Newsbase Global Energy Research Daily 14.01.16

Thursday • 14 January • 2016

Today’s coverage

v Novatek secures Chinese financing for Yamal LNG p2

v Kyiv slashes tax on gas production p3

v Oman budget lays out 2016 spending cuts p4

v Iran and Denmark strengthen ties, discuss turbine factory p5

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

Thursday • 14 January • 2016

Novatek secures Chinese financing for Yamal LNG Novatek, Russia’s largest independent natural gas producer, has managed to secure Chinese investment for the US$27 billion Yamal LNG project from China’s Silk Road Fund (SRF) THE company revealed last month it had signed a binding production technologies. On January 5, a note on the agreement to receive a 15-year loan of about 730 million website of China Insurance Regulatory Commission euros (US$793 million) from SRF. In return, the Chinese (CIRC) stated that over 40 asset managers and insurance company will take a 9.9% stake in the firms had established an investment w w w. N E W S B A S E . c o m 16.5 million tonne LNG project, which is vehicle, raising some US$6 billion currently under construction. for overseas energy and infrastructure “The signing of the binding agreement projects. According to the insurance for the sale of an equity stake in Yamal LNG regulator, some of this funding was is another important step in the execution earmarked for Yamal. of our long-term development strategy,” China’s CNPC is also partnered in China Oil & Gas Monitor Novatek CEO Leonid Mikhelson said. Wang the project with a 20% stake, which Click here to trial ChinaOil Yanzhi, president of SRF, also praised the it purchased in 2014. Following deal, noting that Yamal was moving ahead on schedule. completion of the transaction with SRF, the remaining Novatek has struggled to secure sufficient financing for equity will be divided between Novatek (50.1%) and the costly project. The Russian company and its partners France’s Total (20%). had indicated previously that they intended to borrow up Once operational, the Yamal LNG plant will process to US$20 billion from Chinese banks. This sum would gas from the Yuzhno-Tambeiskoye field, located on the have covered most of the project’s costs (so far, Russian northeastern section of the Yamal Peninsula. The field banks have offered to extend US$4 billion worth of loans is estimated to contain more than 900 billion cubic and USS$3 billion in banking guarantees to the group). metres of gas.n Receiving funds from European banks is also complicated by sanctions. Novatek is one of several Andrew Kemp, Editor, ChinaOil: Russian companies specifically targeted by the US China Oil & Gas Monitor, NewsBase Ltd. sanctions regime, which aims to restrict access to Western Any questions? Please get in touch capital markets and to prohibit the transfer of advanced Email: andrew.kemp@newsbase.com

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Thursday • 14 January • 2016

Kyiv slashes tax on gas production The Ukrainian parliament adopted a law on January 1 that will dramatically cut taxes on gas extraction, in a move aimed at revitalising the country’s upstream industry ACCORDING to the new law, companies will pay a rate The firm still has a US$270 million claim against Kyiv of just 29% for production from deposits at depths of being considered by international arbitration courts for 5,000 metres or less, instead of the previous 55%. Tax the alleged overpayment of taxes by its subsidiary Poltava on extraction from shallow deposits earmarked for supply Petroleum Co. (PPC). The arbitration court issued an to the residential sector has been lowered from 70% to interim award halting Kyiv’s collection of the rental fees in 50%. It will be reduced to just 29% from April 1.

July 2015, but the case is still to be heard by a tribunal Extraction from deposits that lie entirely hearing in July this year. w w w. N E W S B A S E . c o m at depths of more than 5,000 metres has JKX also faces discontent from its been lowered from 28% to 14%. second largest shareholder, Russian London-listed JKX Oil & Gas, which investment fund Proxima Capital, which is involved in upstream operations in JKX claims is trying to buy the company Ukraine and Russia, welcomed the without paying a premium. Proxima changes. The new law, the company said, wants to replace seven JKX board FSU Oil & Gas Monitor should help “restore the viability” of fresh members in response to a 90% fall in Click here to trial FSUOGM capital investments by independent gas JKX’s value over the last five years. On producers in Ukraine.

December 31, the JKX board said it considered Proxima’s Legislators approved the change on December 25 proposal “an attempt to seize control,” and believed such as part of tax reforms needed to avoid criticism from the board changes would “eliminate” corporate knowledge International Monetary Fund (IMF), lead financiers of a and experience.

