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16/03/2015by EOS Intelligence EOS Intelligence No Comments

Russia’s Energy Economy Sanctioned

A host of countries are of the view that Russia is intentionally trying to destabilize Ukraine by allowing infiltration of arms and ammunitions to support Ukraine’s separatist groups. These countries also believe that Russia desires Ukraine to be a part of the newly formed Eurasian Union and be in its circle of influence. This is pinching more to the western group of countries because they, on the other hand, want to integrate Ukraine with the West and make it a member of NATO. Conflicting interests have resulted in the infliction of sanctions from both sides, Russia being the bigger victim.

In order to dilute Russia’s efforts towards annexing Ukraine, western countries imposed sanctions on Russia which initially followed a route of barring entry of people close to the Russian leadership and blocking their assets in those countries, but this strategy proved futile. The result was a series of new sanctions aimed at Russia’s various sectors in an attempt to further pressurize the country by slowing down its economic growth and deteriorating its investment atmosphere.

The latest series of sanctions (those released in July and September 2014) were articulated to weaken Russia’s economy by mainly influencing oil production and its exports (in 2013, exports constituted 28.4% of Russia’s nominal GDP, of which oil and natural gas exports had a share of 68%).

Major Russian energy giants such as Rosneft (integrated oil company majorly owned by the Government of Russia), Transneft (world’s largest oil pipeline company), Lukoil (Russia’s second largest oil company), and Gazprom Neft (fourth largest oil producer in Russia) were directly brought under the purview of sanctions.

The ‘energy sanctions’ prohibit western companies to share energy technologies and invest capital in any Russian offshore oil-drilling projects based out of the Arctic regions, Russian Black Sea, and western Siberia’s onshore. In addition to technology constraint, western companies are debarred from financing Russia’s key state-owned banks for more than 90 days in order to build up financial pressure on Russian energy companies indirectly.

Rosneft and ExxonMobil’s Discovery of Oil at the Universitetskaya-1 Well

One of the major projects under the Rosneft and ExxonMobil partnership was to discover oil and gas reserves in Kara and Black Seas through a joint venture established in 2012. The two companies had also agreed on other projects such as an attempt to conquer the Arctic region’s oil and gas reserves through establishment of the Arctic Research and Design Center for Continental Shelf Development (2013), understand feasibility of developing a LNG facility in Russia (2013), and a pilot project for tight oil reserves development in the shale basin of Western Siberia (end of 2013). Talking about some hard cash involved in research and development activities, Rosneft invested US$250 million while ExxonMobil gambled US$200 million.

In September 2014, the two companies announced their success at discovering oil at the Universitetskaya-1 well in the Kara Sea which became Russia’s second offshore Arctic project. This discovery was a big finding and they initiated drilling activities quickly through the West Alpha rig (originally owned by Seadrill subsidiary of North Atlantic Drilling but under a contract with ExxonMobil till July 2016). Till this time, the partners were under the assumption that they won’t be affected by western sanctions imposed on Russia but to their disappointment, the new sanctions restrained ExxonMobil to cooperate (restricted energy technology transfer) with Rosneft on this project any further. To their dismay, drilling came to a halt in October 2014 as Rosneft could not utilize ExxonMobil’s West Alpha rig.

Rosneft is presently on a lookout for a new rig managed by companies located in the East, China, or South Korea. An attempt to find a new rig and then adjust it at the Kara Sea’s well site is going to be a enormous task and expected to delay things at least till mid-2016. Meanwhile, China (through Honghua Group, for instance) is strengthening its chances of getting positioned as a substitute provider of energy sector technology to Russia, but it is doubtful if it will be able to match the capabilities of western companies. It will be a humongous challenge for Rosneft to find a rig provider which has the expertise to ensure safety operations in such a tough part of the world.

The objective of recent western sanctions appears to not only limit present oil production but harm the future of Russia’s energy sector. 90% of current oil production in Russia comes from conventional oil fields such as West Siberian brownfields which do not require highly advanced western energy technologies, but the problem is that these fields are depleting rapidly. Russia, therefore, faces an urgent need of finding new oil sources to retain its position of being one of the main players in the world’s energy sector (3rd largest crude oil producer – 10.44 million bbl/day, 2013; 2nd largest crude oil exporter – 4.72 million bbl/day, 2013; 2nd largest natural gas producer – 669.7 billion cu m, 2013; largest natural gas exporter – 196 billion cu m, 2013).

