New base 734 special 23 november 2015

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NewBase 23 November 2015 - Issue No. 734 Edited & Produced by: Khaled Al Awadi

NewBase For discussion or further details on the news below you may contact us on +971504822502, Dubai, UAE

UAE: Clean technology start-up accelerator launches in Abu Dhabi

Amid efforts to reduce the UAE economy’s reliance on oil, Abu Dhabi is hosting a portal to help clean technology entrepreneurs to commercialise their ideas.

As part of the country’s Innovation Strategy, Masdar, BP and Masdar Institute yesterday launched The Catalyst, a US$5 million technology start-up accelerator focusing on sustainability and clean

technology. It offers individual awards of up to $50,000 over a six-month period to help new companies.

Successful applicants will take part in a series of competitions to whittle down participants, including hackathons and innovation boot camps. “The Catalyst is the vision to cultivate a culture of innovation,” Ahmed Belhoul, Masdar’s chief executive, said yesterday. “It provides the public with a platform, a bottom-up approach.”

Mr Belhoul noted that the business climate in the UAE was difficult for start-ups. “We’re still lagging behind other countries when it comes to the participation of start-ups in the economy,” he said.Khaldoon Al Mubarak, the group chief executive of Mubadala, said Masdar had grown from a “bold idea into a commercially viable renewable energy company”.

“We want to leverage our own experience, as well as our unique infrastructure and assets at Masdar City, to create a platform for start-ups with similarly bold visions for sustainable technologies,” said Mr Al Mubarak.

The difference between The Catalyst and that of a business incubator overseen by the Khalifa Fund is that all applicants to The Catalyst must have a technological innovation centred on sustainability such as in energy, water and clean technology.

Abdulkarim Al Mazmi, the president and general manager for BP UAE, said its involvement in The Catalyst was to provide the $5m capital to help support start-ups.

“Funding is an aspect, but it’s about [encouraging] individual drive,” said Mr Al Mazmi. The award recipients will be given seed funding, training, mentoring and work space in Masdar City.




UAE powering ahead with solar energy By Zawya - Nada Al Rifai The United Arab Emirates is pushing ahead with renewable energy investments to lower its dependence on natural gas imports as declining solar prices make projects more feasible, analysts said. Last month, the UAE announced plans to invest USD 35 billion to diversify its energy resources for power generation. Energy Minister Suhail bin Mohammed al-Mazroui said the Gulf Arab state aims to decrease dependence on natural gas from around 100 percent of power generation now to 70 percent by 2021.

The UAE's largest push in diversified energy supplies has been its USD 40 billion investment in civil nuclear energy, with one 1.4-gigawatt reactor planned to come online each year between 2017 and 2020, according to a report by the International Renewable Energy Agency (IRENA) and Masdar Institute published in April, 'Remap 2020, A Renewable Energy Roadmap'. For renewable energy, solar power has been the primary focus due to cost and resource availability. According to the report, local solar photovoltaic module prices have fallen around 75 percent since 2008, while natural gas prices have been rapidly increasing. In January, Saudi Arabia's ACWA Power and Spain's TSK won the bid for the second phase of Dubai's Mohammed bin Rashid al-Maktoum Solar Park after offering the lowest ever recorded cost for solar power. "As soon as the vital information about solar competitive prices came from the market, the UAE tripled its renewable energy targets from 5 percent to 15 percent of its energy mix by 2030. And that's a sign that the stakeholders have taken stock of the new economic reality," Shihab El Borai, principal at PwC's Strategy&, told Zawya in a telephone interview. "The fact that solar energy makes economic sense now adds to the other targets set earlier on: to diversify the energy mix and reduce dependence on hydrocarbons , to introduce new technologies into the country and develop new skills," he added. More than 90 percent of the electricity produced in the UAE is generated by coal or gas-fired plants, and the UAE imports nearly all of its natural gas supply from Qatar under long-term contracts, according to Karen E. Young, senior resident scholar at the Washington-based Arab Gulf States Institute (AGSIW). "Energy independence, at least from Qatari natural gas, might be seen as both a political and economic objective," Young told Zawya in an email interview.




