Energy Finance Week Issue 07

Week 07• 21 March • 2016

ENERGY FINANCE WEEK This week’s top stories

v Further decline in Chinese

demand expected, feeding negative asset valuation loop

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v Institutional investors flock to Suncor

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v Debt default looms for PDVSA p16

v Facing a possible downgrade

and with its stock market stymied, Qatar is set to issue a sukuk p21

w w w. N E W S B A S E . c o m NewsBase Ltd. • 108 Dundas Street, Edinburgh EH3 • Tel: +44(0)131-478-7000 • Email: research@newsbase.com

ENERGY FINANCE WEEK

Week 7• 21 March • 2016

Further decline in Chinese demand expected, feeding negative asset valuation loop MARKET AS China’s National People’s Congress (NPC) concluded last week, there was little cause for optimism for beleaguered oil-producing states. With China having accounted for an average of 35% of global oil demand growth since 2000, this year’s economic growth forecast from the NPC of 6.5-7% is the first time the government has acknowledged a goal below 7% in two decades, following China’s slowest economic uptick in 25 years last year with 6.9% growth.

Even this latest forecast, though, looks unduly bullish, according to many seasoned China analysts, including Asia specialist bank, Nomura, which predicts maximum economic growth this year of 5.8%.

The notion, then, that Chinese demand may offset ongoing supply surpluses elsewhere in the world looks ill-founded, which itself could continue to feed into a negative asset valuation loop that may result in oil prices being depressed for many years to come.

No time for optimism “We believe that oil demand growth from the passenger vehicle sector, which has made up 66% of Chinese total oil demand growth since 2010, may slow in the medium term and then begin to decline by 2024, and this casts doubt over the capacity for continued long-term oil demand growth at current trend rates in China, and by extension, the world,” Michael Hsueh, senior commodities analysts for Deutsche Bank, told Energy Finance Week.

This is even without factoring in strong assumptions over the possible growth in electric vehicle market share in China, which, if also taken into account, would in and of itself reduce Chinese oil demand by 2035 by 1 million barrels per day, he added.

The key drivers to potential huge reductions in China’s oil demand are the size of the passenger vehicle fleet, its utilisation in annual km travelled, and its fuel efficiency, with growth in China’s passenger vehicle sales likely to come in at an even slower rate than the reduced GDP growth targets, Hsueh said.

Already, local governments across the country maintain licence plate quota systems whereby limited licences may be allocated through competitive bidding or lottery, and those that have been introduced in Beijing,

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Shanghai, Guiyang, Guangzhou and Tianjin since 2011 also include special licence quotas intended to encourage alternative energy vehicle adoption.

In the case of Beijing’s licence plate cap and lottery scheme, for example, the aim was to reduce vehicle sales from an average of 20,000 per month over the 20052010 period to 18,000 per month in 2012, and targets less than 12,000 per month over 2014-17. According to the United Nations Environment Programme (UNEP) this means that only 1 in every 84 applicants participating in the bid process would be successful.

Reducing demand Not only are there likely to be fewer passenger vehicles around in the future but they may also travel less distance, so decreasing fuel consumption further, said Hsueh.

According to an extensive study on vehicle-use intensity in China by Tsinghua University, historical annual distance travelled per passenger vehicle in China has been high relative to developed countries by virtue of a high proportion of taxis. In comparison to the average taxi which travelled 99,200 km in 2009, the average private light-duty vehicle travelled only 16,900 km.

Factoring in the relationship between total annual vehicle kilometres travelled to economic growth, Deutsche Bank predicts that the annual kilometres travelled per vehicle will fall from an estimated 24,000 km in 2000 to 13,000 km in 2030 and then to 12,950 km in 2035.

“This view is predicated on the expectation that China will more closely follow the example of Europe and Japan rather than the US, owing to high population densities in Chinese cities and progress towards an extensive rail network,” Hsueh said. “Our key finding is that Chinese oil demand growth, the largest single contributor to world oil demand growth, may begin to flatten more quickly than some long-term projections indicate and, all else remaining equal, this could result in world oil demand growth falling from its 2000-2016 trend of 1.1 million bpd year-on-year to only 800,000 bpd by 2024,” he concluded.

Recovery elusive China’s growth rebalancing, together with recent GDP

Ed Reed, Editor, Africa Oil & Gas and LNG • Email: edreed@newsbase.com Richard Lockhart, Editor, Africa, Asia and Central Europe Power • Email: richardl@newsbaase.com Ryan Stevenson, Editor, Europe and Latin America Oil & Gas • Email: ryans@newsbase.com Ian Simm, Editor, Middle East Oil & Gas and MEA Downstream • Email: ians@newsbase.com

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ENERGY FINANCE WEEK

Week 7• 21 March • 2016

growth weakness and the broader-based shift in the commodity supply cycle, have served to exacerbate negative returns across the commodities sector as whole, of course, but this process has not yet been fully factored into the oil pricing complex, Jeffrey Currie, global head of commodities research for Goldman Sachs, told Energy Finance Week.

“It’s important to emphasise that the recent decline in commodity prices is not the result of cyclical demand weakness but rather is the result of a continuation of structural supply and macro forces from 2013, with the long-dated oil prices adjusted for producer country FX being mostly unchanged, which underscores the macro nature of the recent declines,” he said.

Currie added: “Driving this recent macro re-pricing across the commodity complex are the same three themes seen last year: deflation due to excess investment in commodity production, divergence in US economic growth and hence a stronger US dollar, and deleveraging in the rebalancing of China and emerging market [EM] economies which slows potential growth.”

Although this is nothing new, Goldman’s view is that the negative feedback loop continues to pressure commodity prices lower, as the dollar follows an overall higher trend, creating broader growth concerns stemming from a weakening in global manufacturing.

Back in early 2014, it was expected that there would have been a clear re-acceleration in global economic activity, which, in turn, would have put the global output gap forecasts firmly into the recovery phase of the business cycle by the end of 2015, and heading for the expansion phase by late 2017/early 2018.

With the recovery more elusive than expected, though, demand weakness has been compounding the negative returns associated with the ongoing supply shift, and this weak global growth backdrop dynamic has been feeding back into commodity price deflation outside the demand channel. “Weak EM growth and worsening terms of trade have seen significant EM FX depreciation, including among commodity producers and, as the local currency costs of production have fallen, commodity cost curves have been pushed lower and flatter in US$ terms; a process which has been exacerbating oversupply and making new equilibrium price levels a moving target, to the downside,” added Currie.

For oil producing countries with a relatively flexible FX regime – notably Russia – the shock to the economy from the terms of trade can obviously be more easily absorbed through relative devaluation, leaving oil prices in producers’ local currencies nearly unchanged since 2014.

“This allows them to maintain output if costs are also in local terms, reducing the need for an abrupt reduction

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in output and the associated economic ramifications, which, in turn, pushes the burden of adjustment onto the producers tied to the US dollar, such as GCC oil producers,” Currie concluded.

Uncertain future This said, it is entirely possible that not only will China’s economic growth drop by even more than many analysts forecast but also that it may be subject to a systemic banking crisis of a similar scale to the US sub-prime mortgage-inspired credit squeeze that sparked the global financial crisis in 2007/08, so denting global oil demand even further.

Despite some recent limited pullbacks, property prices in China remain fundamentally disconnected to the basic dynamics of supply and demand, with the Chinese Academy of Social Sciences, in Beijing, estimating (based on electricity meter readings) that there are currently still around 65 million empty apartments and houses in urban areas – significantly more than the 12 million or so at the height of the US sub-prime mortgage bubble.

Moreover, according to relatively recent estimates by the European Chamber of Commerce in China, the country has used just 65% of the cement it has produced in the past five years, and just 70% of the steel, after exports, but is still producing more of each.

This housing bubble has resulted in the corollary effect of making the balance sheets of China’s financial institutions ever more stretched, creating a banking bubble to add to the mix. In 2010, Fitch credit ratings agency was the first of the global agencies to highlight that despite the apparent deceleration in bank lending over the course of 2010 shown up in official data, the reality was that lending has not slowed nearly as much as the official data suggested.

This was because of the increasing amount of credit being shifted off Chinese banks’ balance sheets via informal securitisation for sale to investors: that is, the repackaging of loans into credit-backed wealth management products (CWMPs), the data on which has always been highly limited.

“Nothing has changed at all in the way Chinese banks have been hiding their bad loans in general, including the enormous unprofitable credit lines extended to the property sector, a fact which has recently been picked up on by domestic investors in the China stock markets,” Sam Barden, CEO of trading and consultancy SBI Markets, told Energy Finance Week. This has been the reason for the sudden collapses in these over the past few months, with crushing effects on global equities markets.

According to Barden, we can expect more of them same in the coming months and years.n

Andrew Kemp, Editor, Asia Pacific and China Oil & Gas • Email: andrew.kemp@newsbase.com Anna Kachkova, Editor, North America Oil & Gas and Unconventionals • Email: annak@newsbase.com Joe Murphy, Editor, FSU Oil & Gas • Email: joem@newsbaase.com Andrew Dykes, Editor, Renewables • Email: andrewd@newsbase.com

NewsBase Ltd. 108 Dundas Street, Edinburgh EH3 Tel: +44(0)131-478-7000 Email: research@newsbase.com Web: www.newsbase.com

ENERGY FINANCE WEEK

Week 7• 21 March • 2016

Institutional investors flock to Suncor

A number of investors have recently bought more shares in Suncor Energy, undeterred by the challenging economic environment or by any concerns associated with the company’s move to buy Canadian Oil Sands NORTH AMERICA SUNCOR Energy continues to defy expectations as the Canadian oil and gas industry – and particularly the oil sands – struggles with challenging times.

Institutional investors, including the Alberta government’s investment arm, have increased their stakes in Suncor in the past few months. This appears to be a sign that investors have not been deterred by the firm’s takeover of Canadian Oil Sands, which is anticipated to close next week.

According to Financial Market News, Alberta Investment Management Corp. (AIMCo) raised its position in Suncor by 37.1% in the fourth quarter of 2015. As a result, AIMCo now owns 6,436,631 shares of the company’s stock valued at C$229.9 million (US$172.3 million) after buying an additional 1,742,500 shares in its latest purchase.

The move might be perceived as political, although AIMCo operates – at least in theory – at arm’s length from the Alberta government. However, the private sector has also increased its ownership position in the oil sands company. In another large share purchase, Switzerland’s Zurich Cantonalbank – also known by its German name Zurcher Kantonalbank (ZKB) – hiked its Suncor holdings by 45.4%, or 582,727 shares, in the fourth quarter of 2015 and now owns 1,867,031 shares of the company’s stock valued at C$48.0 million (US$36.0 million).

CIBC World Markets increased its stake by 0.7% in the same period, but the percentage is not as modest as it may initially seem, equating to an additional 151,670 shares that give the bank 22,836,743 shares in Suncor valued at C$589.2 million (US$453.7 million).

Financial Market News has also reported that Toron Capital Markets now owns 3,492,827 shares of the company’s stock valued at C$90.1 million (US$69.4 million) after buying an additional 228,927 shares in the fourth quarter of 2015.

Mawer Investment Management was another of several companies that bought more Suncor shares in the fourth quarter of 2015, with a 1.1% increase to 3,087,646 shares.

A matter of timing These share purchases are significant for their timing, occurring when Suncor was attempting its takeover of Canadian Oil Sands, which was ultimately successful.

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Rather than being concerned about the additional risk that Suncor wanted to assume, investors chose to take up more shares instead of unloading their existing ones.

Perhaps more significantly, the investors also chose to assume more risk at a time when oil prices were falling again and questions were arising over the ability of oil sands producers to send their growing output abroad after the US government rejected the Keystone XL pipeline.

Indeed, US President Barack Obama vetoed the project during the same period during which investors were acquiring more Suncor shares.

Recently, Financial Market News reported, a number of stock market analysts issued favourable reports on Suncor shares. RBC Capital Markets issued an “outperform” rating and a US$39.00 target share price for the company in a report on February 8. Meanwhile, three analysts have rated the stock with a “sell” rating, four have given a “hold” rating and nine have assigned a “buy” rating.

In addition, US billionaire Warren Buffett’s holding company, Berkshire Hathaway, purchased an additional 7.6 million shares in Suncor in 2015, according to the firm’s latest regulatory filings. Buffett now owns 30 million Suncor shares valued at over C$1 billion (US$769 million).

Not all good news Not all of the news was good, though, because some investors also disposed of some of their Suncor stock and other analysts lowered their ratings. Shell Asset Management, a division of Royal Dutch Shell, reduced its stake in Suncor by 43.8%, or 174,701 shares, during the fourth quarter of 2015. This week, it was reported that Greenleaf Trust had sold 4.9% of its Suncor stake, or 23,451 shares, but still held 455,737 shares.

Meanwhile, Zacks Investment Research revised its rating to “hold” from “buy” in late November.

For the most part, though, Suncor appears to be keeping its business steady after many questioned its decision to acquire Canadian Oil Sands for the eventually agreed upon price of C$4.2 billion (US$3.2 billion). The producer has also largely withstood a sweeping Moody’s review of Canadian energy company credit ratings, dropping to a triple B rating while other firms have fallen much further.

Ed Reed, Editor, Africa Oil & Gas and LNG • Email: edreed@newsbase.com Richard Lockhart, Editor, Africa, Asia and Central Europe Power • Email: richardl@newsbaase.com Ryan Stevenson, Editor, Europe and Latin America Oil & Gas • Email: ryans@newsbase.com Ian Simm, Editor, Middle East Oil & Gas and MEA Downstream • Email: ians@newsbase.com

NewsBase Ltd. 108 Dundas Street, Edinburgh EH3 Tel: +44(0)131-478-7000 Email: research@newsbase.com Web: www.newsbase.com

ENERGY FINANCE WEEK

Week 7• 21 March • 2016

Suncor share price

What next?

Given the times, it is difficult to say what the increased investments in Suncor mean, because the oil sands industry faces considerable challenges as new Canadian Prime Minister Justin Trudeau tries to balance energy market growth with an increased focus on climate change prevention and emissions reductions.

Adapting to Trudeau’s climate change policies and remaining profitable could indeed be the oil sands industry’s biggest challenge in the next few years.

However, other significant obstacles also exist, including pipeline approvals and financing, First Nations relations and producers’ reticence to launch completely new projects in the current economic environment.