Delay of the Rosneft project is slowly fading Russia’s aspirations of increasing oil output as tapping of Universitetskaya well’s oil reserves (estimated to be up to 9 billion barrels) could have added approximately US$900 billion to the government coffer over the next 10-12 years. Similar projects might have led to discovery of new oil reservoirs in the Kara Sea where oil reserves are estimated to be around 13 billion tons (way more than Gulf of Mexico’s and Saudi Arabia’s independent reserves). As per Merrill Lynch, Russia might lose US$500 billion of direct investment and US$26-65 billion of budget revenue during the next 10 years, as energy investors from other parts of the world also become uncertain of Russia’s economic stability.

If western sanctions remain at this level, it would make it difficult for Russia to discover and exploit oil resources in areas like Arctic, as it is primarily western companies (BP, ExxonMobil, Shell, etc.) which have the required expertise and technology to do so. Since the Russian energy sector almost single-handedly drives the country’s economy through exports, impact of the western sanctions, which is already impacting various facets of Russian economy, will be felt heavily in the long-term.

09/10/2013by EOS Intelligence EOS Intelligence No Comments

Mexico’s Energy Reforms – The Balancing Act

Mexico’s president Enrique Peña Nieto seems to be a man on a mission. Since his term started in July 2012, he has worked towards weeding out the inefficiencies and monopolies plaguing several sectors in Mexico and has received much appreciation for that. But this time, has he gone too far? With Pemex being Mexico’s much-guarded jewel, the attempt to bring in private investment seems much more ambitious than the previously introduced overhaul in the labor laws and telecom sectors.

President Enrique Peña Nieto took a bold step in June 2013 by reforming the country’s quasi-monopolistic telecom sector, voicing his seriousness about bringing real changes to Mexico’s economy by tackling inefficiencies and welcoming foreign investment. While the results of the telecom reforms remain yet to be seen, he has moved to an even more ambitious project – to allow foreign investors to enter Mexico’s energy sector, which has been closed to private participation since 1938.

Pemex, which is the world’s 10th largest oil producer, has been a government monopoly for over 75 years. The country’s oil output has been falling since 2004, as a result of its inability to explore unconventional (deeper) sources driven by lack of investment and outdated technology. It is expected that if further exploration is not undertaken, Mexico will become a net energy importer.

To combat this, the president sent a bill to congress that aims to end the state’s 75-year old monopoly over the energy sector. According to the proposed bill, private oil exploration companies would gain access to the Mexican oil reserves under profit-sharing contracts for upstream oil and gas development (exploration and production).The bill also cover reforms regarding the restructuring of Pemex to make it more transparent and accountable.

The bill also encompasses reforms in the electricity market, wherein it looks to allow private participation in electricity generation, while maintaining transmission and distribution under state control. While few amendments to partially allow private participation in the electricity sector have been introduced in the past, they have left much to be desired. The current amendments only allow private companies to generate or import electricity for self-supply or to undertake cogeneration. In addition, Independent Power Producers that produce less than 30 MW of electricity and exclusively sell to the state-owned Comision Federal de Electricidad (CFE) or export to other countries are allowed to generate electricity under the existing amendments. As against the state-owned CFE choosing the players from which it would like to purchase electricity, these reforms would boost competitiveness in the sector by establishing an independent system wherein power generator participation would be decided based on lowest generation costs.

These reforms are expected to boost investments in the oil sector by about US$10 billion per annum. Further, an influx of investments is expected to help Pemex offset its current US$60 billion debt. In addition, they are also expected to bring down electricity prices in the country (which are 25% higher than that in the USA), boost employment, and strengthen the participation of renewable energy in the energy mix primarily underpinned by private participation in electricity generation.

While these reforms spell out immense benefits for Mexico’s economy, their implementation and outcome are a different story altogether. The Mexican population that applauded and supported the government through the education and telecom reforms, is now much less convinced regarding this arm of reforms. Mexicans have for long considered Pemex to be symbol of their national independence and the oil found beneath Mexico’s soil and water, a part of their national heritage. Moreover, March 18th – the day when president Lazaro Cardenas nationalized the country’s oil industry in 1938 is celebrated proudly as a national holiday. Unlike the case of the previous successful reforms, the government faces much opposition from the leftist groups. However, with full support for the reforms from Peña Nieto’s Partido Revolucionario Institucional (PRI) and the Partido Acción Nacional (PAN) parties, which control more than two-third seats in congress, there are strong chances of this proposed law becoming a reality.