And solar technology is now being produced for a global market at comparable prices to traditional electricity plants, Young added, citing the recent pricing of Dubai's solar park. ENERGY REFORM One of the main challenges facing the Middle East renewable energy sector in general are price distortions and energy subsidies that make it difficult for stakeholders to make investment decisions. But the UAE has already moved to reform its energy subsidies system. In July, the UAE said it was shifting from a system of fixed, subsidised fuel prices to one of adjusting prices monthly in response to global trends. In January, Abu Dhabi emirate hiked electricity and water tariffs. Electricity tariffs vary by emirate and are also differentiated between UAE nationals and expatriates. In Abu Dhabi, tariffs have been raised to AED 21 fils per kilowatt-hour across all sectors, while in Dubai and the northern emirates, the electricity tariff is based on consumption levels, according to the IRENA report. Another challenge for large-scale solar projects in the region is the dust particles and humidity, but according to the IRENA report, research is being conducted to improve cleaning processes and surface-resistance to dust accumulation. Meeting the country's renewable energy targets will depend on government commitment to infrastructure investment, building new electricity plants and purchasing solar technology, according to Young. "The more difficult targets will be diminishing variation in delivery of electricity throughout the federation, especially electricity distribution in Northern Emirates like Sharjah," Young said. "Ironically, a continued downward trend in the price of oil could discourage government spending in all kinds of infrastructure investment, including solar power." The head of Dubai Electricity and Water Authority (DEWA) said in remarks published this month

that the standards, policies and regulations for solar energy use are ready for submission to the Dubai Executive Council, and that DEWA was now "going out strongly into the market". "This will boost confidence as declining solar prices make future projects more feasible," CEO Saeed Mohammed Al Tayer was quoted as saying in local media. The UAE could achieve at least 10 percent use of renewable energy in its energy mix by 2030, saving around USD 1.9 billion annually, according to a recent IRENA report. The country could also reduce CO2

emissions by 29 mega-tonnes per year, and reduce health and environmental costs by USD 1 billion-3.7 billion annually by 2030.




Hibiscus eyes Block 50 drilling in 2016 Written by Oman Observer

Malaysian independent exploration and production company Hibiscus Petroleum Berhad, which has an indirect stake in Masirah Oil Limited — the licensee for Block 50 offshore Oman — says it aims to commence drilling on this hugely promising concession off the Sultanate’s eastern seaboard during 2016.

The proposed move, according to the Kuala Lumpur-based company’s newly released 2014/2015 Annual Report, caps an important financial year that saw, on the one hand, the successful completion of a seismic acquisition programme, but was tempered, on the other, by a decision to ditch Extended Well Testing / Early Production activities in favour of a conservative appraisal approach.

Both initiatives — seismic acquisition and Early Well Testing — were intended to build on the ground breaking discovery of a new basin — the first offshore hydrocarbon find on Oman’s east coast in nearly three decades — in Block 50 early last year.

Hibiscus Petroleum says its strategy going forward is to “high-grade” its exploration assets in the Middle East, among other locations. At least one exploration/appraisal well is envisaged for drilling on Block 50 in Q1 2016, the company noted in its Annual Report.




A new 3D seismic survey commissioned by Masirah Oil Limited (MOL) in Block 50 late last year was completed in Q1 2015. Designed to increase its understanding of the geology around the GA South-1 discovery well, the survey was followed by fast track seismic interpretation and full processing.

Commenting on the significance of the seismic survey, Dr Kenneth Gerard Pereira, Managing Director, Hibiscus Petroleum, said: “Subsequently, Masirah has conducted full seismic interpretation work to identify and rank drillable prospects, with the intent to carry out a drilling programme in 2016.”

“We were hopeful of advancing the GA South-1 discovery to an Extended Well Test/Early Production activity as part of our commitment to gain a better understanding of the geology and petroleum system operating in the area but as oil prices edged lower, our partners in Masirah preferred to pursue a more traditional appraisal path,” Dr Pereira further stated in the company’s 2014/2015 Annual Report issued last week.

The joint venture Masirah Oil Limited acquired the licence for the 17,000 sq km Block 50 in an Exploration & Production Sharing Agreement (EPSA) signed with Oman’s Ministry of Oil and Gas in 2011. Hibiscus is a shareholder of Lime Petroleum Ltd which has a 64 per cent equity interest in Block 50 whilst Petroci Holding from the Ivory Coast owns the remaining 36 per cent.

In addition to its role as an investor, Hibiscus is also the Project Manager of the Block with responsibility for all drilling activities, ranging from the design and planning of the exploration wells to the safe execution of the offshore operations.




Qatar: Maersk Oil produced 1.5bn barrels from Al Shaheen field Gulf Times + NewBase

Utilising its technology and experience, Maersk Oil Qatar (MOQ) has been able to produce more than 1.5bn barrels of oil from the offshore Al Shaheen oilfield and make a significant economic contribution to Qatar, said its managing director Lewis Affleck.

Affleck was speaking at the ‘HEC Paris Guest Lecture’ series recently, sharing his extensive experience in the Oil & Gas industry with master degree students and alumni at the prestigious business school’s Doha campus.

As the largest offshore oil producer in Qatar, MOQ has a “unique understanding” of Al Shaheen, which is one of the world’s mos t complex oilfields, he said.

“In support of realising Qatar’s National Vision 2030 and in close partnership with our partner Qatar Petroleum, our focus in Maersk Oil is on the wise management of the country’s natural resources to help maximise recovery and deliver a stable production plateau from the Al Shaheen field,” Affleck said.