The aforementioned investors are not stock flippers by any stretch of the imagination. They are typical “buy

and hold” players with one primary objective – long-term growth in the value of their investments. Their decisions to increase their holdings amidst significant volatility in the overall Canadian energy sector could be part of the age-old strategy of buying low and selling high, but they also likely point to an underlying confidence in Suncor and the oil sands as a whole. These Suncor share acquisitions may also suggest that investors believe the transformation of Canada’s energy industry away from large oil sands development – which some argue is already occurring – will take a considerable amount of time.

It remains to be seen whether other oil sands producers will see similar investment activity, but Suncor’s dominance in the industry, especially in the wake of the Canadian Oil Sands acquisition, suggests the company is most likely to lead the way.n

KLR sets up IPO for distressed assets NORTH AMERICA US investment firm KLR Energy Acquisition completed an initial public offering (IPO) last week as it kicked off efforts to buy distressed energy assets.

The IPO raised US$80 million through the sale of 8 million units at a price of US$10 per unit, the company said in a statement.

The Houston-based special purpose acquisition company (SPAC) is focused on mergers and acquisitions in oil and gas.

“The company’s efforts to identify a target business will not be limited to a particular industry or geographic region, although it intends to focus efforts on seeking a business combination with a company or companies in the oil and gas exploration and production industry,” KLR said in the statement. Texas-headquartered KLR is reportedly planning to acquire or merge oil and gas firms that are valued in the US at between US$400 million and US$1 billion, including debt.

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KLR’s CEO, Gary Hanna, was previously CEO at US exploration and production firm EPL Oil & Gas. During his five-year tenure at EPL, the firm made a number of acquisitions.

SPACs such as KLR are buying up distressed assets in the energy sector despite a subdued stock market.

Another US investment firm focused on energy, Silver Run Acquisition, made its stock market debut last month.

The private equity-backed company, led by former EOG Resources CEO Mark Papa, raised US$450 million, which was US$50 million more than it had originally planned – representing the largest IPO in the US so far this year.

The company, which owns no assets yet, is also seeking to snap up cheap oil and gas assets amid the oil downturn.

Papa is also a partner at energy-focused private equity firm Riverstone Holdings, which founded the Riverstone Energy global energy investment vehicle in 2013.n

Andrew Kemp, Editor, Asia Pacific and China Oil & Gas • Email: andrew.kemp@newsbase.com Anna Kachkova, Editor, North America Oil & Gas and Unconventionals • Email: annak@newsbase.com Joe Murphy, Editor, FSU Oil & Gas • Email: joem@newsbaase.com Andrew Dykes, Editor, Renewables • Email: andrewd@newsbase.com

NewsBase Ltd. 108 Dundas Street, Edinburgh EH3 Tel: +44(0)131-478-7000 Email: research@newsbase.com Web: www.newsbase.com

ENERGY FINANCE WEEK

Week 7• 21 March • 2016

Energy XXI may seek Chapter 11 bankruptcy protection NORTH AMERICA

US independent Energy XXI has said it may have to seek Chapter 11 bankruptcy protection if oil prices remain low and its liquidity position does not improve.

“We may seek bankruptcy protection to continue our efforts to restructure our business,” the company said in a statement. The firm has contracted investment bank PJT Partners and law firm Vinson & Elkins to advise on restructuring options, it added.

The Houston-based company said that lower oil and gas prices had had a negative impact on revenues, earnings and cash flow.

Energy XXI added that the cash and credit it expects to have available “will not be sufficient to meet commitments as they come due for the next twelve months”.

The company said it might have to resort to liquidating assets for less than their value on its balance sheet.

Energy XXI, which was founded in 2005, is focused on shallow-water assets in the US Gulf of Mexico, as well on south Louisiana.

The company operates 10 of the largest oilfields on

the Gulf shelf – more than any other operator – according to its website.

Energy XXI has 246 million barrels of oil equivalent in proven reserves, of which around 75% consist of liquids.

It produces on average around 58,000-60,000 barrels of oil equivalent per day, with oil comprising nearly 70% of this. If the company – which had US$4 billion in liabilities at the end of December – does file for bankruptcy protection, it will be the second biggest energy-related failure since oil prices collapsed, according to a Reuters report.

Oklahoma-based Samson Resources was the largest energy producer to go bankrupt in the past year. The shale oil producer filed for Chapter 11 protection in September 2015, when its debt totalled US$4.3 billion, citing the drop in oil prices.

Crude prices have edged upwards in recent weeks, recovering to around US$40 per barrel. However, this price is still well below the US$60 per barrel breakeven price required by Energy XXI, among others.n

Chesapeake considering OK asset sale NORTH AMERICA CHESAPEAKE Energy may reportedly sell US$300-700 million worth of shale oil assets in Oklahoma, where the company is based, Bloomberg reported on March 9. At the time of publication, a decision had apparently not yet been taken on whether to sell the assets.

The debt-ridden company has interviewed advisers who might manage the possible sale, anonymous sources told Bloomberg.

The firm has held informal talks with potential buyers, the sources reportedly revealed. A spokesman for Chesapeake did not comment to Bloomberg.

The company, whose founder and former CEO Aubrey McClendon recently died in a single-car crash, has struggled with rising debt – now estimated at about US$10.7 billion – and has been selling assets and retiring bonds in an attempt to cope.

Last month, the company announced that it would seek to offload US$500 million to US$1 billion in assets in 2016.

Chesapeake has recently faced rumours – which it has denied – that bankruptcy is imminent. Such a move could

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complicate asset sales outside of court jurisdiction.

In 2015, Chesapeake sought to sell some assets in the Utica play, but there was not much interest in the properties.

On March 1, McClendon had been charged with rigging lease auctions in Oklahoma while he was at Chesapeake. To the relief of investors, it emerged that Chesapeake was not named in the indictment and in fact has immunity.

Oklahoma’s STACK play, where Chesapeake has a presence, has been described as being one of the more promising right now in the US by those exploring it. And in a post-earnings call with analysts last month, though, Chesapeake’s management did not rule out the possibility of selling assets in that area.

Chesapeake’s STACK position is an “excellent” but “undervalued” asset, Chesapeake’s CEO, Doug Lawler, said. “At this point in time, we do not have any intention of selling that area,” he said.

“But it doesn’t mean that we wouldn’t if we could capture an excellent value for the company.”n

Ed Reed, Editor, Africa Oil & Gas and LNG • Email: edreed@newsbase.com Richard Lockhart, Editor, Africa, Asia and Central Europe Power • Email: richardl@newsbaase.com Ryan Stevenson, Editor, Europe and Latin America Oil & Gas • Email: ryans@newsbase.com Ian Simm, Editor, Middle East Oil & Gas and MEA Downstream • Email: ians@newsbase.com

NewsBase Ltd. 108 Dundas Street, Edinburgh EH3 Tel: +44(0)131-478-7000 Email: research@newsbase.com Web: www.newsbase.com

ENERGY FINANCE WEEK

Week 7• 21 March • 2016

Chesapeake assets

Ontario approves of new renewables NORTH AMERICA ONTARIO’S grid operator has selected 455 MW of new clean energy in a competitive process for procuring large renewable energy projects.

11 companies will be offered a total of 16 contracts to construct seven new solar projects, five wind projects and four hydropower projects (HPPs) in the Canadian province, according to the Independent Electricity System Operator (IESO).

The prices offered for wind and solar are lower than the now dismantled feed-in tariff (FiT) programme. The five wind contracts, totalling 300 MW, have a weighted average price of C$0.086 (US$0.06) per kWh. The seven solar contracts – totalling 140 MW – have a weighted average price of C$0.157 (US$0.12) per kWh, while the four hydropower contracts, which add up to 16 MW, have a weighted average price of C$0.176 (US$0.13) per kWh. The costs of generation have plummeted since previous years, as the technology behind both wind and solar – and especially the siting of wind projects – has vastly improved. Under the FiT programme, for example, early contracts for wind paid more than C$0.13 (US$0.10) per kWh, and solar paid more than C$0.40 (US$0.30) per kWh for previous contracts.

“This…process introduced strong competition among developers of large renewable projects, helping to drive down price and secure clean, reliable generation for the province,” said IESO president and CEO Bruce Campbell.

13 projects, totalling 337 MW, will also have the

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participation and backing of one or more Aboriginal communities, including five with more than 50% Aboriginal participation, IESO added.

In addition, more than 75% of the successful proposals got support from local towns, and more than 60% had support from abutting landowners. Local support is crucial, especially in a region where wind projects have been plagued by opposition of residents who argue that wind turbines cause health problems, are a visual blight on the landscape and cause environmental damage.

Local and foreign interest in the process was also high, with a total of 110 projects entering. Successful wind and solar bidders include a number of well-known renewables companies such as EDP Renewables Canada, a subsidiary of Portugal’s EDP; Renewable Energy Systems Canada, part of the British firm RES; EDF EN Canada Development, a subsidiary of EDF; Chicago-based Invenergy, and SunEdison Canadian Construction, part of America’s SunEdison.

Ontario Corp., BluEarth Renewables and SkySolar Canada were also selected.

Looking ahead, these projects will form a sizable tranche of the province’s new installations. IESO is seeking to connect 1,300 MW of wind and 240 MW of solar to the grid by June 2017, and according to a recent report: “By the end of [this] period, the amount of grid-connected wind and solar generation is expected to increase to about 4,550 MW and 380 MW respectively.”n

Andrew Kemp, Editor, Asia Pacific and China Oil & Gas • Email: andrew.kemp@newsbase.com Anna Kachkova, Editor, North America Oil & Gas and Unconventionals • Email: annak@newsbase.com Joe Murphy, Editor, FSU Oil & Gas • Email: joem@newsbaase.com Andrew Dykes, Editor, Renewables • Email: andrewd@newsbase.com

NewsBase Ltd. 108 Dundas Street, Edinburgh EH3 Tel: +44(0)131-478-7000 Email: research@newsbase.com Web: www.newsbase.com

ENERGY FINANCE WEEK

Week 7• 21 March • 2016

Worldview acquires control of Petroceltic debt EUROPE THE final chapter for Petroceltic International appears to be looming, following the acquisition of 69.4% of its debt by its activist investor, Worldview Capital Management. At the close of business on March 9, an announcement from Worldview’s Sunny Hill subsidiary said, it had acquired the stake of slightly more than two-thirds of the Algeriafocused explorer’s debt.

Sunny Hill said the total debt was US$232.5 million.

Worldview bought up its debt at a “significant discount” to the face value, it said. The investor plans to approach Petroceltic with a proposal to restructure its debt, converting this into equity.

Worldview holds around 29.6% of the equity in Petroceltic. Combined with the debt position, this gives it what may well be an unbeatable hand.

Worldview did not reveal how much it acquired the debt for or which bank sold it. Petroceltic announced a US$500 million facility in 2013 involving the International Finance Corp. (IFC), HSBC, Nedbank and Standard Chartered.

The move comes as pressure has mounted on Petroceltic. The company has been in tough talks with its lenders for some time, as its cash supplies run down and debts become due, while Worldview has thrown up repeated challenges.

Takeover Sunny Hill made an offer, on February 26, to acquire Petroceltic at a price of GBP 0.03 (US$0.04) per share, an 83% discount to the company’s then share price.

The hedge fund investor explained its offer by saying Petroceltic’s value was “close to zero” given its “parlous financial position”.

The statement went on to express concerns on Petroceltic’s “precarious, and worsening, financial position, particularly with regard to the form, structure and level of the company’s indebtedness to the banking syndicate and the stream of short-term repayment waivers that the company has had to seek from the banking syndicate to prevent Petroceltic defaulting on the senior bank facility”.

Worldview’s CEO, Angelo Moskov, said that while the company may have long-term potential, such is the state

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of its debt that it requires a “significant restructuring of both its operations and balance sheet, a simplified and more cost effective corporate structure, a revised strategic direction, and a new senior management team committed to this new approach”.

Petroceltic put itself up for sale in late December 2015. The company responded to the Sunny Hill offer by saying there were uncertainties around the offer and that it undervalued Petroceltic – but that there were no guarantees that its shares would provide any realisable value to holders. As such, it declined to endorse or reject the offer.

The bid required approval from a high proportion of Petroceltic’s non-Worldview shareholders. Skye Investments, which holds 19.2% of the shares, effectively stopped the bid on March 4 by saying it would not support the offer.

Talking tough Worldview has had a stake in Petroceltic since November 2011. The investor’s discussions with Petroceltic have been played out in public, with legal accusations flying amid questions over the development plan of the Ain Tsila asset in Algeria.

Sunny Hill followed up its acquisition offer, on March 4, with a bid to have an examiner installed at Irish-based Petroceltic. Such a process has some similarities with an involuntary administration, with Sunny Hill saying an examiner would have the task of putting together a plan to deal with creditors, in order to allow the company to continue trading.

The move was described as a last resort by Worldview, with the stated aim of ensuring Petroceltic’s long-term viability. An examiner was appointed on March 9.

The examiner process, though, does not appear to have been quite the last resort that Worldview said, given its subsequent debt acquisition.

Despite the various corporate challenges, Petroceltic has begun development drilling at Ain Tsila. The Sinopec Rig 50117 spudded the AT-10 well on February 21. This is the first of 24 development wells planned for the field, which should reach first production in 2018.n

Ed Reed, Editor, Africa Oil & Gas and LNG • Email: edreed@newsbase.com Richard Lockhart, Editor, Africa, Asia and Central Europe Power • Email: richardl@newsbaase.com Ryan Stevenson, Editor, Europe and Latin America Oil & Gas • Email: ryans@newsbase.com Ian Simm, Editor, Middle East Oil & Gas and MEA Downstream • Email: ians@newsbase.com

NewsBase Ltd. 108 Dundas Street, Edinburgh EH3 Tel: +44(0)131-478-7000 Email: research@newsbase.com Web: www.newsbase.com

ENERGY FINANCE WEEK

Week 7• 21 March • 2016

Serbia’s NIS eyes IPO EUROPE NAFTNA Industrija Srbije (NIS), the Serbian oil producer controlled by Russia’s Gazprom Neft, is planning to take another portion of its shares public, the company’s director of strategy has revealed.

“The company has evolved from a typical oil company into an energy company […] NIS is currently financing its activities from its own cash flow and we have no need to borrow,” Srdjan Boshnyakovich told Bloomberg on March 9. “NIS is preparing for an IPO,” he added, without disclosing the size of the offering.

