The oil market is recovering

Oil inventories have been worked down and beginning to return to historical normalised levels, driven by a mix of robust demand growth on the one hand and concerted efforts by OPEC plus friends to cap production on the other.

While 12-18 months ago heightened geopolitical tensions and operational outages barely moved oil prices, such events are now needle moving news. The outage of Forties at the end of last year and intermittent headline grabbing conflicts in Libya which cause temporary spikes in oil prices are case in point.

However, RBC argues that understanding the breakdown of the inventory story is critical. Data shows that Asian inventories have been worked down which is key for “pulling” crude out of the Atlantic Basin. On the other hand European storage remains in surplus but the clearing of the Atlantic Basin will support drawdowns of European inventory.

Source: RBC Capital Markets, March 2018

It is therefore clear that while the global picture is moving in the right direction, there remains pockets of over and under supply in different regions. The clearing of North Sea crudes, which will be demonstrated by stronger pricing of regional blends such as Ekofisk vs. benchmark is therefore a secondary data point to monitor together with inventory levels for the next step of the global rebalancing story.

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Double success for Energean – IPO and FID

Energean put the East Med on the map this week propelling the region into the headlines.

Energean debuted on the London Stock Exchange at the beginning of this week with its Initial Public Offering and USD460 million of new money putting the company’s market capitalisation at just under USD1 billion. The company’s flagship asset is its 70% stake in the Karish & Tanin gas fields offshore Israel which contain 2.4tcf of gas and 33mmboe of light hydrocarbon liquids. First gas is targeted for 2021. The company also has producing assets in Greece and an exploration portfolio throughout the Aegean region.

In the same week Energean reached Final Investment Decision on the Karish & Tanin development giving the green light to commence the USD1.6 biliion project. USD405 million from the IPO proceeds will be used to fund Energean’s 70% share of the project and partner Kerogen will fund its 30% stake. A USD1.275 billion bank facility will also be used to fund this ambitious project.

Energean has secured long-term gas agreements with some of the largest private power producers and industrial companies in Israel. To date it has contracted for the purchase of a total of 61bcm over a period of 16 years, at an annual rate of c.4.2bcm p.a..

The East Med has become a hot play for gas and Karish & Tanin follow in the footsteps of giant gas fields in the region including Leviathan, Zohr and Aphrodite. Energean is set to become an exciting story to follow as industry interest in the East Med grows and the demand for its gas becomes increasingly important being in the centre of short gas MENA countries and the doorstep of Europe.

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Delek and Noble seeking to acquire gas pipeline to Egypt

Following Noble and Delek’s agreement to sell 64bcm of gas into Egypt via Egyptian intermediary Dolphinus Holdings, the two upstream companies have commenced discussions to acquire EMG, the business which owns the Arish-Ashkelon pipeline (otherwise known as the EMG pipeline).

This is one of the routes contemplated by Noble and Delek as part of plans to export gas into the wider East Med and Europe. The 64bcm of gas will be sourced from Tamar and Leviathan, the latter scheduled to deliver first gas at the end of 2019. Both fields are operated by Noble Energy.

Source: Delek, February 2018

The EMG pipeline used to export gas from Egypt to Israel under a deal agreed in 2008. However post the Arab Spring, the pipeline was increasingly the target of militant attacks and together with an emerging gas supply shortage, gas exports to Israel were terminated altogether. A lawsuit is continuing in the background between Egypt, Israel and EMG around the termination of gas exports.

In the meantime, it is understood that technical studies have begun to reverse the flow of the system for sending Israeli gas to Egypt.

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Petsec increases interest in Block 7 offshore Yemen to 100%

Petsec has acquired Oil Search's 40% interest in Block 7.

Full announcement below.

Petsec Energy has completed the transaction with Oil Search to acquire all of the shares of its subsidiary Oil Search (ROY) Limited which holds a 40% working interest (34% participating interest) in the Al Barqa (Block 7) licence and operatorship, in the Republic of Yemen.