“We currently produce around 300,000 barrels of oil per day, which is over one third of Qatar’s daily oil production,” Affleck said.

Affleck walked the audience through his role as an executive at Maersk Oil, part of A.P. Moller-Maersk Group — one of the world’s largest conglomerates — and his views on creating and driving value, particularly in a low oil price environment.




“Delivering value begins with understanding the context that you are operating in. Maersk is not only committed to delivering tangible contributions to the economy and society today, but we’re committed to Qatar for generations to come,” he said.

“Ensuring the safety of company operations and staff is our number one priority,” he asserted. “Safety is a pre-requisite for a successful business and the mindset and processes involved in ensuring a safe environment are quite similar to what it takes to run an effective organisation. We are very pleased with the safety culture at Maersk Oil Qatar but there is always more that can be done.

As leaders and future leaders – it should always be our goal to further improve performance,” he said. Maersk Oil introduced its global ‘Incident-free’ programme in 2011, with an aim to transform the company’s safety culture and performance in two ways: focusing on the personal aspects of safety; and setting up technical processes and competencies that are needed to run an incident-free organisation.

“Based on my experience, I believe at the heart of every organisation are its values” Affleck emphasised. “Company values are integral to drive the way you do business. You also need an ambitious vision to articulate where you want to go and a strategy which sets out what you want to achieve and how,” he said.

Affleck said a successful business strategy was underpinned by a set of processes, governance procedures, supported by “your people, your culture, and your ways of working.”

“ It’s important that you also set clear key performance indicators (KPI’s) that allow you to monitor and drive performance and that you develop an operating rhythm that establishes very clearly how the business works” explained Affleck, sharing his experience and a number of practical examples.

In closing, he shared how Maersk Oil and the Maersk Group were mounting a robust response to the current low oil price environment, not only seeking to sustainably reduce costs, but also pursuing growth opportunities.

“It’s a difficult and challenging time for our industry, but with challenge, also comes opportunity.” Maersk Oil has sanctioned two mega-projects this year – Culzean in the United Kingdom and Johan Sverdrup in Norway, both of which are expected to benefit from lower commodity prices during their construction period.

“We also announced an acquisition in Africa recently – so despite the current low oil price environment and our focus on cost transformation, opportunities still exist for efficient businesses to grow,” Affleck added.




Algeria sees energy earnings, reserves plunging Reuters + NewBase

Algeria’s energy earnings are forecast to fall to $26.4bn next year while foreign exchange reserves will dip to $121bn after low oil prices cut into the Opec nation’s economy, Finance Minister Abderrahmane Benkhalfa said yesterday.

The North African state, a major gas supplier to Europe, has already said energy earnings will fall by 50% this year to about $34bn. Oil and gas sales make up 95% of its exports and account for 60% of the country’s budget.

Algeria is considering higher taxes, import duties and a hike in subsidised diesel and electricity prices to help cover its deficit after the slump in crude oil prices eroded its revenues, according to a draft of its 2016 budget.

“We have to be vigilant in the management of our money. We have to control public spending,” the minister told the parliament where the draft budget law was presented. “We have to mobilise new resources. We have planned a reasonable increase in the

prices of fuel and electricity to cover production costs,” he said. Domestic prices for energy products are very low by international standards in Algeria, which analysts say is the main reason behind high consumption rates in the country of 40mn people.

The world oil price slide is testing an economic system that relies on energy revenues to pay for a vast range of social subsidies, from public housing to cheap loans and subsidised fuel, which helped Algeria avoid the kind of “Arab Spring” uprisings that erupted in its North African neighbours.

Benkhalfa said overall spending on subsidies will rise 7.5% next year. That includes mainly food, transport, housing and public health coverage. Algeria is also trying to draw more foreign investment to help increase oil and gas production, which has remained largely stagnant in the past three years.

Algeria posted a trade deficit of $10.825bn in the first 10 months of 2015 against a $4.29bn surplus a year earlier, after a 40.7% drop in energy earnings, customs data showed on Sunday. The finance minister said foreign exchange reserves will drop to $151bn by the end of this year before reaching $121bn in December 2016. That represents the equivalent of 23 months of imports, he said.

Reserves were $159bn in June 2015, down from $193bn in the same month in 2014. The law is widely expected to be approved by the parliament, but some lawmakers have criticised the government’s plans to increase the prices of some subsidised fuels. “This is a dangerous law. The government wants its citizens to pay for deficits from their own pockets,” said Lakhdar Benkhellaf, a deputy for the opposition Islamist party Justice and Development Front. “The price increases will push inflation up.”




Pakistan: Rostec Starts Work on Pakistan Gas Pipeline RT-Global Resources, a Rostec subsidiary, has commenced work on the North-South gas pipeline in Pakistan, TASS reported Friday. The company is conducting surveys and engineering work along the pipeline route.