The company, which already has a minor proportion of its stock in free-float on the Belgrade Stock Exchange, posted a heavy profit drop last month owing to weak oil prices and currency volatility. Net income for 2015 slumped by 47.5% on the year to 14.6 billion dinars (US$132 million). A strong US dollar against the Serbian dinar was also cited by the company as the main driver behind its net loss in the first quarter of last year – the firm’s first quarterly negative result since 2010.

NIS’s management has warned that more hard times lie ahead, which could explain their decision to pursue an IPO. “Conditions for operations in 2016 will be much more complex than in the previous year,” said CEO Kirill Kravchenko in a statement last month, referring to the

challenging oil price and currency environments. “We must stay focused throughout and make a great effort to maintain profitability,” he added.

Serbia’s Ministry of Economy first revealed plans to take the company public in early 2007 as an alternative to privatisation. But Belgrade soon scrapped the plans and began the privatisation process later that year.

In 2008, Gazprom Neft took a 51% equity position in NIS for around US$536 million, pledging to invest a further US$557 million in the company over three years.

It then increased its holding to 56.15% in 2011 after buying out smaller shareholders. The government in Belgrade still owns a 29.87% stake.

The sale came under scrutiny from Serbia’s Interior Ministry in 2014 as part of a wider investigation into long-term strategic accords with Russia and the UAE. The current administration claims the company was undervalued when sold by the previous government. NIS is one of the largest integrated oil firms in Southeastern Europe, with upstream assets in mainly Serbia and the wider Balkan Peninsula. The group owns and operates two refining complexes in Pancevo and its home city of Novi Sad, which supply a network of filling stations across the region.n

CEZ expects decline in 2016 profits EUROPE

VAALCO Energy’s revolving credit facility has been reduced to US$20.1 million, effective as of the end of 2015, the company said on March 2. The facility was reduced from US$65 million. Czech energy giant CEZ expects profits to plummet in 2016 amid record-low power prices.

The company said in its earnings statement on March 15 that net profit would drop 35% in 2016 to 18 billion koruny (US$739 million). It expects earnings before interest, taxes, depreciation, and amortization (EBITDA) to fall to 60 billion crowns (US$2.46 million). “Constantly falling power prices will be the main reason for lower profit this year,” chief financial officer Martin Novak told a press conference in Prague. CEZ shares dropped up to 2.4% in Prague on the news. Analysts said the disappointing forecast should put further pressure on the stock. This is despite the fact that CEZ reported adjusted net profit of 27.7 billion koruny (US$1.11 billion) last year, slightly better than its own target of 27 billion koruny (US$1.1 billion). Wholesale power prices have been undercut by plummeting global commodity prices, hurting many European utilities. But CEZ has also been hit by write-offs

9

at two of its plants and, more importantly, unplanned power outages at its Dukovany nuclear power plant (NPP), one of the company’s most profitable power plants.

Three out of Dukovany’s four 500-MW units were offline during the late summer and autumn of 2015 for maintenance checks. Last month, CEZ CEO Daniel Benes said the outages would cost the company some 2.5 billion koruny (US$102.6 million) in lost profits. He also said “heads will roll” once the company completes an investigation into the problems at Dukovany. In November, CEZ cited the Dukovany outages in cutting its 2015 earnings forecast for the second straight quarter, down 10% from the beginning of the year.

The Czech government has blamed CEZ for the outages and suggested that management could be held responsible. To adjust to the tough times, Benes has said CEZ will look for foreign investments in Germany, Poland and other neighbouring countries to spur growth. CEZ is interested in Swedish power firm Vattenfall’s coal and hydropower plants (HPPs) in Germany, as well as other wind power assets in that country.n

Andrew Kemp, Editor, Asia Pacific and China Oil & Gas • Email: andrew.kemp@newsbase.com Anna Kachkova, Editor, North America Oil & Gas and Unconventionals • Email: annak@newsbase.com Joe Murphy, Editor, FSU Oil & Gas • Email: joem@newsbaase.com Andrew Dykes, Editor, Renewables • Email: andrewd@newsbase.com

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ENERGY FINANCE WEEK

Week 7• 21 March • 2016

BEH seeks US$722m in bridge financing to pay NEK’s debts EUROPE STATE-OWNED Bulgarian Energy Holding (BEH) is to begin talks with a consortium of banks to secure 650 million euros (US$722 million) of bridge financing for National Electricity Co. (NEK), its indebted generation and supplying subsidiary.

The consortium is led represented by Italy’s Banca IMI, Bank of China and JP Morgan Securities, which beat off competition in February from a rival bid in a tender held by the Bulgarian government.

“BEH reserves its right at any time to invite the consortium ranked second for negotiations for concluding a contract,” BEH said in a statement.

The company said the bridge loan was for 12 months, and could be refinanced through a subsequent placement of a bond issue.

BEH will use the money to repay NEK’s accumulated debts to two US-owned coal-fired thermal power plants

(TPPs) – AES Galabovo and ContourGlobal Maritsa East 3.

It will allow the BEH to introduce price cuts under the long-term power purchase agreements (PPAs) and to cover debt owed to the power plants and the Maritsa East coal mines.

Based on current data, NEK owes 485 million euros (US$539 million) to AES Galabovo and ContourGlobal Maritsa East 3 and 174 million euros (US$193 million) to the coal mines. NEK currently owns 30 hydropower plants (HPPs) with 2,713 MW of capacity. The 15 biggest hydro facilities, which have a total installed capacity of 2,630 MW, generate most of the country’s hydro output. They are operated as part of four hydro cascades: Belmeken Sestrimo Chaira; Batak; Vacha and Dolna Arda.

The power plants cover peak loads and regulate the grid system. They produce between 5% and 10% of Bulgaria’s electricity.n

Enel posts losses in Russia EUROPE ENEL Russia slipped to a 48.6 billion ruble (US$702.5 million) net loss in the company’s 2015 full-year results unveiled last week.

The result compares with a 5.6 billion ruble (US$80.95 million) net profit posted for 2014, and includes a 58.2 billion ruble (US$841.3 million) writedown of fixed assets, particularly those in Russia.

EBITDA decreased by 41.2% to 10.8 billion rubles (US$156.1 million) on pricier coal inputs from Kazakhstan owing to the tenge’s appreciation against the ruble from January to September 2015, according to Kommersant.

The Russian business daily reported fuel costs had grown 7% across the board to 41.5 billion rubles (US$599.9 million), leading to a 38.9% increase in the margin on units sold, at 138 rubles (US$1.99) per MWh. Enel’s loans, much of which is denominated in euros, swelled with the weakened ruble. Net debt increased by 16.4% to 24.5 billion rubles (US$354.17 million), more than doubling the firm’s net debt to EBITDA ratio, to 2.3.

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The Russian economic downturn has meant weakening electricity demand, reflected by 4.6% lower revenues for Enel in 2015, at 70.9 billion rubles (US$1.02 billion), on lower free power and capacity prices. Enel’s swing into the red means shareholders will miss out on a dividend payment for 2016.

Carlo Palasciano, Enel general director, has attributed the performance to a “difficult macroeconomic environment”.

Relief is likely to be scant for Enel this year, with the firm projecting EBITDA of 10 billion rubles (US$144.8 million) as demand remains static. Moscow is likely to contain tariffs to head off inflation, and in February proposed 365 MW of clean energy capacity slated for delivery in the next three years.

Enel expects these factors to keep a lid on market prices in 2016, and has highlighted lower capital expenditure of 26.1 billion rubles (US$377.3 million) from 2016-2019 that will target mandatory investment projects and optimisation work.n

Ed Reed, Editor, Africa Oil & Gas and LNG • Email: edreed@newsbase.com Richard Lockhart, Editor, Africa, Asia and Central Europe Power • Email: richardl@newsbaase.com Ryan Stevenson, Editor, Europe and Latin America Oil & Gas • Email: ryans@newsbase.com Ian Simm, Editor, Middle East Oil & Gas and MEA Downstream • Email: ians@newsbase.com

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ENERGY FINANCE WEEK

Week 7• 21 March • 2016

Sound seals Moroccan deal AFRICA HAVING completed its purchase of PetroMaroc’s operating interest in three onshore gas permits at Sidi Moktar, Sound Energy has signed a farm-out agreement for the assets with Culebra Petroleum.

Confirming details of the double deal on March 10, Sound said that on completion of the transactions it would retain operatorship of the licences, holding a 25% working interest with a carry of US$4.5 million, plus an additional US$6 million in cash.

Sound’s acquisition of the Sidi Moktar permits was announced on January 26 and is subject to regulatory approval.

The company bought PetroMaroc’s 50% interest in Sidi Moktar, taking its total stake to 75% with the remaining 25% held by Morocco’s Office National des Hydrocarbures et des Mines (ONHYM).

Under the terms of the sale, PetroMaroc will receive GBP3.65 million (US$5.4 million) of Sound’s ordinary shares, plus a net profit interest of 10% from any cashflow relating to the Kechoula discovery. PetroMaroc will also benefit from a 5% net profit interest from cashflow relating

11

to any other structures within the Sidi Moktar licences.

Sound’s agreement covers the sale of 66.67% of its Sound Energy Morocco South subsidiary to the privately owned Culebra.

Under this agreement, Culebra will effectively acquire a 50% interest in the Sidi Moktar licences in exchange for US$6 million in cash, with a commitment totalling US$18 million in exploration investment. Culebra will also assume responsibility for payment of 90% of the net profit interests due to PetroMaroc under Sound’s purchase agreement.

Sound will retain operatorship of the assets, which will be jointly staffed by Culebra. The Kechoula gas discovery has a mid-case estimated 293 billion cubic feet (8.3 billion cubic metres) of gas originally in place and lies close to existing infrastructure. It is due for an extended well test before commercial production begins.

On March 14, the company provided an update on its operations, predicting the first well at its Tendrara site would begin producing in April. It farmed in to the area in mid-2015.n

Andrew Kemp, Editor, Asia Pacific and China Oil & Gas • Email: andrew.kemp@newsbase.com Anna Kachkova, Editor, North America Oil & Gas and Unconventionals • Email: annak@newsbase.com Joe Murphy, Editor, FSU Oil & Gas • Email: joem@newsbaase.com Andrew Dykes, Editor, Renewables • Email: andrewd@newsbase.com

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ENERGY FINANCE WEEK

Week 7• 21 March • 2016

Andalas enters Indonesian upstream ASIA UK-LISTED Andalas Energy and Power has secured a foothold in the Indonesian upstream sector by signing a farm-in agreement for the Tuba Obi East (TOE) technical assistance contract (TAC) in Sumatra.

Under the deal with Indonesia’s Akar Golindo, Andalas will acquire a 30% direct working interest in the concession through the execution of a roughly US$1.1 million well work programme, Andalas said in a filing to the Alternative Investment Market (AIM) last week.

The programme includes the completion of a geological, geophysical and reservoir (GG&R) study along with the drilling and flow testing of a single well to assess the deliverability, recoverable volumes and gas quality in the Air Benakat formation, Andalas said.

The TOE TAC is located in the South Sumatran Basin around 30 km northwest of Jambi City, Jambi Province, and covers 55 square km. Akar Golindo operates the block with a 100% stake.

Akar Golindo and Andalas will jointly carry out the well work programme. Andalas has also agreed to pay an additional US$500,000 to Akar Golindo if the 20-year TOE TAC is renewed beyond its expiry date of May 15,

2017, Andalas said.

The farm-in agreement is still subject to approval by Andalas’ shareholders. Andalas was formerly called CEB Resources.

Andalas’ CEO, David Whitby, said: “The signing of this agreement … secures [Andalas’] foundation gas asset. We are keen to take full advantage of the opportunity Tuba Obi East now affords Andalas, and we regard it as the base upon which a profitable Indonesian gas and power business can be built.”

He added: “TOE has all the essential features to be a successful first asset for the company. It has gas proven by two wells into the reservoir zone that has been defined on 3-D seismic and confirmed by well logs, all whilst located in a prolific hydrocarbon basin.”

The executive noted that the field lay close to gas and power infrastructure and also had easy access to Indonesia’s burgeoning energy market, which he said was generating high prices for producers.

“It represents an unrivalled opportunity for a new Indonesian gas and power market entrant like [Andalas],” Whitby added.n

Australian exploration collapses ASIA OIL and gas exploration in Australia collapsed in 2015, with a plunge in the number of wells drilled as companies slashed costs amid weak oil prices, according to a new EnergyQuest report.

The number of oil and gas exploration and development wells drilled in Australia almost halved last year to 821 from 1,534 in 2014, the report found. Within those totals, the number of exploration wells specifically plunged to 54 from 119.

Offshore activity was particularly hard hit, with just three exploration wells drilled in 2015, down from 29 the previous year.

The number of onshore exploration wells dropped from 90 to 51, with big declines in all states except Western Australia, where exciting results in the Perth Basin have driven activity, said EnergyQuest CEO Graeme Bethune.

Energy companies spent just A$446 million (US$337 million) on exploration in Australia in the fourth quarter of 2015, compared with A$1.03 billion (US$778.1 million) in the same period a year earlier.

“This is Australia’s lowest oil exploration spend in a decade,” Bethune said, adding that low oil prices had also

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triggered big downward revisions of reserves, leading to negative reserves replacement ratios over last year.

Australia produced 76.2 million barrels, or around 208,700 barrels per day, of crude last year – down from 83.3 million barrels (228,200 bpd) in 2014, representing the country’s lowest output since 1970. The biggest declines were seen at the mature Gippsland Basin fields off southeastern Australia.

Although Australian oil and gas companies’ sales by volume lifted 6.8% in the fourth quarter of last year, revenue per barrel of oil equivalent fell an average 29%, dragging down sales revenues at a number of big names.

Australia’s condensate production dropped by 8.5% in 2015 to 41.4 million barrels, with all areas except the Bass and Perth Basins registering declines.

Gas was one bright spot, with LNG gross production rising 23.5% to 30.4 million tonnes in 2015, while natural gas production climbed 12.6% to a record 2,634.6 petajoules (68.63 billion cubic metres).

