 10-20 years when they came up for renewal. The licences are owned directly and indirectly through a JV with the Gabonese government (75% Shell, 25% State). The largest asset in the portfolio is Toucan which commenced production in 2003 – significant investment was made between 2012-2014 as part of an additional phase of development to extend the field life to c.2030.

The offshore licences (BC9 and BC10) are excluded from the same, where Shell made the large Leopard-1 discovery in 2014 which is estimated to contain close to 1tcf of recoverable gas.

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Bowleven Bomono farm-out

Bowleven and Victoria Oil & Gas ("VOG") have signed a farm-out agreement relating to the Bomono production sharing contract. VOG is a domestic Cameroon gas supplier, and gas upcoming production from Bomono fits in with its strategy of expanding local supply.

Bowleven will retain a 20% operated interest in the Bomono PSC and VOG will have an 80% interest. Bowleven will receive £100,000 worth of new ordinary shares in VOG and a 3.5% royalty from VOG’s production share from the licence, with a cap limiting the total royalty payments to USD20 million. VOG will complete the civil engineering (c.USD6 million) and Bowleven has agreed to pay 50% of any deficit, limited to a USD2 million.

Gas produced from the Bomono PSC is expected to be fed into the customer distribution network owned and operated by Gaz du Cameroun, a wholly owned subsidiary of VOG and the gas will be sold to GDC less a tolling fee. First gas supply to the GDC network is anticipated to start following granting of a Provisional Exploitation Authorisation ("PEA") and other approvals.

Bowleven’s detailed prospect inventory indicates there is 146bcf and 263bcf of mean un-risked GIIP in the Tertiary and deeper Cretaceous reservoir intervals respectively. Completion of the deal is subject to the grant of a PEA over the Bomono PSC and approval from the Cameroon Government.

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Perenco acquires Gabonese assets from Total

On 27^th February Total announced that it had agreed the sale of its Gabonese assets to Perenco for USD350 million. Perenco will acquire:

• Total Participations Petrolières Gabon ("TPPG") a wholly owned subsidiary of Total which has interests in 10 assets; and
• 5 assets from Total Gabon, the publicly listed entity in which Total owns 58.3% and the government of Gabon 41.7%

The package will comprise of 12 fields (some are owned by ‎TPPG and Total Gabon) with 13mbopd production as well as the operated Rabi-Coucal-Cap pipeline. Perenco will acquire operatorship of all the assets apart from Rabi which is operated by Shell.

The assets are mature with the majority currently having an expected end of life between 2020 and 2030. However the deal fits with Perenco's successful strategy of creating value from mature assets. Perenco has a track record of exploiting mature assets around the world, including in Colombia, the UK, Congo and Cameroon. Perenco already has assets in Gabon and this acquisition provides an opportunity for operational and cost synergies and cements West Africa as a core region for the company.

Although the assets provide only oil production, there ‎are significant contingent gas resources especially in Rabin with an estimated 250 bcf gas cap. Perenco is currently the sole gas producer in the country, supplying local power plants and the new gas provides significant back up volumes.

For Total, the divestment will contribute towards the 2014 mandated divestment target of USD10 billion to 2017, of which c.USD8 billion has been achieved to date. It should be noted that this does not represent a complete country exit for Total which still retains assets through Total Gabon, such as Grand Anguille and the deep water Diaba exploration block.

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