Thursday, 27 August 2015

Gulf of Mexico - stepping up to the challenges

by Elaine Reynolds

The full note is available here

The Gulf of Mexico benefits from a unique combination of factors that make it a particularly attractive region for major operators, with Shell, BP and Chevron holding substantial acreage. Companies operating in the area have access to potentially large resources together with the ability to hold large positions that gives them running room to grow, while the concentration of companies with interests in the region allows flexibility to farm in and out as necessary. The Gulf is close to a centre of excellence in a range of oilfield applications from seismic to drilling technologies, and also benefits from a well developed infrastructure. Together with the predictable fiscal regime and low tax rate of the US, this makes it a good place to replace reserves and grow production. The region is technically demanding which plays to the majors’ strengths, however US independents are also active in the region, with Cobalt and Anadarko holding key positions in the inboard Lower Tertiary.

Production from the Gulf of Mexico is set to reach a new peak of 1.9mboe/d in 2016.  Activity has returned to the region following the post 2010 Macondo slowdown, and will result in an expected 18% production increase between 2014-2016 as new developments come online. Since late 2014 the Jack/St Malo, Tubular Bells, Lucius and Hadrian South developments have all commenced production, while Lower Tertiary exploration continues to throw up new discoveries, most recently in Chevron’s  Anchor discovery announced in January 2015.

Beyond 2016 however, production is currently expected to remain relatively flat as existing fields decline and the rate of start-ups falls from 15 in 2014-2016 to 8 between 2017 and 2020. Although the overall rig count in the Gulf of Mexico has dropped in the wake of lower oil prices, the deep water rig count has remained resilient, with jack up rigs bearing the brunt of the cuts. Activity does however seem to be prioritising appraisal and development, with only five rigs drilling exploration wells compared to fourteen a year ago.

Given the long lead times required to progress a project from prospect to development in the region, together with long production profiles, we expect activity to continue in the near term as operators focus on maintaining their long term outlook while looking to reduce costs. For example, Shell’s 175,000 boepd Appomatax development was given the go ahead in June 2015 having achieved cost reductions of 20%, and is expected onstream in 2020. BP is aiming for a final investment decision on its Mad Dog 2 project by end 2015/early 2016, and is now working with a reworked project cost of $10bn, significantly lower than its 2011 estimate of $22bn. And it isn’t only the majors that are continuing to invest in the region. US Independent Cobalt recently increased its stake in the Goodfellow prospect from 29.2% to 47% where it is now the operator. The company believes that costs will come down in alignment with the price environment, maintaining the attractiveness of its discoveries in the inboard Lower Tertiary.

Beyond cutting costs, companies will also need to keep innovating if they are to grow production into the next decade.  To achieve this, we see a continuing focus on developing new technologies to improve the recovery factor in the Lower Tertiary and in extending the HP/HT operating limits beyond the 15,000psi and 2500F that is currently feasible. Initiatives to tackle these issues include BP’s Project 20K and Statoil’s ‘Unlocking the Paleogene’, while new ownership structures such as the 2015 alliance between BP, Chevron and ConocoPhillips to develop the Gila and Tiber fields are designed to combine expertise and share costs in order to unlock further resources. Beyond these initiatives, the recent deepwater discoveries in the Mexican waters of the Perdido Fold Belt could point to the opening up of the next area of the Gulf for growing reserves.

Thursday, 6 August 2015

Genel Interims

by Will Forbes

This is the first interim results statement under Genel’s new management, with a new CEO and CFO taking the reins. In the near-term, we expect them to  focus on operational delivery in Kurdistan rather than seeking expansionist acquisitions in/outside the core area.

Genel’s interims add only incrementally to the overall story. Revenue, production and capex guidance all remain unchanged and operations at the fields continue, safe from ISIS. The company has disclosed capex estimates for the Miran/Bina Bawi gas condensate development, which highlights the very low development costs that KRG-focused projects benefit from. Upstream full life costs are estimated at less than $2/boe, with additional midstream capex (of $2.5bn) expected to be funded/managed by the KRG. These are extremely low by global benchmarks and underline the appeal of Kurdistan operations in a $50/bbl world.

Given the KRG statement a few days ago on starting payments to contractors (see our previous blog post here), the next few months will hopefully see positive news. Should the payments start in September (and ramp up in early 2016) as promised, we should see a marked increase in interest for Genel, DNO, GKP and others as they get paid for their production and start to recoup past profits (the Genel net KRG receivable alone now stands at $378.4m). The lack of payments visibility has been a major obstacle to the long-term story for contractors and the KRG. Once cash is flowing, the companies can start to invest more materially in other projects (for Genel this includes at Peskabir, Ber Bahr and Chia Surkh) where discoveries await appraisal and development.