Overall, however, the trend is down, and Bethune predicted that this was just the beginning of a long period of muted activity in Australia.n

Ed Reed, Editor, Africa Oil & Gas and LNG • Email: edreed@newsbase.com Richard Lockhart, Editor, Africa, Asia and Central Europe Power • Email: richardl@newsbaase.com Ryan Stevenson, Editor, Europe and Latin America Oil & Gas • Email: ryans@newsbase.com Ian Simm, Editor, Middle East Oil & Gas and MEA Downstream • Email: ians@newsbase.com

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ENERGY FINANCE WEEK

Week 7• 21 March • 2016

Taiwanese firms mull investment in Indonesia’s downstream ASIA TAIWANESE petrochemical firms are weighing up a US$2.5 billion investment in Indonesian ammonia and mega methanol facilities, according to an Indonesian investment board official.

The head of the Investment Co-ordinating Board of the Republic of Indonesia (BKPM), Franky Sibarani, said Taiwanese companies would look at building the plants, which are used to produce engineering plastic and resin among other products. Investors are reportedly interested in a two phase development, with two factories each covering 100 hectares (1 square km).

The first phase would develop a 600,000 tonne per year capacity ammonia plant, and the second would introduce 1.8 million tonne per year methanol capacity.

At present, Indonesia’s only major methanol plant is the 660,000 tonne per year Kaltim Methanol Industri facility in Bontang.

“The petrochemical industry is one of [Indonesia’s] strategic industries,” Sibarani said. Indonesia has planned heavy investment in the petrochemicals sector since at least 2012, when Jakarta promised to spend US$4-5 billion each on three petrochemical complexes.

The country has a burgeoning plastics manufacturing industry spurred by its relatively young population, and a

growing number of middle-income consumers.

The petrochemical sector contributed around 3% of Indonesia’s GDP as of 2014, according to the SCB Economic Intelligence Centre (SCBEIC). But despite massive oil, gas and coal reserves, Indonesia is still a net importer of petrochemicals, with a trade deficit of US$5.1 billion as of 2014. Thailand’s PTT has partnered with Indonesia’s state-owned Pertamina to develop a 1 million tonne olefins plant and downstream polymer facility in Balongan, and Saudi Aramco has also said it will consider a development. International markets such as Indonesia provide Taiwanese petrochemical firms with an opportunity to diversify away from fluctuating domestic demand. On February 24, the Taipei Times reported that Taiwan’s manufacturing sector had lost 10.84% of its value in 2015 as petrochemical firms suffered from the collapse in global oil prices.

But there are a number of challenges particular to Indonesia that investors will have to consider, such as shortages of feedstock for petrochemical production.

According to SCBEIC, Jakarta does not currently define the petrochemical industry as a priority sector for natural gas, which could make it tough for new plants to source inputs.n

CNOOC Ltd may buy Braskem stake ASIA CNOOC Ltd is interested in a minority holding in Brazilian petrochemical firm Braskem, which is owned by state-run Petrobras, according to a Brasilia-based newspaper Valor.

Should a deal surface, it would mark another in a series of large-scale acquisitions overseas by China as it seeks to capitalise on low commodity prices.

Petrobras, meanwhile, is trying to streamline its portfolio to fund expansion and pay off its staggering US$130 billion debt pile. The Brazilian oil giant owns a 36.1% stake in Braskem, which local media have claimed could fetch around 5.85 billion reais (US$1.56 billion) if sold immediately. Talks are still at an early stage, according to Valor. As of press time, neither Petrobras nor CNOOC Ltd had commented on the report.

Citing unnamed sources, Reuters said in January that a large international company was interested in the stake in Braskem. It has since emerged that Riyadh’s Saudi Aramco and Canada’s Brookfield Asset Management may

13

also be chasing a deal with Petrobras.

Braskem owns petrochemical complexes in Europe and the Americas. Another major shareholder in the company is Brazil’s Grupo Odebrecht, which owns a 38.3% stake. The engineering giant is also looking to offload its equity share, Reuters reported, and may do so in a joint sale with Petrobras. Braskem reported a net profit of 158 million reais (US$42.2 million) in the fourth quarter, reversing a loss a year earlier. Low oil prices and a stronger US dollar have strengthened the firm’s margins.

Chinese firms are embarking on a spending spree overseas to take advantage of the weak value of commodities. ChemChina bought a stake in Swiss agribusiness Syngenta last month for US$35 billion, making it the biggest foreign acquisition by a Chinse company on record. Previously, that mantle belonged to CNOOC Ltd’s US$15.1 billion takeover of Canadian oil producer Nexen in 2012.n

Andrew Kemp, Editor, Asia Pacific and China Oil & Gas • Email: andrew.kemp@newsbase.com Anna Kachkova, Editor, North America Oil & Gas and Unconventionals • Email: annak@newsbase.com Joe Murphy, Editor, FSU Oil & Gas • Email: joem@newsbaase.com Andrew Dykes, Editor, Renewables • Email: andrewd@newsbase.com

NewsBase Ltd. 108 Dundas Street, Edinburgh EH3 Tel: +44(0)131-478-7000 Email: research@newsbase.com Web: www.newsbase.com

ENERGY FINANCE WEEK

Week 7• 21 March • 2016

Troubled private yards seek new investors ASIA WITH China’s offshore service shipyard industry in dire financial trouble, two privately owned yards are bidding to rescue their businesses from collapse by bringing in new shareholders.

Dayang Shipbuilding on the southern Guangdong coast is receiving investment support from Jiangsu-based SUMEC, a machinery maker, maritime website Splash 24/7 reported. SUMEC is reportedly stepping in under a government-directed rescue after street protests in Dayang by hundreds of unpaid workers.

Dayang is part of Sinopacific Shipbuilding, which produces offshore support vessels (OSVs) for oil and gas platforms. Sinopacific is closing its entire yard operations in Shanghai as part of a survival programme and Dayang is considering laying off 600 employees. The Dayang City government gave some yard workers a part-pay advance in February in the run-up to Chinese New Year.

Huarong Energy, meanwhile, intends to issue shares to creditors and suppliers as part of its rescue package.

Hong Kong-listed Huarong, formerly called Rongsheng Heavy Industries, said the issue was to “adjust and optimise the business and to dispose the relevant liabilities of the group in light of the depressed shipbuilding market”. Three creditor banks will become Huarong’s major shareholders, Splash reported.

Huarong’s major shipyard in Jiangsu has been at a standstill since the middle of 2015. Many of its losses stem from cancelled orders for rigs and oil tankers. As Rongsheng, the firm attempted to diversify away from shipbuilding by investing US$280 million in stakes in oilfields in Kyrgyzstan in 2014.

The offshore services sector is suffering as the continued oil price slump puts more upstream development projects on hold. Additionally, private shipyards appear to be left off of a government “white list” of yards that can qualify for state aid and bank loans as part of a state-induced consolidation programme to trim down the sector.n

PetroChina Daqing loses US$770 million in first two months ASIA PETROCHINA Daqing Oilfield, the operator of the country’s largest crude producing complex, lost 5 billion yuan (US$769.6 million) in the first two months of this year.

The company’s vice president, Jiang Wanchun, said in a group discussion at the National People’s Congress (NPC) last week that crude oil production fell to 38.39 million tonnes (771,000 bpd) in 2015, down from 39.98 million tonnes (803,000 bpd) in 2014.

According to a research report by PetroChina Daqing parent China National Petroleum Corp. (CNPC), production from the Daqing oil complex will decrease by around 1.3 million tonnes per year (26,000 bpd) until 2020, when output will stand at 32 million tonnes (640,000 bpd).

The company’s revenue fell by 100.2 billion yuan (US$15.42 billion) to 155.3 billion yuan (US$23.91 billion) last year, while its profit also declined by 54.2 billion yuan (US$8.34) to 10.2 billion yuan (US$1.57

14

billion). Jiang said PetroChina Daqing’s revenue in 2016 would drop to 123.6 billion yuan (US$19.03 billiom) based on an average crude price of US$30 per barrel.

In 2011, the company’s revenue peaked at 272.4 billion yuan (US$41.92 billion) in 2011, when its crude was sold at US$110.9 per barrel, he said.

He said the company was struggling to replace the reserves it produced.

The complex only has 197 million tonnes (1.44 billion barrels) of commercially viable reserves remaining, with more than 80% of new discoveries having low permeability. The bulk of production is maintained by chemical injections and other costly enhanced oil recovery (EOR) methods. The field’s watercut now averages 95%, driving up lifting cost, he said.

The Daqing field has been in production for 56 years, and cumulative output has reached 2.27 billion tonnes (16.64 billion barrels) of oil and 120 billion cubic metres of gas.n

Ed Reed, Editor, Africa Oil & Gas and LNG • Email: edreed@newsbase.com Richard Lockhart, Editor, Africa, Asia and Central Europe Power • Email: richardl@newsbaase.com Ryan Stevenson, Editor, Europe and Latin America Oil & Gas • Email: ryans@newsbase.com Ian Simm, Editor, Middle East Oil & Gas and MEA Downstream • Email: ians@newsbase.com

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ENERGY FINANCE WEEK

Week 7• 21 March • 2016

Novatek completes Yamal LNG sale FSU NOVATEK has completed the sale of a 9.9% stake in Yamal LNG to China’s Silk Road Fund, the Russian independent producer said on March 15. The Chinese investor bought its stake for 1.08 billion euros (US$1.21 billion).

Following the completion of the deal, the remaining equity is held by Novatek with a 50.1% stake, while Total and China National Petroleum Corp. (CNPC) have 20% each. The first train at the plant is due to start up in 2017. The Chinese investor signed a framework agreement on its 9.9% stake in September 2015, during Russian President Vladimir Putin’s visit to Beijing, where he was hosted by Chinese President Xi Jinping.

In addition to buying an equity stake in the Arctic liquefaction project, Silk Road Fund agreed to provide a 730 million euro (US$810 million) loan to Novatek for Yamal LNG. The debt was to run for 15 years, a statement from Novatek in December last year said, noting that the “larger part” had already been paid out.

Commenting at the time, Silk Road Fund’s president, Wang Yanzhi, said Yamal LNG was “progressing on schedule and is widely viewed as sustainable [owing] to its high-quality conventional reserve base and long-term

15

contracts for almost 100% of its sales volumes”.

A report in Maritime Executive this week quoted a Novatek executive, Stanislav Shevkunov, as saying that no additional financing would be needed for the first 5.5 million tonne train. It went on to suggest, though, that a breakeven price for Yamal LNG production would be around US$300 per 1,000 cubic metres (US$11 per million British thermal units). At least initially, therefore, the plant runs the risk of starting up below breakeven costs. The Yamal LNG project involves a three-train plant with total capacity of 16.5 million tonnes per year.

Feedstock for the development will come from the South Tambeyskoye field, which was assessed as having 926 billion cubic metres of proven and probable reserves, as of the end of 2015. A final investment decision (FID) on the plant was taken in December 2013, with a total estimated cost of US$27 billion.

The Chinese fund was launched in Beijing in December 2014, with a medium- to long-term investment horizon, wielding a reported US$40 billion. It has a stated aim of investing in infrastructure, energy and industrial capacity that will help connect the Chinese economy with the rest of the world.n

Andrew Kemp, Editor, Asia Pacific and China Oil & Gas • Email: andrew.kemp@newsbase.com Anna Kachkova, Editor, North America Oil & Gas and Unconventionals • Email: annak@newsbase.com Joe Murphy, Editor, FSU Oil & Gas • Email: joem@newsbaase.com Andrew Dykes, Editor, Renewables • Email: andrewd@newsbase.com

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ENERGY FINANCE WEEK

Week 7• 21 March • 2016

Debt default looms for PDVSA Concerns about PDVSA’s ability to service its debts have led to a downgrade by Moody’s and raised the spectre of a default this year LATIN AMERICA FEARS are mounting about PDVSA’s ability to service its debt after Moody’s Investors Service lowered its outlook on the company’s bonds to negative from stable. The move has followed similar action the ratings agency took on Venezuela’s sovereign debt.

Moody’s refrained from downgrading PDVSA’s debt, which maintains its junk bond rating of Caa3. The company’s baseline credit assessment (BCA) was lowered to Caa3 from Caa1.

“Moody’s rating actions were triggered by the sharp decline in oil prices that put pressure both on the company’s credit profiles and the finances of the government, hindering their ability to provide extraordinary support to its company and heightening risks for creditors” Nymia Almeida, a senior credit officer at Moody’s, said in a statement.

Moody’s went on to say that “the lowering of PDVSA’s BCA to Caa3 from Caa1 reflects Moody’s view of a higher probability of default or debt restructure in the next 12 to 18 months, on the back of low cash generation related to depressed oil prices and lack of visibility regarding the company’s investing and refinancing plans over the short to medium term.” According to Moody’s, PDVSA has bonds worth US$5.6 billion maturing this year, and an additional US$7 billion in 2017.

The credit rating agency also underlined the dependency between the company and the Venezuelan government, and the intermingling of their finances.

Moody’s suggested that Venezuela would become even more dependent on PDVSA in the future for its financial survival, while PDVSA’s ability to sell fresh debt will be hurt by concerns over Venezuela’s sovereign debt. The negative outlook effectively ends PDVSA’s ability to sell fresh bonds at competitive rates.

Venezuelan President Nicolas Maduro, who is facing a possible recall, said earlier this year that the country and PDVSA would have to make about US$14 billion in debt repayments this year. The government made an earlier payment of US$1.5 billion last month, easing fears of an immediate default. But with oil prices remaining weak, questions remain about the country’s ability to make other payments.

Debt loading PDVSA’s precarious financial situation is largely a result of the government’s interference in its operations. In 2007,

16

the company’s debt was about US$3 billion. That quickly rose as the government used PDVSA as a cash cow. It also took advantage of its sound financial footing to load up the company with debt, ostensibly to fund its capital expenditure in its key oil and natural gas industries. Some of the bonds sold carried maturities of up to 30 years (coming due in 2037). Many of the funds were seemingly used to finance the government’s socialist programmes or underwrite campaign expenses of Maduro’s United Socialist Party of Venezuela (PSUV).

PDVSA’s debts, excluding domestic creditors including the Central Bank, currently stand at about US$43.8 billion, a slight improvement on the US$45.7 billion recorded in 2014. The company’s borrowing spree and where that money ended up is likely to be the focus of a National Assembly investigation.

The state of the company’s worsening finances has been known for months. PDVSA’s president Eulogio del Pino said late last year that the company was seeking to refinance bonds coming due this year and next with new notes coming due in 2018 and 2019. Del Pino said earlier this month that the company was in talks with international banks but gave no details.

The lack of movement on refinancing was cited by Moody’s as one of the reasons for its ratings downgrade.