Completion of the Oil Search agreement follows the 2016 transaction with KUFPEC (25% working interest) to acquire their interests in Block 7, and the transactions with AWE (25% working interest) and Mitsui E&P Middle East (10% working interest) completed and approved by the Yemen Ministry of Oil and Minerals in 2014. The acquisition of Oil Search (ROY) Limited increases Petsec’s potential working interest in Block 7 to 100% and operatorship of the block.

Block 7 is an onshore exploration permit covering an area of 5,000 sq kms (1,235,527 acres) located approx. 340 kms East of Sana’a, 80 kms North East of the Company’s Damis (Block S-1) Production Licence, and 14 kms East of OMV’s Al Uqlah (Habban) Oilfield. The block contains the Al Meashar oil discovery made by Oil Search in 2010 as well as an inventory of nine prospects and leads defined by 2D and 3D seismic surveys, with target sizes ranging from 2 to 900 MMbbl oil gross.

The Al Meashar Oilfield, with a target resource of 11 MMbbl to 50 MMbbl, contains two suspended discovery wells that intersected over an 800 metre oil column which in 2010-11 delivered flow rates ranging from 200 to 1,000 bopd in short-term testing of the wells. The oil column extends over the same reservoir sequence as that of the Habban Oilfield in the adjacent Al Uqlah (Block S-2).

Petsec Energy has secured a 100% interest in two production and exploration licenses in the highly productive Shabwah Basin in Central Yemen, Blocks S-1 and 7, which contain six oil & gas fields – one developed and five yet to be developed, with cumulative target resources between 45 and 84 million barrels of oil and 550 billion cubic feet of gas, in addition to further high potential exploration targets.

Block 7 is a key addition to the Company providing material upside to Petsec’s existing Production Licence, Damis (Block S-1) acquired in February 2016 from Occidental Petroleum, which holds the developed An Nagyah Oilfield and four undeveloped oil and gas fields, containing substantial oil and gas resources in excess of 34 million barrels of oil and 550 billion cubic feet of gas. The developed AnNagyah Oilfield was estimated, based on limited production rates of 5,000 bopd for trucking purposes, by DeGolyer and MacNaughton, reserve engineers, to contain gross 2P reserves of 12.8 MMbbl, of which the financial net to Petsec Energy is 5.6 MMbbl of oil, having a NPV 10 of US$155.4 million based on January 2016 forward oil prices.

Petsec’s Chairman, Mr Terry Fern stated:

'We are pleased to have secured the acquisition of 100% of both Blocks 7 and S-1 so we can now concentrate on bringing these acquired oil and gas fields into production. This oil and gas production is critically important to the local Yemeni people to provide employment and revenues, absent since 2015 because of the country’s political issues. We were heartened by the recent welcome and encouragement we received from senior members of the Yemen Government currently based in Riyadh, Saudi Arabia, and hope this offered support will allow the early restart of production of the An Nagyah Oilfield, which will demonstrate to the World that foreign investment is welcome in Yemen, and will encourage other foreign oil companies to join us in rebuilding the Yemen oil industry. We look forward to working with the Ministry of Oil & Minerals in developing Yemen’s oil and gas industry.'

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Total enters into two new 40 year concessions with ADNOC

Total has extended its commitment to the Abu Dhabi by entering into two new 40 year concessions with ADNOC for USD1.45 billion. This follows the deal last week between Eni and ADNOC.

Total has been granted a 5% interest in Lower Zakum and 20% interest in the new Umm, Shaif & Nasr concession. Total notes that the access cost equates to USD1/boe of reserves.

Comparison of transactions

	Total	Eni
Lower Zakum	5%	5%
Uum, Shaif & Nasr	20%	10%
Price Paid	USD1.45 billion	USD875 million

Each concession has a target production of c.450mbopd – the partners intend to grow production to these levels and beyond. At Umm, Shaif & Nasr, as well as growing production from the current 300mbopd, the fields have substantial gas reserves and could support 500mmcfpd. The gas would be used domestically to reduce the reliance on imports while associated condensates can be used in the petrochemicals industry.