The bill also falls short from the point of view of leading global oil exploration companies. While the reforms give foreign companies access to extract and exploit oil, share risks and profits, they would not be able to have a share in the resources. This makes the Mexican agreements far less lucrative for large oil players when compared with proposals offered by neighboring oil-producing countries, such as Brazil and Columbia, which allow the producers to own a certain amount of oil in their books. Thus, although leading oil companies, including Shell, Chevron, BP, and Exxon Mobil have welcomed the wave of reforms in Mexico, their participation will largely depend on the nature and attractiveness of the final profit-sharing agreements.

Therefore, while these reforms look at altering history, it remains extremely premature to predict their outcome. These reforms run the risk of offering ‘too much’ from the eyes of the Mexican public or ‘too little’ from the point of view of resource-hungry energy companies and can only be a success if they manage to find the perfect balance between both the stakeholders. Thus, the key question that remains is not regarding the approval of reforms, but if these reforms will actually manage to stir foreign investment into the Mexican oil sector.

01/04/2013by EOS Intelligence EOS Intelligence No Comments

Will Shale Gas Solve Our Fuel Needs for the Future?

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At first glance, shale gas might look too good to be true: large untapped natural gas resources present on virtually every continent. Abundant supplies of relatively clean energy allowing for lower overall energy prices and reduced dependence on non-renewable resources such as coal and crude oil. However, despite this huge potential, the shale gas revolution has remained largely limited to the USA till now. Concerns over the extraction technology and its potentially negative impact on the environment have hampered shale gas development in Europe and Asia on a commercial scale. However, increasing energy import bills, need for energy security, potential profits and political uncertainty in the Middle East are causing many countries to rethink their stand on shale gas extraction development.

How Large Are Shale Gas Reserves And Where Are They Being Developed?

An estimation of shale gas potential conducted by the US Energy Information Administration (EIA) in 2009 pegs the total technically recoverable shale gas reserves in 32 countries (for which data has been established) to 6,622 Trillion Cubic Feet (Tcf). This increases the world’s total recoverable gas reserves, both conventional and unconventional, by 40% to 22,622 Tcf.

Continent	Shale Gas Reserves and Development
North America	Technically Recoverable Reserves: 1,931 Tcf Till now, almost whole commercial shale gas development has taken place in the USA. In 2010, shale gas accounted for 20% of the total US natural gas supply, up from 1% in 2000. In Canada, several large scale shale projects are in various stages of assessment and development. Despite potential reserves, little or no shale gas exploration activity has been reported Mexico primarily due to regulatory delays and lack of government support.
South America	Technically Recoverable Reserves: 1,225 Tcf Several gas shale basins are located in South America, with Argentina having the largest resource base, followed by Brazil. Chile, Paraguay and Bolivia have sizeable shale gas reserves and natural gas production infrastructure, making these countries potential areas of development. Despite promising reserves, shale gas exploration and development in the region is almost negligible due to lack of government support, nationalization threats and absence of incentives for large scale exploration.
Europe	Technically Recoverable Reserves: 639 Tcf Europe has many shale gas basins with development potential in countries including France, Poland, the UK, Denmark, Norway, the Netherlands and Sweden. However, concerns over the environmental impact of fracturing and oil producers lobbying against shale gas extraction are holding back development in the region with some countries such as France going as far as banning drilling till further research on the matter. Some European governments, including Germany, are planning to bring stringent regulations to discourage shale gas development. Despite this, countries such as Poland show promising levels of shale gas leasing and exploration activity. Several companies are exploring shale gas prospects in the Netherlands and the UK.
Asia	Technically Recoverable Reserves: 1,389 Tcf China is expected to have the largest potential of shale gas (1,275 Tcf). State run energy companies like Sinopec are currently evaluating the country’s shale gas reserves and developing technological expertise through international tie-ups. However, no commercial development of shale gas has yet happened. Though both India and Pakistan have potential reserves, lack of government support, unclear natural gas policy and political uncertainty in the region are holding back the extraction development. Both Central Asia and Middle East are also expected to have significant recoverable shale gas reserves.
Africa	Technically Recoverable Reserves: 1,042 Tcf South Africa is the only country in African continent actively pursuing shale gas exploration and production. Other countries have not actively explored or shown interest in their shale gas reserves due to the presence of large untapped conventional resources of energy (crude oil, coal). Most potential shale gas fields are located in North and West African countries including Libya, Algeria and Tunisia.
Australia	Technically Recoverable Reserves: 396 Tcf Despite Australia’s experience with unconventional gas resource development (coal bed methane), shale gas development has not kicked off in a big way in Australia. However, recent finds of shale gas and oil coupled with large recoverable reserves has buoyed investor interest in the Australian shale gas.