In spite of the downgrade, the government has not yet defaulted, and has slashed imports to meet debt payments. This has come at a cost to the government, though, with popular unrest about growing shortages eroding support for Maduro further.

The government is desperate to avoid a default so its creditors do not go after valuable PDVSA assets, such as its US affiliate Citgo Petroleum.

What next PDVSA’s financial woes look like they are just beginning.

The company’s prospects are, as Moody’s pointed out, inextricably tied to those of the government, which is facing lower revenues this year because of low oil prices.

The value of Venezuela’s oil exports this year is forecast to fall by 40% over 2015 levels, with revenue from oil sales estimated to total about US$22.1 billion.

The price of Venezuela’s oil basket, which is heavily tilted toward extra-heavy and heavy crude, averaged US$44.65 in 2015, down from US$88.42 in 2014.

The price of the market basket this year has averaged

Ed Reed, Editor, Africa Oil & Gas and LNG • Email: edreed@newsbase.com Richard Lockhart, Editor, Africa, Asia and Central Europe Power • Email: richardl@newsbaase.com Ryan Stevenson, Editor, Europe and Latin America Oil & Gas • Email: ryans@newsbase.com Ian Simm, Editor, Middle East Oil & Gas and MEA Downstream • Email: ians@newsbase.com

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ENERGY FINANCE WEEK

Week 7• 21 March • 2016

Venezuela oil map Source: Gazprom

US$24.91. This means revenue from oil sales – which provide the country with 95% of its hard currency income – will fall dramatically in 2016 just as the country is facing the burden of making debt payments.

The government’s policy to deal with the situation so far has been to slash imports and hope for a rally in oil prices. Maduro appears politically paralysed and unable to make any decisions to reverse the economic decline, especially regarding state control over the economy.

The president devalued the currency in February and raised domestic petrol prices. But those isolated steps have done little to hold back inflation, which is forecast to top 700% this year. Maduro has also failed to use

extraordinary the economic powers that the country’s Supreme Court granted him after the opposition-controlled National Assembly refused him. Last week he requested that the powers be extended for another two months. The Assembly is likely to reject that plea, though the Supreme Court will probably approve it again.

Energy Finance Week believes PDVSA will continue to sell non-strategic assets to raise cash to meet its debt obligations. But those assets have limited value and appeal to investors, given the political risk in the country.

The outlook is not bright for PDVSA. Without a major rebound in oil prices, a debt default by PDVSA – and Venezuela – may be inevitable later this year.n

TransCanada consider pipeline purchase LATIN AMERICA TRANSCANADA is reportedly in talks to purchase Columbia Pipeline Group, in a deal worth over US$10 billion.

Citing unnamed sources, the Wall Street Journal reported last week that TransCanada would secure a large portion of the natural gas business and obtain access to shale plays in the US northeast if a deal was reached.

Houston-based Columbia operates a network of pipelines in the Marcellus and Utica shale regions.

Calgary-based TransCanada confirmed it was negotiating with a “third party” about a “potential transaction”. It noted, however, that “no agreement has been reached and there is no assurance that these discussions will continue or that any transaction will be agreed upon”.

Commenting on the deal, FirstEnergy Capital analyst Steven Paget told the Financial Post: “I think it makes good sense, but everything has a price.”

An acquisition would enhance TransCanada’s shale

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gas portfolio. The company already has a presence in shale gas formations in Alberta and British Columbia and this would also give it exposure to the Marcellus shale. In addition, the extra capital provided by TransCanada could help Columbia extend its pipeline network.

Shipper contracts for export service on the TransCanada network have shrunk by 50% to 700 million cubic feet (19.8 million cubic metres) per day.

TransCanada projects that this figure could eventually fall to 200 mmcf (5.7 mcm) per day.

Access to the Marcellus and Utica could therefore provide some breathing space for the company. “I think if you put the projects they’re having difficulty with aside and just look at the core business of TransCanada, they move gas, and there’s a new area that has come up and is bigger than Western Canada,” the Globe and Mail quoted AltaCorp Capital analyst Dirk Lever as saying.

“They must be looking at it going, ‘Well, we want a piece of that,’ and this is how they would go about it.”n

Andrew Kemp, Editor, Asia Pacific and China Oil & Gas • Email: andrew.kemp@newsbase.com Anna Kachkova, Editor, North America Oil & Gas and Unconventionals • Email: annak@newsbase.com Joe Murphy, Editor, FSU Oil & Gas • Email: joem@newsbaase.com Andrew Dykes, Editor, Renewables • Email: andrewd@newsbase.com

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ENERGY FINANCE WEEK

Week 7• 21 March • 2016

Venezuela seeks to renegotiate terms of China loans LATIN AMERICA PDVSA is seeking to make changes to the terms of loan deals it arranged with China that are repayable in oil. The company’s president, Eulogio del Pino, confirmed that talks had commenced, though he provided few further details other than to say they were ongoing.

The Venezuelan press reported earlier that PDVSA was seeking a two-year grace period during which it could rebuild its tattered finances. China has reportedly rebuffed the request.

Since 2007, China has advanced more than US$50 billion in loans repayable in oil, of which a little more than US$20 billion has been repaid. Terms of the agreements have never been released.

Venezuela’s National Assembly, which is controlled by opponents of President Nicolas Maduro, has promised to investigate the loans. Critics of the accord say the Chinese are receiving price discounts on the crude they receive to defray the cost of shipping. Venezuela has counted on financing from China in the past to ease the economic crisis that is threatening the political stability and

survivability of Maduro. Energy Finance Week forecasts that the country’s GDP will contract 8% this year and its inflation rate will be above 700%. The country has had the world’s highest inflation rate for the last three years.

Shortages of basic foodstuffs, medicines and spare parts are already grave and have led to a series of lootings of supermarkets, threatening to ignite a social explosion.

PDVSA delivered about 650,000 barrels per day of crude to China last year, of which two-thirds was in repayment for the loans. The state-run company does not receive any funds for the transfers.

Furthermore, statistics from Beijing suggest that up to half of the Venezuelan crude being sent to China is actually sold on the spot market. Energy Finance Week does not anticipate that China will make major changes in terms of restructuring the loans. Facing its own economic problems, Beijing is wary of advancing new credits.

China’s position is also being shaped by growing doubts about Maduro’s ability to fight off moves by the opposition to force him out of office.n

Bleak outlook for Pacific E&P LATIN AMERICA

QUESTIONS have once again emerged about the solvency of Pacific Exploration and Production (Pacific E&P), Colombia’s largest private oil producer. The company has been struggling with low oil prices and state-owned Ecopetrol’s decision to cancel its lease for the Rubiales oilfield.

Colombian brokerage Casa de Bolsa reported last week that the largest group of creditors in the South America-focused company was due to meet on March 11 to discuss whether the company was in default.

Pacific E&P received a request from the Colombian Financial Superintendency on March 10 asking if it would clarify reports in the media of a qualified restructuring.

The company demurred. But a source familiar with the negotiations told Energy Finance Week that one or more parties with credit default swaps relating to the 2025 notes had asked the International Swaps and Derivatives Association (ISDA) for a ruling that a credit event had occurred. This would allow the parties to collect under the credit default swap. The ISDA ruled on March 11 that there had been a “failure to pay credit event” at the

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company, according to a release on its website.

The 30-day grace period on Pacific’s January interest payment has expired but the company was able to get an extension with the support of 42% of 2025 bondholders, as well as 34% of the holders of 2019 bonds. It is some of the remaining 58% of holders that are now making their disapproval known. According to the bond prospectus, investors need the support of 25% of a series of notes to accelerate the securities.

The association was due to meet again on March 15 to rule whether there would be a credit default swap (CDS) auction. The source Energy Finance Week spoke to said that other than the potential for a change of creditors, the decision should not have any impact on the 2025 notes. This seems disingenuous, however.

Credit default swaps act as insurance against nonpayment. The fact that the CDS buyers are moving to collect suggests that the concern of default now outweighs the potential benefits of the swaps. Under the swap, the buyer is entitled to the face value of the bond from the seller, in the event that the issuer defaults.

Ed Reed, Editor, Africa Oil & Gas and LNG • Email: edreed@newsbase.com Richard Lockhart, Editor, Africa, Asia and Central Europe Power • Email: richardl@newsbaase.com Ryan Stevenson, Editor, Europe and Latin America Oil & Gas • Email: ryans@newsbase.com Ian Simm, Editor, Middle East Oil & Gas and MEA Downstream • Email: ians@newsbase.com

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ENERGY FINANCE WEEK

Week 7• 21 March • 2016

Default risk The ISDA ruling also establishes that Pacific E&P has already defaulted on its debt, which will have an impact on the company’s creditworthiness. Pacific E&P has until March 31 to meet its commitments under an extension to payment dates, and the company is remaining characteristically tight-lipped on its plans. A representative said the company could not comment at this time.

CEO Ronald Pantin said last month that the extension to the payment period would allow Pacific E&P “an additional period to continue working toward a consensual and comprehensive reorganisation of the company’s balance sheet”.

Ratings agency Standard and Poor’s believes the company is likely to default and investment firm EIG Partners is also counting on the alleged insolvency of the

company. EIG subsidiary Harbour Energy made a takeover bid for Pacific E&P in January, subsequently extending the deadline for shareholders to vote on the offer to March 24.

Harbour also amended the terms, reducing the amount it was willing to pay bondholders to US$0.16 per bond, as the company’s financial situation had “deteriorated”.

With the firm refusing to comment on its plans, the market is waiting for decisions from the ISDA on March 15 and from Pacific E&P’s own shareholders on March 24. They have previously shown themselves reluctant to be bought out, with a proposed deal from Harbour and Alfa falling apart last year because of shareholder opposition. Though Pacific E&P’s shareholders are likely to deem Harbour’s bid to be too low, with just two weeks to come up with the money to avoid a default, the company may be running out of options.n

PDVSA could sell more stakes in heavy oil ventures LATIN AMERICA CASH-STRAPPED PDVSA is offering minority partners the opportunity to increase their stakes in at least two Venezuelan extra-heavy oil joint ventures that are already up and running.

State-run PDVSA could sell shares in its Petropiar and Petrolera Sinovensa joint ventures.

US super-major Chevron has a 30% stake in the former, while China’s state-run CNPC has a 35.75% holding in the latter. Under Venezuelan law, PDVSA must maintain at least 60% in all oil ventures, giving foreign companies the chance to boost their stake by small margins. Both Petropiar and Petrolera Sinovensa were nationalised by the late President Hugo Chavez in 2007, when PDVSA took a majority stake.

Energy Finance Week estimates that such sales could raise at least US$150 million. But we also doubt that CNPC and Chevron will be interested in increasing their stakes given the myriad uncertainties in the country. The offers are similar to a sales agreement that PDVSA signed with Rosneft under which the Russian company paid US$500 million to raise its participation in Petromonagas to 40% from 16.67%.

In most of its other extra heavy joint ventures, PDVSA has a 60% stake. PDVSA is scrambling to raise money to meet debt obligations coming due this year and in 2017.

PDVSA’s debt servicing bill – including both principal and interest payments – is about US$5.2 billion this year, of which most comes due in the last quarter of the year. The company has more than US$9.2 billion in debt servicing in 2017.

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The above sums exclude PDVSA’s domestic obligations, including those to the country’s Central Bank.

PDVSA’s president, Eulogio Del Pino, who is also Venezuela’s oil minister, has repeatedly said the company is seeking to refinance debt coming due this year and next. Bondholders could be asked to exchange the notes for instruments coming due in 2018 and 2019 when PDVSA’s debt servicing payments are less.

Del Pino said the company was doing everything in its power to avoid a debt default, which looks increasingly likely. PDVSA, like Venezuela, is facing a cash crunch brought on by weak oil prices, which have reduced its ability to service debt taken on after 2007. That year, the company’s financial debt was about US$3 billion but the company subsequently went on a borrowing spree to finance government programmes and campaigns. Earlier this year, PDVSA said its bank debt had fallen to US$43.8 billion as of last year, down from US$45.7 billion in 2014. President Nicolas Maduro has said that Venezuela and PDVSA need about US$14 billion to service their combined debt obligations this year. So far, the country has been able to avoid any late payments by slashing imports and drawing down international reserves, which fell to 13-year lows last month after a debt repayment.

Energy Finance Week believes PDVSA will try to sell more assets to raise funds to meet its debt obligations. But low oil prices have diminished the value of many of its assets, limiting its pricing flexibility.

Potential buyers will also be wary of the growing political and economic risk in the country.n

Andrew Kemp, Editor, Asia Pacific and China Oil & Gas • Email: andrew.kemp@newsbase.com Anna Kachkova, Editor, North America Oil & Gas and Unconventionals • Email: annak@newsbase.com Joe Murphy, Editor, FSU Oil & Gas • Email: joem@newsbaase.com Andrew Dykes, Editor, Renewables • Email: andrewd@newsbase.com

NewsBase Ltd. 108 Dundas Street, Edinburgh EH3 Tel: +44(0)131-478-7000 Email: research@newsbase.com Web: www.newsbase.com

ENERGY FINANCE WEEK

Week 7• 21 March • 2016

SAExploration LatAm revenues dive LATIN AMERICA GEOPHYSICAL services provider SAExploration (SAE) saw revenue from its Latin American activities plummet in the fourth quarter of last year.

The US firm reported US$6.74 million in revenue in the fourth quarter of 2015, compared with US$80.2 million in the same period a year earlier.

The Houston-based company said that this was because of a slowdown in Peruvian seismic activity, as well as regulatory issues in Colombia that inhibited the flow of government approvals. It was also the result of the “general deterioration of the broader commodity price environment and its distinct impact on smaller producers in the region,” the firm said in a conference call last week.

There was a “meaningful decrease in exploration activity in South America” during the fourth quarter of last year, said Brent Whiteley, the company’s CFO. Activity in the region during 2015 was “below historical levels,” added Brian Beatty, the company’s CEO. “However, we did gain more visibility towards the end of

the year. And we currently have crews operating in Bolivia and Colombia,” he said.

The firm has “additional programmes in backlog” which are scheduled to take place in mid-2016, he said.

The company is also receiving and reviewing other bid opportunities that may take place this year, he added.

The effect of lower commodity prices has also been felt at a national level in a number of countries in the region, where governments are heavily dependent on oil revenue. Peru has been particularly hard hit, where the oil price situation has been exacerbated by continuing delays in companies securing government approvals and by frequent environmental opposition. SAE has operations in Peru, Colombia, Bolivia and Brazil.