US$40 billion bailout for Ukraine. Kiev adopted higher In a circular published January 11, Proxima urged royalties for deposits in 2014, in what it initially said shareholders to back its proposal at a meeting scheduled would be a temporary measure to increase government for January 28. Proxima said the board had “failed revenues to pay for the costly, ongoing conflict with proto deliver” on their promises, and had “only achieved Russian rebels in the east of the country. consistency in its failure to deliver.” The circular praises Further pressure was heaped on independent the proposed board members’ track record as “excellent”, producers by Kiev’s decision to restrict industrial gas sales telling shareholders the investment fund believes its to protect supplies for households. ~20% stake could “be worth several multiples” of its JKX said the previous changes had damaged current value.n “economic parameters” and followed Chevron, Royal Dutch Shell, Exxon and Eni in suspending its Ukrainian Joseph Murphy, Editor, FSUOGM: investments in January 2015. But last week, the Former Soviet Union Oil & Gas Monitor, NewsBase Ltd. company announced it would press ahead with drilling in Any questions? Please get in touch Ukraine now that taxes had been reduced.

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FSUOGM

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Andrew Kemp, Editor, ChinaOil • Email: andrew.kemp@newsbase.com Joseph Murphy, Editor, FSUOGM • Email: josephm@newsbase.com Ian Simm, Editor, DMEA • Email: ians@newsbase.com Andrew Dykes, Editor, REM • Email: andrewd@newsbase.com

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Thursday • 14 January • 2016

Oman budget lays out 2016 spending cuts Oman unveiled the 2016 state budget in early January, promising substantial reductions in spending achieved partly by the politically-fraught policy of slashing energy subsidies THIS was also aided by more conventional means of – according to the Finance Ministry’s statement. increasing the efficiency of both capital and current The latter intention was confirmed by the signature outlays. The cuts will nonetheless be coupled with a in December of contracts worth billions of dollars on the hefty fiscal deficit as a result of the expected continuing flagship project in the sultanate’s drive to develop a worldslide in revenues from crude exports – the source of more scale petrochemicals industry. Expenditure on oil and gas than 70% of government income despite intensifying production is due to be reduced by 14.8% from the actual diversification efforts. Muscat’s determination to maintain figure for 2015 to 1.79 billion riyals (US$4.65 billion) this income was demonstrated in a flurry of end-of– which Oil & Gas Ministry under-secretary Salim bin year contracting activity on major strategic economic Nasser al-Aufi insisted in December would be achieved development projects. by demanding efficiencies from contractors rather than by In contrast to last year’s deficit – the sacrificing major projects or significantly w w w. N E W S B A S E . c o m first for a quarter of a century and close to reducing output. double that projected 12 months ago – the The limited success of diversification shortfall is to be funded primarily through efforts is evident in the government’s revenue international rather than domestic borrowing, estimates for the year ahead, which anticipate as well as by drawing down reserves.

72% of total income being derived from Expenditure in 2016 is budgeted Downstream ME & Africa Monitor oil despite the price slump. Total projected at 11.9 billion riyals (US$30.9 billion), revenues of 8.6 billion riyals (US$22.3 billion) Click here to trial DMEA 15% less than planned last January are 25.9% lower than those foreseen in the and 11% below the actual spending in 2015 that the previous budget and slightly reduced from the 8.9 billion riyals government has provisionally estimated at 13.4 billion (US$23.1 billion) actually collected last year. riyals (US$34.8 billion). The Finance Ministry statement Hydrocarbons income is estimated at 6.15 billion laid out a series of measures aimed at trimming public riyals (US$16 billion) compared to the 9.16 billion riyals sector running costs – chiefly by removing lavish employee (US$23.8 billion) budgeted in 2015. This year’s assumed perks – adding up to a reduction of current spending by oil price was not disclosed, but with relatively constant ministries and government departments by 12% to 4.3 production the figure appears to be around US$50 per billion riyals (US$11.2 billion), or 36% of the total. barrel – US$25 per barrel less than the price used in A smaller financial saving will be achieved through 2015’s projections but nevertheless appearing optimistic the more dramatic policy shift of liberalising domestic fuel in the context of an official selling price for Omani crude of prices under a system similar to that implemented last less than US$30 per barrel in early January. year in the UAE, with prices set monthly by a government With the depth of the oil market plunge far outweighing committee with reference to prevailing international prices.