What Are The Potential Negative Impacts Of Shale Gas Production?

Despite the large scale exploration and production of shale gas in the USA, countries around the world, especially in Europe, remain sceptical about it. Concerns over the environmental impact of hydraulic fracturing, lack of regulations and concerns raised by environmental groups have slowed shale gas development. Though there is no direct government or agency report on pitfalls of hydraulic fracturing, independent research and studies drawn from the US shale gas experience have brought forward the following concerns:

Will Shale Gas Solve Our Future Energy Needs?

Rarely does an energy resource polarize world opinion like this. Shale gas has divided the world into supporters and detractors. However, despite its potential negative environmental impact, shale gas extraction is associated with a range of unquestionably positive aspects, which will continue to support shale gas development:

Shale gas production will continue to increase in the USA and is expected to increase to 46% of the country’s total natural gas supply by 2035. USA is expected to transform from a net importer to a net exporter of natural gas by 2020.
Despite initial opposition, countries in Europe are opening up to shale gas exploration. With the EU being keen to reduce its dependence on imported Russian piped gas and nuclear energy, shale gas remains one of its only bankable long-term options. Replicating the US model, countries like Poland, the Netherlands and the UK are expected to commence shale production over the next two-five years and other countries are likely to follow suit.
Australian government’s keenness to reduce energy imports in addition to the recent shale gas finds has spurred shale gas development the country. Many companies are lining up to lease land and start shale gas exploration.
More stringent regulations from environment agencies are expected to limit the potential negative environmental impact of shale gas exploration.
Smaller energy companies that pioneered the shale gas revolution in the USA are witnessing billions of dollars worth of investments from multinational oil giants such as Exxon Mobil, Shell, BHP Billiton etc. are keen on developing an expertise in the shale gas extraction technology. These companies plan to leverage this technology across the world to explore and produce shale gas.The table below highlights major acquisitions and joint venture agreements between large multinational energy giants and US-based shale gas specialists over the last three years.

Major Deals in Shale Gas Exploration

Company	Acquisition/Partnership	Year	Investment
Sinopec	Devon Energy	January 2012	USD 2.2 billion
Total	Chesapeake Energy	January 2012	USD 2.3 billion
Statoil	Brigham Exploration	October 2011	USD 4.4 billion
BHP Billiton	Petrohawk	July 2011	USD 12.1 billion
BHP Billiton	Chesapeake Energy	February 2011	USD 4.75 billion
Shell	East Resources	May 2010	USD 4.7 billion
Exxon Mobil	XTO Energy	December 2009	USD 41.0 billion
Source: EOS Intelligence Research

Shale gas production is expected to spike in the coming three-five years. Extensive recoverable reserves, new discoveries, large scale exploration and development and technological improvement in the extraction process could lead to an abundant supply of cheap and relatively clean natural gas and reduce dependence on other conventional sources such as crude oil and coal For several countries including China, Poland, Libya, Mexico, Brazil, Algeria and Argentina, where the reserves are particularly large, shale gas might bring energy stability.

The need for energy security and desire to reduce dependence on energy imports from the Middle East and Russia (and hence to increase political independence), are likely to outweigh potential environmental shortfalls of shale gas production, and some compromise with environment protection activist groups will have to be worked out. Though the road to achieving an ‘energy el dorado’ appears to be long and rocky, it seems that with the right governments’ support, shale gas could become fuel that could significantly contribute to solving the world energy crisis over long term.

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