The UAE remains an important region for Total who has been in the country for 80 years. Current production from Abu Dhabi alone is c.290mboe/d or 11% of the group’s overall production.

The Lower Zakum concession includes ONGC Videsh (10%), Inpex (10%), Eni (5%) and Total (5%). ADNOC expects to sign a deal for the remaining 10% stake, and has 60% interest.

For the Umm, Shaif & Nasr concession, Total has 20% interest, alongside Eni (10%), with ADNOC having 60% interest. A further agreement for the remaining 10% stake is yet to be signed.

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Leviathan and Aphrodite gas to fuel ELNG at Idku

As widely reported, Shell has been in talks to buy gas from Israel’s Leviathan field and Cyrpus’ Aphrodite field. It is understood that Shell are looking to contract up to 10bcm p.a. for 10 years in a deal worth up to USD25 billion.

Shell would use the gas to properly restart LNG exports from Egyptian LNG at the Idku liquefaction plant. BG Group was the operator of the plant prior to its acquisition by Shell and previously had a non-binding 15 year deal to source gas from Leviathan – this deal stalled amid the takeover by Shell and regulatory hurdles in Israel.

Leviathan is owned by Delek Drilling (45.34%), Noble Energy (39.66% operator) and Ratio Oil Exploration (15%). The field is on track to target first gas by end 2019.

Aphrodite is owned by Noble (35% operator), Delek Drilling (30%) and Shell (35%). Aphrodite lies in Block 12, offshore Cyprus and was discovered in 2011. BG Group farmed into 35% of the field from Noble Energy in November 2015 for USD165 million. Its commercialisation was previously called into question given the resource was too small to justify export infrastructure to mainland Europe or Egypt. However with the recent Calypso discovery in Block 6, which operator Eni has dubbed as a “Zohr like” play, Cypriot gas could finally take off.

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Dolphinus and the wider Egyptian gas hub story

Dolphinus was established with the main aim of becoming a “reliable and stable supplier of gas to major industrial gas distributors and consumers in Egypt”. It was co-founded by prominent Egyptian entrepreneurs Dr. Alaa Arafa, Eng. Khaled Abu Bakr and Mohamed Khalifa.

As a first step in its strategy, Dolphinus entered into a 64bcm, 10 year gas supply contract with Noble Energy and Delek Drilling for their gas in Israel (see Israel's Leviathan and Tamar gas to be sold into Egypt).

This is a welcome move for Egypt as Dolphinus can act as “middleman” for sourcing Israeli gas into Egypt. The two countries are still embroiled in a lawsuit over compensation to Israel when Egypt stopped supplying gas to the former in 2014 under a long term contract after Egypt ran into domestic supply shortages. Dolphinus therefore acts as a politically clean way to buy gas from Israel.

Dolphinus sees Egypt becoming a regional gas hub and looks to take part in that story by playing to the as import side of the story. Egypt has the right ingredients to be a hub. The country has a long history with gas, being an exporter for decades up until 2014 before needing to import gas in the last few years. This means the country has much of the infrastructure in place from domestic gas grids, cross-border pipelines, LNG facilities and access to FSRU capabilities.

While Egypt remains short gas, it is on the verge of being able to export again given the recent large discoveries in the offshore and also the emerging ability to re-export gas sourced from another country. This introduces the concept of Egypt being a gas trader, albeit currently at very early stages.

The existence of LNG export facilities means that the country has the ability (as it did before) to ship gas to a wide variety of destinations and is not reliant on pipeline infrastructure to penetrate markets. Being on the doorstep of the East Med allows Egypt to tap abundant sources of gas and the developing gas import dynamics means that the country is no longer tied to domestic supply sources to feed LNG – the issue back in 2014 when domestic demand outstripped supply and led to LNG facilities to call force majeure and stop exports.

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