Muscat’s modest spending cuts, the government envisages The current global oil market weakness has rendered running a budget deficit of 3.3 billion riyals (US$8.6 billion) the sensitive move more politically-palatable across the this year, equivalent to 13% of GDP – lower than the actual region. As a result, the subsidy bill is projected to fall by 2015 figure of 4.5 billion riyals (US$11.7 billion), which almost 66% to 400 million riyals (US$1 billion) from 1.1 overshot projections by 2 billion riyals (US$5.2 billion) and billion riyals (US$2.9 billion). forced resort to high levels of domestic borrowing alongside Capital spending on “development projects” is to depletion of limited state reserves.n be cut by 18% to 1.35 billion riyals (US$3.5 billion) – apparently to be achieved by suspending “the award Ian Simm, Editor, DMEA: and execution of unnecessary or unimportant projects” Downstream ME & Africa Monitor, NewsBase Ltd. while proceeding with “projects of economic and Any questions? Please get in touch social significance” that contribute to economic growth Email: ians@newsbase.com

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Andrew Kemp, Editor, ChinaOil • Email: andrew.kemp@newsbase.com Joseph Murphy, Editor, FSUOGM • Email: josephm@newsbase.com Ian Simm, Editor, DMEA • Email: ians@newsbase.com Andrew Dykes, Editor, REM • Email: andrewd@newsbase.com

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Thursday • 14 January • 2016

Iran and Denmark strengthen ties, discuss turbine factory In early January, Iranian minster of energy Hamid Chitchian announced that his government would co-operate with its Danish counterparts to build new renewable generating capacity in the Islamic Republic ACCORDING to the minister, plans also include the Its interest was apparent as far back as July 2015 when construction of a wind turbine manufacturing facility company spokesperson Michael Zarin told media that the in the region. company was eager to explore the Iranian market, adding Chitchian told local reporters of the agreement that 37 of its turbines have already been installed there. following a meeting with Danish foreign Much of the capacity installed in w w w. N E W S B A S E . c o m affairs minister Kristian Jensen. Talks Iran is based on Vestas’ 660-kW turbine between the two centred on Danish variant, components of which were made investment in the country’s water locally by the Sadid Industrial Group under and power industries, and included a license. Vestas would be no doubt keen to delegation of 58 Danish companies keen tap into a market desperate for expertise to do business in post-sanctions Iran. and greater generating capacity, whilst Renewable Energy Monitor According to a summary of the visit preserving its newer IP. Click here to trial REM on the Iranian Ministry of Foreign Affairs Indian turbine manufacturer Suzlon has website, “Grounds for expansion of cooperation in energy, also announced similar intentions once sanctions are lifted. agriculture, transportation and renewable energies are well Under its 6th Development Plan, Iran is looking prepared, [Jensen] said.” to install 4,500 MW of wind capacity and 500 MW Chitchian told reporters that: “The Danes have of solar by 2025, as well as explore the potential for offered investment for the construction of a wind-turbine greater geothermal generation. At present, less than 1% manufacturing factory in Iran so that they can export their of its energy mix is sourced from renewables, though products via our country to the region,” as quoted by the the Renewable Energy Organisation of Iran (SUNA) has IRNA news agency. suggested there are up to 15 GW of wind resources in The prime candidate for investment in a turbine areas such as Manjil, Zahedan, Zabol, and Nishapur.n facility would be Denmark’s Vestas Wind Systems, which confirmed that its representatives were included in the Andrew Dykes, Editor, REM: Danish delegation, but would not comment further. With Renewable Energy Monitor, NewsBase Ltd. estimated revenue for 2015 of around 8 billion euros Any questions? Please get in touch (US$8.65 billion), it also has cash to spend.

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REM

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Andrew Kemp, Editor, ChinaOil • Email: andrew.kemp@newsbase.com Joseph Murphy, Editor, FSUOGM • Email: josephm@newsbase.com Ian Simm, Editor, DMEA • Email: ians@newsbase.com Andrew Dykes, Editor, REM • Email: andrewd@newsbase.com

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