In January, the firm said it had been awarded two new projects for onshore logistical support and seismic data acquisition services in Latin America. It said the projects would take place in the rainforest region, but did not specify in which country.n

Ormat to buy geothermal plant in Guadeloupe LATIN AMERICA ORMAT Technologies has signed a deal to acquire a 10MW geothermal power plant in Guadeloupe, with plans to restore and expand its capacity.

The Nevada-based company said March 14 that it would gradually acquire an 85% stake in Geothermie Bouillante (GB), the operator of the Bouillante geothermal power plant. The seller is Sageos Holding, a subsidiary of the French government’s geological survey company Bureau de Recherches Geologiques et Minieres (BRGM), according to an Ormat statement.

Ormat intends to increase the plant’s capacity to its designed specification of 14.75 MW by mid-2017, via the incorporation of its technology and expertise to optimise geothermal resources. The acquisition will also gain the company two exploration licences in Guadeloupe, with a total potential capacity of up to 30 MW, Ormat said.

Judging by its statement, Ormat plans to make use of these permits within the next few years, with further expansion taking capacity to a total of 45 MW by 2021, the company added. Energy Finance Week requested further details on the company’s exploration and expansion plan but the company did not immediately

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respond. Bouillante is the largest geothermal power plant on the island, supplying about 5% of the electricity in the French overseas territory. It sells output to French utility Electricité de France (EDF) under a new 15-year power purchase agreement (PPA) agreed in January 2016.

The plant is situated on the west coast of the island near the Soufriere volcano, where geothermal heat can be found just a few hundred metres below ground at high enough temperatures to produce electricity. Ormat has said it will pay 22 million euros (US$24 million) in the second quarter of this year for an initial 79.6% stake in GB, and then invest another 10 million euros (US$11 million) over the next two years to expand its holding to 85%. Sageos Holding could get up to another 16 million euros (US$17.7 million) from the deal, depending on meeting certain production thresholds and capacity expansion, Ormat said. Ormat’s CEO, Isaac Angel, said the company’s current strategy was focused on improving existing projects, expanding its geographic reach and widening its portfolio. Ormat currently has 2,000 MW of gross capacity, and 697 MW in production in the US, Guatemala and Kenya.n

Ed Reed, Editor, Africa Oil & Gas and LNG • Email: edreed@newsbase.com Richard Lockhart, Editor, Africa, Asia and Central Europe Power • Email: richardl@newsbaase.com Ryan Stevenson, Editor, Europe and Latin America Oil & Gas • Email: ryans@newsbase.com Ian Simm, Editor, Middle East Oil & Gas and MEA Downstream • Email: ians@newsbase.com

NewsBase Ltd. 108 Dundas Street, Edinburgh EH3 Tel: +44(0)131-478-7000 Email: research@newsbase.com Web: www.newsbase.com

ENERGY FINANCE WEEK

Week 7• 21 March • 2016

Facing a possible downgrade and with its stock market stymied, Qatar is set to issue a sukuk With Qatar appearing likely to be downgraded by international ratings agencies, Doha is seeking billions of dollars in Islam-compliant financing MIDDLE EAST ALTHOUGH Moody’s Investors Service recently placed Qatar’s Aa2 government bond and issuer ratings on review for downgrade, until the review is completed in late May at the latest, the emirate will enjoy a temporary comparative credit ratings advantage over most of its neighbours.

However, in common with its neighbours, the buildout of its benchmark stock market remains unfinished, its banks over-leveraged, and its fiscal balance will turn into a deficit of more than 6% of GDP on average until 2018, resulting in a rise of 10% in Qatar’s debt burden over 2016-18, according to various economic forecasts.

Given the confluence of these factors, Energy Finance Week understands that the emirate is now weighing not just a major sovereign bond issue within the next two months – i.e. before any further ratings action is likely to be taken against it – but, much more intriguingly, that this is likely to be an Islamic bond offering (sukuk) of a size not seen for many years.

Sukuk in the pipeline According to a senior Dubai-based finance industry specialist spoken to by Energy Finance Week last week, Qatar is already in advanced talks with a number of international banks about a sovereign sukuk issue aimed at plugging the anticipated US$12.8 billion fiscal deficit to be incurred this year.

“The structure being discussed would be [US] dollar denominated, with a three to five-year tenor, and aimed principally both at Middle East and international buyers, with the amount anywhere from US$3 billion to US$5 billion, depending on the amount of paper they think they can get away,” said the source.

The amount would be in line with Qatar’s last sovereign bond offering – a US$4 billion sukuk in July 2012 – and with the fact that the emirate has also already borrowed US$5.5 billion through a syndicated bank loan concluded in January and arranged by Bank of TokyoMitsubishi UFJ, Mizuho, Sumitomo Mitsui Banking Corp.

(SMBC), Deutsche Bank, Barclays and Qatar National Bank, each of which are consequently expected to be

21

given first- or second-lead book-runner mandates for the offering by Qatar, according to the Dubai financier.

Tough sell Having said this, and despite the international line-up of likely book-runners and underwriters for a Qatari sovereign sukuk issue, such paper is unlikely to be an easy sell, or even to meet the minimum offer amount currently being discussed.

For a start, although in theory Islamic bond issues are always supposed to have a natural market appetite across the Muslim areas of the world (principally, the Middle East and Malaysia for the sukuk), over the past few years to date there has been doubt about their actual Islamic credentials. Mehrdad Emadi, senior economist for risk analysis and energy derivatives markets consultancy, Betamatrix told Energy Finance Week that this has dented demand from otherwise expected sources.

“Many of the stauncher Islamic states have come to be concerned that what have often been labelled as Sharia-compliant investments are, in fact, little different from conventional ones and, as such, do not merit being assessed on a different basis to the usual debt offerings, which, in turn leaves them looking relatively unappealing on an empirical basis,” he said.

In this context, it is true to say that there are many similarities in the way in which Islamic finance is theoretically interpreted around the globe, primarily forbidding investing in activities that can be deemed speculative, involve uncertainty, entail the payment of interest, are fundamentally unjust to participants, or are involved in prohibited businesses (such as gambling, alcohol, and the sale of certain foodstuffs).

However, there are also some key differences in the way Islamic finance is practiced, which has impacted its development in recent years and continues to have longterm ramifications for the development of this financial sector in the future.

General lack of compliance In broad terms, for example, a Hong Kong-based lawyer

Andrew Kemp, Editor, Asia Pacific and China Oil & Gas • Email: andrew.kemp@newsbase.com Anna Kachkova, Editor, North America Oil & Gas and Unconventionals • Email: annak@newsbase.com Joe Murphy, Editor, FSU Oil & Gas • Email: joem@newsbaase.com Andrew Dykes, Editor, Renewables • Email: andrewd@newsbase.com

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ENERGY FINANCE WEEK

Week 7• 21 March • 2016

specialising in Islamic finance told Energy Finance Week, a financing structure for a murabaha-type sukuk that may be able to be traded at an amount other than par in Malaysia, may not be considered as having sufficient tangibility in the underlying assets to make the sukuk tradable at an amount other than par in Middle Eastern jurisdictions.

Indeed, he added, there has been a great deal of controversy over such structures, particularly of the commodities type (Tawarooq) in which a bank buys and takes title to the relevant commodity assets from a third party broker, and then sells the assets to the borrower at cost plus a specified profit.

“In the Middle East, Islamic scholars highlight the risk of the commodities never changing hands and of there being no tangible commodities at all, just cashflows between banks, brokers, and borrowers, thus negating the basic tenet of Shari’a pertaining to tangible underlying assets underpinning all transactions,” he said.

Even more specifically, a Bahrain-based Islamic banker told Energy Finance Week last week, the Accounting Auditing Organisation for Islamic Financial Institutions (AAOIFI) – the foremost global body for setting Islamic finance standards – said as long ago as February 2008 that the repurchase undertakings found in around 85% of apparently Shari’a-compliant bond- and equityfund structures that were based on ‘mudaraba’ and ‘musharaka’ principles violated the Islamic duty to share risk. After this, the issuance of these two types of bonds fell over that year by around 83% and 63% respectively, even at a time when – with the global financial crisis still whirling – these ‘less risky’ Islamic finance products should have benefitted markedly from tumult in the Western financial systems.

The result of such wariness over the practical interpretation of the laws of Islam into Shari’a-compliant financial models has been a marked diminution in such Islamic offerings even at a time when they – in theory – would have been the likely first method of raising money from international debt markets.

In this context, according to industry sources, the value of outstanding sukuks rose from around US$23.9 billion in 2004 to around US$277.1 billion (equivalent to 13% of total Islamic finance assets) by the end of 2014.

However, during 2015, Gulf Co-operation Council (GCC) received only around US$6 billion through global sukuk issuance – 49% less than the previous year.

So far this year, the only sovereign sukuk deal in the Gulf has been by the emirate of Sharjah, and this was hardly encouraging. Although the US$500 million five-year issue did attract orders totalling around US$950 million, the deal was priced at a spread of 250 basis

22

points (bp) over mid-swaps, which, adjusting for the tenor extension, paid a new issue premium of 35-40 bps over the US$750 million 10-year sukuk that it issued in September 2014 (which also attracted orders of around US$7.85 billion).

Given the disappointing figures, Energy Finance Week has learned that Sharjah’s plans for a 10-year issue have now been shelved indefinitely. Moreover, any idea that Qatar might be able to offload a sizeable portion of its offering to Malaysia – which accounts for around 50% of the global sukuk market now – looks optimistic, said the legal source. This is both because of the opacity of Shariarelated guidance on the matter and on the type of issues that are popular in Malaysia.

“In the Middle East, guidance broadly comes both from the AAOIFI, and its associate members and scholars, whilst in Malaysia specifically, and in Asia more generally, such guidance comes largely from central banks, their associated bodies – monetary authorities, for example, in the case of Hong Kong – and local Shari’a boards, which tends to be more insular,” he said.

“Additionally, Asia’s Islamic finance sector is currently much more focussed on the individual domestic markets involved than is the case in the Middle East, with the vast majority of sukuk issuances in Malaysia, for example, being sold into the very deep local ringgit-denominated market, rather than in the more international currencydenominated offerings,” he concluded.

Weighing the odds Given this, Qatar’s offering – whether supposedly Shari’acompliant or not – is highly likely to be weighed up by investors simply on the basis of any other bond, which means that that three criteria would be employed to determine its degree of investability.

“These criteria are a country’s foreign debt to GDP ratio [which is worsening for Qatar], its ratio of debt servicing costs to GBP growth [also worsening] and the government’s overall fiscal position [worsening as well],” Emadi underlined. The only two major historical exceptions to this general rule of bond investing in Middle East debt issues – China and Russia – whose investment criteria are more geared towards increasing geo-political influence than making straightforward monetary gains are also unlikely to have any interest in propping up any bond issuance from Qatar.

Both of these states have completely redirected their efforts in this regard towards Iran, and away from Saudi Arabia and the countries seen as being in its sphere of influence, with both Russia and China now actively working with Tehran on new debt structures for upcoming issues and on building out its stock market.n

Ed Reed, Editor, Africa Oil & Gas and LNG • Email: edreed@newsbase.com Richard Lockhart, Editor, Africa, Asia and Central Europe Power • Email: richardl@newsbaase.com Ryan Stevenson, Editor, Europe and Latin America Oil & Gas • Email: ryans@newsbase.com Ian Simm, Editor, Middle East Oil & Gas and MEA Downstream • Email: ians@newsbase.com

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ENERGY FINANCE WEEK

Week 7• 21 March • 2016

ORPIC signs landmark Liwa financing MIDDLE EAST STATE-OWNED Oman Oil Refineries & Petroleum Industries Co. (ORPIC) signed the sultanate’s largest-ever project financing deal in early March for the Liwa Plastics venture at Sohar. Funding will be provided by a group of 19 international banks – giving the scheme and the government a resounding vote of confidence at a time of domestic fiscal strain and global petrochemicals market downturn.

The award of the main construction contracts in November was itself a signal of the substantial strategic importance attached by Muscat to the project, which on completion in 2019 is expected to add billions of dollars to the country’s GDP and take ORPIC’s national economic contribution to nearly 10% – while fulfilling the government’s perennial job creation and economic diversification imperatives.

An eclectic group of international and regional banks signed up to the US$3.8 billion, 15-year deal, which also received backing from six export credit agencies (ECAs) – reflecting the national diversity of the selected engineering, procurement and construction teams.

The commercial banks participating are Arab Banking Corp., Bank Dhofar, Bank Muscat, Bank of TokyoMitsubishi UFJ, BNP Paribas Fortis, Cassa Depositi e Prestiti, Crédit Agricole, Crédit Industriel et Commercial, Export Development Canada, ING Bank, JPMorgan Chase Bank, HSBC, KfW IPEX-Bank, Korea Development Bank, National Commercial Bank, Natixis, Societe Generale, Sumitomo Mitsui Banking Corp. – also the financial adviser – and UniCredit.

ECA support was secured from Atradius of the Netherlands, France’s Euler Hermes, Korea Export-Import Bank, Korea Trade Insurance Corp., Italy’s SACE and UK Export Finance. Financial close is due early in the second quarter.

ORPIC’s approach to banks on such a landmark deal for the sultanate – at a period when the sovereign suffered

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successive downgrades from ratings agencies warning of the government’s particular vulnerability to the oil revenue slump – was assisted by the state-owned firm also having set the country’s previous project-financing record two years ago with the US$2.8 billion funding package secured in April 2014 for the expansion and upgrade of its Sohar refinery.

That scheme, which will supply some of the feedstock for Liwa, is on track for commissioning later this year.

Remarkably, given the longevity and severity of the oil price downturn and a near-doubling of anticipated project cost as contracting got under way, ORPIC’s timetable has slipped only marginally since the launch of the EPC tendering process in late 2014 – despite consistentlyvoiced doubts in light of the continual worsening of the market context.

EPC packages worth a total of US$4.5 billion on the estimated US$6.5 million scheme were signed in December with Netherlands-based CB&I – also the front-end engineering and design (FEED) contractor – in consortium with Taiwan’s CTCI for the mixed-feedstock cracker and the offsites and utilities, Italy’s Tecnimont for the plastics units, South Korea’s GS Engineering & Construction with Japan’s Mitsui for the natural gas liquids (NGL) extraction plant at Fahud, and India’s Punj Lloyd for the Fahud-Sohar NGL pipeline.

