Market Update: Oil & Gas - June 2016

Market Update: Oil & Gas - June 2016

Focus on opening licenses


Focus on opening licenses

Global oil price benchmarks have experienced a rally over the last couple of months. NYMEX WTI and ICE Brent contracts temporarily passed the psychologically potent US$50 mark, however it appears now that the surge has run out of steam. In mid-June oil prices dipped below US$50. A strong US dollar and the ambiguity surrounding Brexit have shaken global markets and commodity bulls.


NYMEX near-month Henry Hub natural gas futures contracts have risen sharply in June, breaking US$2.50 per MMBtu. Warm weather in North America, combined with a record low number of working rigs have contributed to upwards price pressure. Looking ahead, numerous countries are turning towards gas as part of their future national energy framework and production declines are expected as the long term natural gas prices grow considerably.


The BP 2016 statistical review highlighted the vast energy consumption of the world. In light of the central role fossil fuels will play, particularly oil which remains the leading fuel (accounting for 32.9% of global energy consumption, and gaining market share for the first time since 1999) and volatile price movements, this month’s article addresses what licensing reforms national governments are pursuing to invigorate their upstream activity.

Norway offers prospective new Arctic acreage

In May, the Ministry of Petroleum and Energy (MPE) issued an offer of new production licenses in the 23rd licensing round of the Norwegian continental shelf. 13 companies have been offered 10 production licenses, including Statoil, Lundin, DEA and Chevron.


For the first time since 1994, new exploration acreage has been made available to the industry in the southeastern Barents Sea. The areas awarded are important in the search for greater geological knowledge and understanding of the Barents Sea and for the benefit of further exploration of the area.


With several postponed projects already identified and resource estimates in excess of one billion barrels, success in the Southeast Barents Sea could be the opening of a significant new oil and gas region in Norway.


"Industry players were attracted by large prospects and the refund system for exploration costs under the Norwegian petroleum tax system. The authorities have prepared binding work programs that include a requirement for four exploration wells within three years in the three production licenses in the Southeastern Barents Sea. Potentially the first exploration well is expected to be drilled as early as 2017."

– Per Daniel Nyberg, Partner, KPMG Law Advokatfirma AS, KPMG in Norway

East Africa’s new interest in exploration

Due to prevailing market conditions, there has been a slowdown in activity in the East African region for the first half of 2016. We expect that two (2) to three (3) wells will be drilled along the Tertiary Rift basin for the rest of 2016. The looming question remains how and when the development of existing discoveries both onshore and offshore would take place under current economic conditions. While most analysts believe that the East Africa projects are still viable, the expectation is that most projects will be delayed.


In Kenya, following a set of relinquishments that freed up new acreage, the Ministry of Energy and Petroleum gazetted a new oil block map with 63 areas. The new map avails 17 new blocks from the previous set of 46. There is every indication that the Ministry of Electricity and Energy (MoEP) will be conducting direct negotiations for the unlicensed blocks. With the new code on petroleum exploration and production expected later this year, the MoEP hopes to attract new interest in exploration activity.


Earlier this quarter, the Governments of Kenya and Uganda announced that they will be developing separate export pipelines. The Government of Kenya is now seeking consultants to conduct the FEED for the export crude pipeline from the oilfields in Lokichar to Lamu Port. In the interim, there are short term plans to rail/truck crude from Lokichar to Mombasa as early as this year as part of market testing.


Plans to construct the Uganda-Tanzania pipeline that will traverse central Tanzania to Tanga Port are underway. Announcements by both governments have stated that construction should start as early as August 2016 and take three years to complete. If this can be achieved, Uganda aspires to have first oil as early as 2020. Given recent decisions on the route-to-market, issuance of long awaited production licenses that will signal the next stage in development of assets in the Albertine Graben should be expected soon. Exploration licensing activity in Uganda has remained quiet, however, with results from the licensing round that was concluded in 2015 are still awaited. Undoubtedly, a volatile and depressed market had an impact on the responses that were received, as only seven of the 16 firms who were provided with bid documents submitted final proposals to the Government of Uganda.


"Like its neighbours, Tanzania E&P activity has slowed. In addition to uncertain economic conditions, the adoption of a new petroleum law and election of a new government at the start of 2016 contributed to limited new activity. Market players have been observing closely how the new code will be administered and the approach that the new Government will take towards development of the oil and gas sector. With the huge exploration phase for gas discoveries over, the market is awaiting development projects to be sanctioned. There is, of course, anticipation that the Shell/BG merger will be finalized with Government of Tanzania soon and the direction for future projects clarified thereafter."

Jean Githinji, Senior Manager, Energy and Natural Resources, KPMG in Kenya

Structural Change in Indian Energy Reform

Earlier this year, the Modi government instituted and implemented significant reforms to the fiscal regimes of India's energy industry. The previous policy, called New Exploration and Licensing Policy (NELP), originated in the late 1990s, and was paired with an ambitious vision for the exploration of India's 3.14 million square kilometres of potential oil and gas fields.  Despite the nine rounds of NELP in which 254 blocks were awarded, more than 40% were relinquished, with only eleven final conversions from discovery to production. The revised policy, aptly named “HELP” (Hydrocarbon Exploration Licensing Policy), sees a structural shift from a production/profit sharing approach to one of revenue sharing.


"With a degree of cautious optimism, HELP appears to set India back on track to address its significant dependence on foreign oil imports to meet its fast-growing demand. The overall reduction in royalties, together with a graded approach to counter-incentivise difficult and/or technically advanced projects should promote greater levels of interest by energy companies. The single license allowing coverage of multiple forms of energy may also provide real optionality for large diversified energy firms. While most E&P firms will bemoan the shifted cost recovery component, it opens the door for greater levels of productivity innovation."

Oliver Hsieh, Associate Director, Commodity & Energy Risk Management, KPMG in Singapore

Analyst estimates: oil

  2016 2017 2018 2019
April Avg 42.0 55.9 71.6 76.1
May Avg 42.1 56.6 71.6 75.4
April Median 42.8 55.0 70.0 75.0
May Median 42.7 55.0 70.0 75.0

Analyst estimates: gas

  2016 2017 2018 2019
Min 2.1 2.4 2.9 3.2
Average 2.3 3.0 3.3 3.5
Median 2.3 2.9 3.3 3.5
Max 2.8 3.5 4.0 4.0
  2016 2017 2018 2019
April Avg 2.3 3.0 3.3 3.5
May Avg 2.3 3.0 3.3 3.5
April Median 2.3 2.9 3.3 3.5
May Median 2.3 2.9 3.3 3.5

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