African exploration has taken a back seat as expected, with relinquishment of Juby Maritime and studies continuing on the other two licences (Mir Left and Sidi Moussa). Somaliland remains a longer-term play (one we remain positive on), Ethiopia has a drill-or-drop decision due in January 2016 and the 24% interest in Cote D’Ivoire is under consideration for a farm-down before a commitment well in 2H2015.

Monday, 3 August 2015

Kurdistan ~ payments coming

by Will Forbes

The singularly most important concern for investors in Kurdistan-based companies over recent times has been the ability of the contractors to get paid on a timely basis for their production, and to a lesser extent, to recover back payments owed. This has taken a further step forward today with the publication of a statement from the MNR.

The full text of the statement is at the bottom of the post, but the important section to our minds is

"[t]herefore, from September 2015 onwards, the KRG will on a monthly basis allocate a portion of the revenue from its direct crude oil sales to the producing IOCs, to cover their ongoing expenses. Furthermore, as export rises in early 2016, the KRG envisages making additional revenue available to IOCs to enable them to begin to catch up on the past receivables due under their production sharing contracts."

A clear statement of intent from the KRG is extremely welcome, and shares in Kurdistan-based companies have all jumped today in trading. While the move to start compensating companies for back payments in early 2016 is very positive, this still leaves uncertainty for the period from September until then.  

When the KRG refer to covering "ongoing expenses", does this mean (i) just opex (ii) opex and in-country G&A (iii) opex, G&A and debt payments (iv) other? Obviously inclusion of debt payments would be more material, especially for Gulf Keystone, which does not have the cash piles that DNO and Genel enjoy (although all three have made efforts to support cash inflows through domestic sales). Non-producers such as Oryx, WesternZagros and ShaMaran should also benefit as it becomes clearer that funds invested in development will see a clear path to monetisation through sales.

In the meantime, we would expect that each are being paid regularly (GKP receives monthly payments under a direct contract with a domestic offtaker currently). 

We'll hear more at results announcements (in chronological order):
GENL - Q215 results - August 6th
DNO   - Q215 results - mid August
Oryx   - Q215 results - mid August
WZR   - Q215 results - August 13th
SNM   - Q215 results - August 14th
GKP    - H115 results - August 27th

We look forward to clarification on this point in time.


Statement by Ministry of Natural Resources regarding the producing International Oil Companies (IOCs) in the Kurdistan Region

From September 2015 onwards, the Kurdistan Regional Government (KRG) will on a monthly basis allocate a portion of the revenue from its direct crude oil sales to the producing international oil companies (IOCs), and as export rises in early 2016, the KRG envisages making additional revenue available to IOCs.

At the start of 2015, the KRG reached a deal with the federal government in Baghdad to export crude oil in exchange for regular payments of the Region’s 17% revenue entitlement. The arrangement was enshrined in the 2015 federal Iraqi budget.

The KRG recognizes the spirit of cooperation in which the budget deal was struck with the federal government and it remains determined to build on such progress, and through dialogue and discussion to reach a lasting agreement with Baghdad on all outstanding issues relating to oil and gas and revenue sharing.

The KRG has also been pleased with the level of technical cooperation on the ground from federal government entities such as the North Oil Company (NOC) and SOMO. The KRG will continue to facilitate oil export from NOC-operated fields in Kirkuk via the KRG’s pipeline network to Turkey.

However, due to a number of factors, the federal government has to date been unable to provide the Kurdistan Region with its monthly budgetary dues. As a result, the KRG has been obliged to introduce direct crude oil sales from Ceyhan to help pay Kurdistan Region’s governmental salaries, maintain vital government services, and of course, pay the Peshmerga and other security forces who are fighting Islamic State terrorists.

Although the revenue gained from direct sales is still below Kurdistan’s 17% share of the federal budget, it is significantly higher than the amount the federal government was able to allocate to the KRG on a monthly basis.

In this regard, the KRG acknowledges and appreciates the economic contribution to the Kurdistan Region made by the producing IOCs and their success in raising oil export from Kurdistan to record levels. They have demonstrated their commitment to the people of Kurdistan at a time when the Region has been fighting terrorism, enduring a budget shortfall from the federal government in Baghdad, and shouldering the social, political and economic burden of an influx of 1.8 million refugees and internally displaced people.

The KRG also recognizes the patience of the producing IOCs, which, despite receiving hardly any payments for their crude oil production since May 2014, have maintained operations and have continued to invest to support Kurdistan’s crude oil export.

Crude oil export is the principal revenue earner for the Kurdistan Region. But, it is also recognized that it is difficult for the IOCs to sustain oil export at its current levels, let alone increase it as planned, without receiving their financial dues.

Therefore, from September 2015 onwards, the KRG will on a monthly basis allocate a portion of the revenue from its direct crude oil sales to the producing IOCs, to cover their ongoing expenses. Furthermore, as export rises in early 2016, the KRG envisages making additional revenue available to IOCs to enable them to begin to catch up on the past receivables due under their production sharing contracts.