The project encompasses an 859,000 tonne-per-year steam cracker and units producing linear low-density polyethylene (LLDPE), high-density polyethylene (HDPE), polypropylene (PP), mogas and benzene. ORPIC officials claimed late last year that the Liwa scheme would generate annual income of US$2.3 billion and bring ORPIC’s total contribution to GDP to 8-9%, from around 6% in 2014.

The company also operates aromatics and PP plants at Sohar and the sultanate’s older Mina al-Fahal refinery near Muscat.n

Andrew Kemp, Editor, Asia Pacific and China Oil & Gas • Email: andrew.kemp@newsbase.com Anna Kachkova, Editor, North America Oil & Gas and Unconventionals • Email: annak@newsbase.com Joe Murphy, Editor, FSU Oil & Gas • Email: joem@newsbaase.com Andrew Dykes, Editor, Renewables • Email: andrewd@newsbase.com

NewsBase Ltd. 108 Dundas Street, Edinburgh EH3 Tel: +44(0)131-478-7000 Email: research@newsbase.com Web: www.newsbase.com

ENERGY FINANCE WEEK

Week 7• 21 March • 2016

Sound Energy acquires Nigeria needs US$500 additional Moroccan million to fix refineries AfDB’s new deal to add 160 GW to Africa’s interest power grids AFRICA

President of the African Development Bank Dr Akinwumi Adesina says the new deal articulated by the bank on energy for Africa in 2015 will add 160 GW of new electricity generation capacity to Africa’s power grids by 2025. In September 2015, the bank articulated a New Deal on Energy for Africa and launched a Transformative Partnership on Energy for Africa to light up and power the continent by 2025.

Adesina, who said a lot more needed to be done given Africa’s energy potential and the huge needs to be met, stated that energy remains the central theme of the African Development Bank’s 2016 Annual Meetings as well as its 2015 Annual Report. “The goal is to add 160 GW of new generation capacity through the existing grid, deliver 130 million new grid and 75 million off-grid connections,” Adesina explained.

He added that “Africa is blessed with limitless potential for solar, wind, hydropower and geothermal energy resources. We must unlock Africa’s energy potential, both conventional and renewable. Unlocking the huge energy potential of Africa, for Africa, will be a major focus of the bank.”

A statement from the bank said the continent’s energy needs are so huge that efforts being made in the sector often appear like drops of water sprinkled in the Sahara Desert. According to the bank, its current energy portfolio hovers around US$11 billion, but lending to energy sector projects (public and private) is exceeding an annual US$1 billion in recent years.

GUARDIAN.NG (NIGERIA), March 16, 2016

Mediterranean-focused upstream gas company Sound Energy has signed a binding agreement for the acquisition of a further 50% operated interest in three onshore gas permits located in Morocco from PetroMaroc. The company has also signed a heads of agreement for a farmout of Sidi Moktar to Culebra Petroleum via a partial sale of an intermediate subsidiary of Sound Energy.

The Sidi Moktar licences cover 2,700 sq km in the Essaouira basin, central Morocco and contain a material existing gas discovery in the Lower Liassic (Kechoula). Two wells have already been drilled at Kechoula and a near term extended well test is awaited prior to expected commercial production. Kechoula is close to existing infrastructure and has been estimated to have an unrisked mid case GOIP of 293 bcf (100% working interest). The Sidi Moktar Licences are also estimated to have significant (in excess of 1 tcf of unrisked mid case GOIP; 100%) Triassic exploration potential.

Further to the heads of terms announced by the company on January 26, 2016, the company has now signed a binding agreement to acquire, subject to regulatory approvals, PetroMaroc’s 50% working interest in, and operatorship of, the Sidi Moktar licences.

On completion of the acquisition, Sound Energy will issue 21,258,008 new ordinary shares in the company to PetroMaroc as consideration and will also issue PetroMaroc: (i) a 10% net profit interest in any future cash flows from the Kechoula discovery; and (ii) a 5% net profit interest in any future cash flows from structures within the Sidi Moktar Licences other than the Kechoula discovery.

These terms are identical to those announced on 26 January 2016.

SOUND ENERGY (UK), March 10, 2016

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Minister of State for Petroleum and group managing director of Nigeria National Petroleum Corporation (NNPC) Dr Emmanuel Ibe Kachikwu said that the four refineries in the country will require between US$300 million and US$500 million to function effectively. The minister disclosed this during an interactive meeting with the joint House of Representatives Committee on Gas Resources, Petroleum (Downstream and Upstream) and Local Content chaired by Representative Victor Nwokolo over the controversy on the recent unbundling of NNPC to 30 companies.

He acknowledged the communication gap between his office and the National Assembly on the issue of unbundling of the NNPC, adding that the concerns expressed by members were legitimate. Kachukwu said that the “unbundling was used to qualify the sub-sects” otherwise called divisions, and not companies as would have been applicable to the actual unbundling of the corporation as stipulated in the PIB. VANGUARD (NIGERIA), March 11, 2016

Saudi firm to invest US$2.2 billion in South African energy projects Saudi-based energy firm ACWA Power is planning to invest more than 35 billion rand (US$2.23 billion) in renewable and conventional energy projects in South Africa over the next five years, despite the depressed economy that has placed the country at risk of a ratings downgrade.

Speaking at the commissioning of the 5-billion-rand Bokpoort concentrated solar energy plant, which has one of the highest thermal energy storages in the world, ACWA Power chairman

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Mohammad Abunayyan said he was aware of South Africa’s economic situation, including the decline in foreign direct investment.

“But ACWA power is looking towards the future. We are committed to South Africa. Our total project pipeline exceeds 35 billion rand,” said Abunayyan. The Bokpoort plant, located in Groblershoop near Upington, was to date the biggest investment Saudi Arabia had made in South Africa, according to the country’s trade and commerce minister Tawfiq Fawzan Alrabiah.

The plant has the capacity to store up to 9.3 hours of power for night usage and to electrify about 200,000 households.

The Saudi minister said the Northern Cape, where temperatures can exceed 45 degrees Celsius, was one of the top three locations in the world with the highest solar capacity, making it an attractive destination for investment. The international power utility firm was already planning to begin construction of the 9 billion rand 300-MW coal-fired plant in Mpumalanga and another 150 MW concentrated solar energy plant also in the North Cape.

BDLIVE.CO.ZA (SOUTH AFRICA), March 15, 2016

ASIA

Chinese group buys Australian wind farm China’s State Power Investment Corporation (SPIC) has snapped up another wind farm in Australia, as new entrant Thailand’s Wind Energy Holding has bought 50% of project developer CWP Renewables, confirming a surge of overseas interest in the wind and solar sector, the Sydney Morning Herald reported. Industry sources have been anticipating increased merger and acquisitions interest across the renewables sector, helped by a surge

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in the prices of the certificates that underpin new large-scale projects because of increased confidence in the renewable energy target regulations.

China’s SPIC has acquired the Taralga wind farm in NSW from Spain’s Banco Santander, just three months after its A$3-billion-plus deal to buy Pacific Hydro from IFM Investors. The price for the 106.8MW Taralga venture in the Southern Tablelands region was not disclosed but Santander was seeking A$250300 million when it started the sale process in August.

SYDNEY MORNING HERALD (AUSTRALIA), March 15, 2016

Green Dragon Gas gets China subsidy boost China has increased the cash subsidy paid on gas produced from coal assets by 50%, Green Dragon Gas reported.

The subsidiary has risen to US$1.31 per mcf from US$0.87 per mcf and is effective from the start of 2016. Green Dragon is one the largest independent producers of coal-bed methane (CBM), or unconventional gas, in China. The company said the move underlines both how important CBM is to China’s domestic energy market and the commitment of the country’s government’s for a cleaner energy mix.

Green Dragon has extensive acreage in China through six production sharing agreements in partnership with CNOOC, PetroChina and CNPC. In 2015, the company received an average of US$9 per mcf for piped gas and US$16 for compressed gas.

It aims to produce 16 bcf of gas this year, an increase of a third over 2015.

Green Dragon chairman Randeep Grewal said: “This increase is yet another demonstration of the Chinese government’s continued commitment to develop domestic clean energy from Coal Beds to facilitate its objective of increasing the gas component of the energy mix. Green Dragon’s CBM provides an important domestic

resource which, after twenty years of efforts, is well defined, de-risked with proven technology and made even more economically favourable with this increased government contribution.”

PROACTIVE INVESTORS (UK), March 15, 2016

Uttar Pradesh to issue bonds to aid ailing state distributors The Indian government’s ambitious debt-recast plan for ailing state distribution companies received a shot in the arm with the decision of Uttar Pradesh to issue bonds worth 36.77 billion rupees to help reduce the debt of its distribution companies. Power, coal and renewable energy minister Piyush Goyal said this was a historic development. “Welcome the issuance of first UDAY bonds worth 36.77 billion rupees by UP. Historic step towards power for all,” the minister wrote.

Last year, the government announced the distribution companies revival package called UDAY, under which states have been promised attractive incentives such as cheaper power and more coal if they adopt the scheme and take over 75% of the debt of ailing distribution companies. States have to issue bonds in the market or to the lenders, while the debt that is not taken over by the state will be converted into loans or bonds with an interest rate not exceeding the base bank rate plus 0.1%.

The revival scheme is critical for the power sector because state distribution companies are central to the sector, being the link between power producers and customers.

Heavy losses and inefficient operations often encourage the distribution companies to reduce power purchases, leaving many regions in darkness even though power plants have surplus capacity.

The scheme is voluntary as the central

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government does not control these distribution companies. Most states have opted for the scheme, which has the potential to transform the power sector. Officials said the weakest link in the power sector’s value chain is distribution.

than a land-based one, contradicting the findings of the maritime affairs ministry.

REUTERS, March 12, 2016

Novatek completes deal to sell Yamal LNG to China’s Silk Inpex could save US$6 stake billion if Indonesia LNG Road plant sited on land ECONOMIC TIMES (INDIA), March 11, 2016

Inpex and Shell could save as much as US$6 billion if Indonesia builds the Masela Abadi LNG plant on land rather than offshore, an Indonesian maritime affairs official said. President Joko Widodo is expected to soon decide on the site of what will be one of Indonesia’s biggest LNG plants, but his administration is divided on whether a land or floating facility would better suit Southeast Asia’s largest economy. “Onshore will be cheaper,” said official of the maritime affairs co-ordinating ministry Haposan Napitupulu, who estimated an onshore project would cost US$16 billion, against US$22 billion for an offshore plant.

“But the most important thing is not the costs, but which one gives the most benefit for the regional economy.” He added that an onshore plant would also spur construction of petrochemical and fertiliser plants in the eastern province of Maluku, an impoverished area with little development. Both companies have declined to comment on which project would be more economical.

Last year, Inpex submitted a plan to develop the Masela block by building a floating LNG plant with the capacity to produce 7.5 million tonnes of the fuel each year. If approved, production could start as early as 2024.

Indonesia’s energy regulator, SKK Migas, has estimated a floating LNG plant, at a cost of US$14.8 billion, would be US$4.5 billion cheaper

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Russia’s second biggest natural gas producer Novatek said has completed a deal to sell a 9.9% stake in the Yamal LNG project to China’s Silk Road Fund for 1.09 billion euros (US$1.2 billion). After the deal, Novatek will hold 50.1% in Yamal LNG, which is due to start producing LNG in 2017. France’s Total, China’s CNPC will retain 20% each.

The US$27-billion project has been struggling to raise funds due to international sanctions against Russia over the crisis in Ukraine. The fund has already provided a loan worth 730 million euros (US$804 million) for financing of the project as part of the transaction.

REUTERS, March 15, 2016

DSME announces massive downsizing programme President of Daewoo Shipbuilding and Marine Engineering Jung Sung-leep said on March 10 that his company would cut its payroll numbers (including those hired through employment agencies) to 30,000 from current 45,000. He also pledged that he would do everything he can to bring up the company’s operating profit to more than 500 billion won (US$420.6 million) this year after turning to the black from the first quarter of this year. He said: “In order to turn the company around to the black, you must adjust payroll numbers in ways to raise

labor productivity. At the peak of our business in late 2014 our sales revenue was 16 trillion won, with the total number of workers [including employment agency-dispatched workers] reaching as high as 50,000.

As the company’s size got bigger, inefficiencies grew and productivity suffered.

“We plan to adjust the workers number to about 30,000 with sales revenue of 12 trillion won. This is exactly where we were in the 20092010 period when our productivity level was at a record high.” Right now, the shipbuilder hires 14,000 full-time regular workers and 31,000 contractbased and temporary workers.

Jung said he will focus more on dispatch workers in the companywide downsizing measures, saying: “Instead of relying on painful restructuring measures like voluntary retirement programmes, I would rather resort to natural attrition and always-on reviews on low performers.

I will also discontinue some of the programmes such as ‘bulk hiring’ by which employment agencies dispatch a bulk of workers in specific projects.”

THE KOREA ECONOMIC DAILY (SOUTH KOREA), March 11, 2016

South Korean investors eyeing gas transportation business South Korean investors are interested in investing in Indonesia’s shipping sector. They aim to provide two gas transport ships worth US$80 million.

The investors are planning to visit Indonesia soon to look for prospective local partners. The investment commitment is one of the results of Franky Sibarani’s visit to South Korea last week. Franky, chief of the Investment Co-ordinating Board, said that the board is not only looking for investments, but pursuing added value as well.

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Investment interest in the sector shows great opportunities and sustainability for the marine transportation industry. “They mentioned the president’s marine highway programme, which creates opportunities for the development of gas terminals as storage,” Franky said.

According to BKPM’s records, South Korean investors are quite active in investing in Indonesia. Actualised investment by South Korean investors in 2015 reached 15.1 trillion rupiah, comprising of 2,329 projects.

The total value of their investment realization from 2010 to 2015 reached 79.6 trillion rupiah, and they are always in the top five positions.

TEMPO (INDONESIA), March 14, 2016

EUROPE

Poland’s statecontrolled firms ready to pour cash in coal group Three Polish state-controlled firms, the largest utility PGE, the fourth largest utility Energa and the dominant gas group PGNiG, have submitted preliminary offers to buy shares in a state coal mining group. PGE said that it could purchase shares in the Polska Grupa Gornicza (PGG) group worth up to 500 million zlotys (US$130 million), while PGNiG said it could buy shares worth up to 400 million zlotys. Energa said it could buy shares worth up to 600 million zlotys.

The companies said in separate statements one of the conditions for their purchase of shares was that PGG would be restructured so that all coal mines become profitable in a sustainable way. PGG is a new entity that is to be formed on the basis of assets of the loss-making and stateowned Kompania Weglowa, the EU’s largest coal miner, which is suffering from high production cost and a

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slump in global coal prices.

REUTERS, March 16, 2016

Ukraine’s SPF mulling sale of six regional energy companies in three groups The State Property Fund (SPF) of Ukraine could start the privatising the remaining state-owned controlling stakes in six regional energy supply companies with the sale of the most prepared and those having an attractive business profile, namely Ternopiloblenergo and Khmelnytskyoblenergo, SPF Head Ihor Bilous has said. “There is an idea to split the six power companies into three groups according to their degree of readiness and problematicity,” he told reporters.

The fund head said that the second stage could include tenders for the sale of Kharkivoblenergo and Mykolaivoblenergo, the third one, Cherkasyoblenergo and Zaporizhiaoblenergo. Bilous noted that in Ternopil and Khmelnytsky regions the structure of customers of energy supply companies the significant share is occupied by more attractive clients in the current conditions, households, small and medium businesses. According to him, the energy supply companies are relatively small and are not so expensive, which also creates conditions for the formation of competition at the tenders and their successful sale.

INTERFAX UKRAINE (UKRAINE), March 17, 2016

billion) over the next five years, as Chancellor of the Exchequer George Osborne seeks to ease the strain on producers squeezed by plunging prices. The corporate tax rate for all fields will be cut to 40% from 50% for newer fields and 67.5% for older ones, after Osborne cut a supplementary charge by half to 10%. He also scrapped the Petroleum Revenue Tax in another change that will be backdated to January.

Osborne’s move comes after the 60% slump in Brent crude since mid-2014 made much of the production in the UK’s North Sea basin, once the treasury’s golden goose, uneconomic as costs escalate at ageing fields.

“We need to act now for the long term,” Osborne said in his annual budget speech, adding that the oil and gas industry employs “hundreds of thousands of people” across the country.

The UK has more tax revenue to gain by protecting jobs in the sector, UK head of energy tax at PricewaterhouseCoopers Alan McCrae said. “This is aimed at stimulating investment at a time when the industry desperately needs it,” he said. More than 60,000 jobs supported by the UK oil and gas industry have been lost since the start of 2014, lobby group Oil & Gas UK said in September. Since then, BP announced plans to cut 600 jobs in the North Sea alone. Oil & Gas UK has forecast a 22% slump in capital expenditure in the region this year as dwindling revenue forces operators to retrench or suspend projects.

BLOOMBERG, March 16, 2016

L AT I N A M E R I C A

UK cuts tax on North China’s CNOOC eyes Sea drillers squeezed Petrobras’ stake in by slump in oil Braskem The UK has cut taxes on the North Sea oil and gas industry, forgoing revenue of GBP 1 billion (US$1.41

China’s CNOOC is interested in purchasing a minority stake in

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Brazilian petrochemical company Braskem SA from state-run Petrobras, a Brazilian newspaper said. A Petrobras source said in January the company had been receiving interest from major international chemical companies for its 36% stake in Braskem. Talks are still preliminary, financial daily Valor reported.

Petrobras has tried to speed up a long-stalled programme to sell assets as it struggles to finance expansion and pay down US$130 billion in debt, the largest of any oil company.

Braskem’s controlling shareholder, engineering conglomerate Grupo Odebrecht SA, is also seeking to exit Braskem and could sell its stake in a joint transaction with Petrobras, three sources told Reuters last week.

REUTERS, March 15, 2015

Weak market sinks Caribbean FLNG plans When Exmar NV and Pacific Exploration and Production (PEP) agreed to terminate the liquefaction and storage agreement related to the Caribbean FLNG project, it became clear that the once-burgeoning FLNG market was becoming yet another victim of the prolonged industry downturn. The agreement was originally executed in March 2012 for a term of 15 years from delivery of the floating liquefaction unit, which Exmar says has capacity of approximately 0.5 mtpa of LNG and a storage volume of 16,100 cubic metres. The so-named Caribbean FLNG (CFLNG) vessel was slated to serve northern Colombia’s La Creciente field while operating off the country’s Caribbean coast. La Creciente is operated by PEP-subsidiary Pacific Stratus Energy Colombia Corp.

Since the agreement was signed for the vessel, “the domestic natural gas market in Colombia and international LNG market have changed substantially, making the liquefaction of LNG in Colombia no longer economic for PEP,” Exmar said

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in a statement.

The settlement agreement reached between the two companies on March 3 stipulates a termination fee payable by PEP to Exmar in monthly installments from March 2016 until June 2017. Lower crude prices have had deleterious effects on the LNG market, and by extension, large-scale LNG projects. As the International Energy Agency noted in its 2015 Gas Medium-Term Market report, “through its direct and indirect linkages to oil, [gas] is not immune to the tremors shaking the oil industry”.

PENNENERGY.COM (US), March 10, 2016

Pemex remains bottomless barrel for Mexican investors Mexican state oil firm Pemex is something of a bottomless barrel for the country’s Bank of Mexico (Banxico) and board of investors.

Around 100 billion Mexican pesos (US$5.64 billion) were invested in the firm last year alone, yet investors have yet to see a marked turn around in the company’s 2016 budget and production goals.

A lack of investment and poor planning are being cited as principal problems faced by the firm.

EL UNIVERSAL (MEXICO), March 14, 2016

MIDDLE EAST

China firms push for multi-billion dollar Iran rail and ship deals Two Chinese firms are pushing for multi-billion dollar deals with Iran to build a high-speed railway and modernise its shipping fleet following the lifting of most sanctions against Tehran, sources with knowledge of

the negotiations said. State-run China National Transportation Equipment & Engineering Co (CTC) is close to finalising an agreement on the US$3 billion rail project to connect Tehran with the northeastern holy city of Mashhad, a Chinese source said.

Dalian Shipbuilding Industry Co, which is also controlled by Beijing, has likewise been in discussions on building container ships and oil tankers for Iran, according to two sources. China, Iran’s largest trading partner and long-time ally, has agreed to boost bilateral trade by more than 10 times to US$600 billion in the next decade. With Iran no longer subject to international sanctions since January following its nuclear deal with world powers, Beijing sees the country as part of its policy to increase trade and open new markets for its firms as the domestic Chinese economy slows. For the 930-km rail project, China’s Export and Import Bank (EXIM) is expected to fund 85% of the cost, with CTC providing engineering, procurement and construction services, said the source.

REUTERS, March 10, 2016

Glencore taps into Iraqi Kurdistan with US$300 million oil deal Glencore has paid Iraqi Kurdistan US$300 million as an advance for oil as it seeks to compete with trading houses Vitol and Petraco for profitable business despite disruptions and political instability, industry sources said. Glencore, which declined to comment, has made a prepayment in recent days to the government of Iraq’s semi-autonomous region, which will start allocating it crude from midyear, the sources said.

Kurdistan began direct oil sales to world markets in mid-2015 as it said the central government in Baghdad had failed to respect a budget deal, depriving the Kurdistan Regional Government (KRG) of funds to pay

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state and army salaries as it seeks to defeat Daesh militants. Iraq says the KRG failed to respect a deal to transfer oil to Baghdad.

Vitol has been the dominant player in Kurdish oil in recent months, exporting as many as 12 cargoes in January, Petraco has had as many as seven, and Swiss-based Trafigura has taken one cargo per month.

REUTERS, March 11, 2016

Oman’s Liwa Plastics successfully concludes debt financing Oman Oil Refineries and Petroleum Industries Company (ORPIC) has closed the US$3.8-billion project financing facility for its approximately US$6.5-billion Liwa Plastics Industries Complex (LPIC) in the Sohar Industrial Port Complex in Oman. The completion of the financing for LPIC is a landmark in project financing for Oman, and also the Middle East as a whole. The project will have massive economic benefits for the Omani economy and overall economic diversification for the country. ORPIC CEO Musab Al Mahruqi commented: “Orpic’s LPIC project is part of our long-term growth strategy to firmly enter into the petrochemical market. This financing facility, which is the largest ever project financing transaction to be achieved in the sultanate, is an indication of the level of confidence and support ORPIC has from key institutions and stakeholders.”

The financing is supported by six export credit agencies (ECAs) representing the governments of Germany (Euler Hermes), Italy (SACE), Korea (KEXIM and K-sure), the Netherlands (Atradius Dutch State Business) and the UK (UKEF), along with 19 international, regional and local commercial lenders.

TXF NEWS (UK), March 14, 2016

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NORTH AMERICA

Carbon levy cash to finance biodiesel refinery in Edmonton An Edmonton-based company plans to commercially produce a new biofuel capable of completely replacing diesel by the end of the year, at a lower cost than existing renewable fuels.

SBI Bioenergy in south Edmonton is in the final stages of building a biorefinery to convert canola oil and animal fats into a renewable fuel that can replace or be blended with regular diesel. CEO Inder Pal Singh said his technology produces a cleaner fuel that other renewable products, because it does not use water or hydrogen. The process also does not produce any waste, he said. “Any kind of vegetable oil can be converted into renewable diesel or renewable jet fuel using our technology,” he said. He added the low operating costs allow SBI to market a cheaper product than most renewable fuels. While the new biofuel is capable of replacing diesel entirely, petrol stations are not equipped to carry entirely renewable fuels, Singh said. His company plans to sell the fuel to refineries to be mixed with other diesel products to help meet federal renewable fuel standards.

CBC NEWS (CANADA), March 10, 2016

Top Canadian oil producers sitting on cash Canada’s biggest oil producers are sitting on a near-record pile of cash, giving them the resources to keep investing and manage debt while weathering the worst price rout in a generation. The five largest oil producers including Suncor Energy and Cenovus Energy have a combined C$8.5 billion in cash and cash

equivalents, an increase of 7.6% from a year earlier and more than twice the levels seen during 2009 downturn.

The figures, which are little changed from a record C$9 billion in 2014, do not include the proceeds from Imperial Oil’s recent sale of its Esso-brand gas stations for C$2.8 billion.

The spending, combined with the drop in prices, has taken a toll on balance sheets with debt now standing at an average of 2.16 times earnings before interest, taxes, depreciation and amortisation, compared with 1.08 times last year, according to data compiled by Bloomberg.

BLOOMBERG, March 16, 2016

Canadian producers continue to trim budgets for 2016 Canbriam Energy, a private Calgarybased intermediate drilling for liquids-rich gas in northeastern British Columbia, said its 2015 capital spending budget has been set at between C$100 million and C$110 million in 2016 to ensure its spends less than cash flow. The eight-yearold firm had a budget of between C$340 million and C$360 million for 2015. Publicly traded Birchcliff Energy, meanwhile, said it had cut its C$140-million budget set in January

by C$12 million, while maintaining its 2016 average production guidance of 40,000-41,000 boe per day. It plans to drill 15 wells this year.

About two-thirds of Canbriam’s spending is to be focused on drilling and completion activity at its Altares Montney property west of Fort St John, BC, said president and CEO Paul Myers. Canbriam reported production reached 30,000 boe per day in early 2016 but is currently averaging 27,000 boe per day due to well shut-ins required for completion activities. Output was 22,920 boe per day in the fourth quarter and averaged 17,900 boe per day for all

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of 2015. It said 2016 production, based on an eight-well programme, is expected to average between 27,000 and 30,000 boe per day. Production capacity rose to 40,000 boe per day last fall, Canbriam reported, thanks to the commissioning of Phase 2 of its owned and operated gas processing plant.

CALGARY HERALD (CANADA), March 16, 2016

Chevron pivots from big projects to West Texas shale After years of spending billions of dollars constructing massive oil and gas projects, Chevron is planning to pivot to more profitable, shorter-cycle investments like its fields in the West Texas tight-oil plays. The No 2 US oil company says it is winding down long-term investments on big projects as they come into production this year and next, but it is going to put more of its budget toward the Permian Basin.

It believes it can double or nearly triple its oil production there by the end of the decade by doubling its spending from US$3 billion, about a tenth of its

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budget, and boosting its rig fleet there to 14 from seven.

“Don’t be surprised if by the middle of the next decade 20 to 25% of our production is in this short-cycle shale and tight activity,” Chevron chairman and CEO John Watson said.In the Permian Basin, Chevron says it has 1,300 drilling locations that can make a 10% return at US$40 oil; at US$50 oil, 4,000 locations can turn a profit; at US$60, 5,500 locations. And that is just assessing a third of its portfolio there.

It expects to drill 175 wells this year with seven operated rigs and nine non-operated rigs. By 2020, the company projects it could pump up to 350,000 bpd out of the Permian, up from its current 125,000 bpd.

SAN ANTONIO EXPRESS NEWS (US), March 8, 2016

Chesapeake said to weigh sale of assets in Oklahoma Stack region Chesapeake Energy Corp is weighing a sale of some of its holdings in an oil-soaked patch of shale in Oklahoma known as the Stack, as the natural

gas giant unloads assets to pay down debt, according to people familiar with the matter. The Oklahoma City-based company recently interviewed advisers to oversee a potential sale, said the people, who asked not to be identified because the matter is not public.

It has also held informal talks with potential buyers, they said.

The slice of its holdings in the Stack it is considering selling could fetch US$300-700 million, one of the people said. The company has not retained an adviser yet and could still opt against a sale, this person said.

The Stack and another Oklahoma oil field called the Scoop are two of the best places in the US to drill for oil right now because producers can still make money despite low commodity prices. Gastar Exploration Inc and Vanguard Natural Resources have recently hired advisers to sell assets in the area.

Chesapeake, whose former chief executive and co-founder Aubrey McClendon died last week, has been selling assets and retiring bonds to lower its roughly US$10.7 billion of debt.

BLOOMBERG, March 9, 2016

Ed Reed, Editor, Africa Oil & Gas and LNG • Email: edreed@newsbase.com Richard Lockhart, Editor, Africa, Asia and Central Europe Power • Email: richardl@newsbaase.com Ryan Stevenson, Editor, Europe and Latin America Oil & Gas • Email: ryans@newsbase.com Ian Simm, Editor, Middle East Oil & Gas and MEA Downstream • Email: ians@newsbase.com

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