In October, Moscow and Islamabad signed an intergovernmental agreement on the construction of a gas pipeline from Karachi to Lahore. Last December, Rostec announced that its subsidiary, RT Global Resources, would be building oil and LNG pipelines and terminals in Pakistan with total cost of about $3 billion.

The Russian state owned firm will carry out the construction of the pipeline in Pakistan by mid-2020, TASS said. The 1100 km long gas pipeline will link LNG terminals in the port of Karachi in the south of Pakistan with the city of Lahore in the north of the country.

The project will be implemented in three stages. In the first stage, which is expected to be complete by second quarter of 2018, the gas pipeline will be build. In the second stage, which is slated to be finish by second quarter of 2019, part of compressor stations will be completed.

In the third stage, by the second quarter of 2020, all compressor stations will be

commissioned bringing the pipeline to its full capacity, which is 12.4 billion cubic meters a year, TASS stated. Head of Rostec

Sergey Chemezov said that the selection for contractors to build the pipeline

in Pakistan will be held in 2016.

Pakistan’s state gas supplying company ISGAL will act as a partner customer in the project and will pay gas transportation services. In its turn, the government of Pakistan will issue a sovereign guarantee for project financing.




Norway: Statoil makes minor gas/oil/condensate discovery near the Visund field in the North Sea – 34/8-16 S. Source: NPD

Statoil, operator of production licence PL120, has completed drilling of exploration well 34/8-16 S. The well was drilled on the east flank of the Visund field in the northern part of the North Sea, and about 140 km northwest of Bergen.

The primary exploration target for 34/8-16 S was to prove gas and/or gas condensate in the Middle Triassic (the Lomvi formation). The secondary exploration target was to investigate additional resources in Lower to Middle Jurassic reservoir rocks (the Statfjord and Brent Group) and Upper Triassic reservoir rocks (the Lunde formation).

The well encountered an oil/gas/condensate column of about 85 metres in the Lunde formation, 40 metres of which were of moderate to good reservoir quality. The Brent group is not present. Preliminary calculations of the size of the discovery are between 0.4 and 1.1 million Sm³ of recoverable oil equivalents. The licensees will consider further development of the discovery in the context of other potential additional resources.

The well was not formation tested, but comprehensive data collection and sampling were carried out.

This is the 26th exploration well drilled in production licence PL120. Well 34/8-16 S was drilled to a vertical and measured depth of 3875 and 3830 metres below sea level, respectively, and was terminated in the Hegre group in the Triassic. The water depth at the site is 380 metres. The well will now be permanently plugged and abandoned.

The well was drilled by the Songa Trym drilling facility.




China and India drive recent changes in world coal trade Source: U.S. EIA +SSY Consultancy and Research Ltd, IEA, U.S. DOC , and Indonesia Central Bureau of Statistics Global trade of coal grew dramatically from 2008 to 2013, but in 2014, it declined for the first time in 21 years. China and India accounted for 98% of the increase in world coal trade from 2008 to 2013, but declines in China's import demand have led to declines in total world coal trade in 2014 and, based on preliminary data, in 2015 as well.

Nearly all of the 47% growth in total world coal trade between 2008 and 2013 was driven by rising coal import demands by countries in Asia, specifically China and India. Coal trade in the rest of the world declined over the same period. However, data for 2014 and 2015 indicate a reversal of this trend, with declines in China's coal imports currently on pace to more than offset slight increases in other countries in both years.

China imported 341 million short tons of coal in 2013, up from 45 million short tons in 2008, while India imported 203 million short tons, up from 69 million short tons. About 75% of China's coal imports and 90% of India's coal imports were steam coal, used primarily for electricity generation. Coking coal, used in the manufacture of steel, made up the remaining volumes.

While China's coal imports have been declining in 2014 and 2015, India's imports continued to rise in 2014 and through the first half of 2015 as coal demand increased at a faster pace than domestic supplies. In China, rising output from domestic mines, improvements in coal transportation infrastructure, and slower growth in domestic coal demand have resulted in lower domestic coal prices and reduced demand for coal imports.

Additionally, the Chinese government introduced a number of measures in late 2014 and early 2015 aimed at supporting China's coal industry. These measures include reestablishing taxes on coal imports; placing limits on allowable sulfur, ash, and trace elements for imported coal; and issuing a directive to major utilities to reduce their annual coal imports by approximately 55 million short tons.




In India, efforts are underway to substantially increase domestic coal production over the next few years and to complete three major rail transportation projects for facilitating increased shipments of coal from major producing regions in northeastern India to demand centers in other parts of the country.

Although India's coal producers have already increased domestic production in 2014 and through the first few months of 2015, the first of India's three major coal railway projects, the Jharsuguda-Barpali railway link, is not scheduled to be completed until approximately 2017.

Note: Graph does not include small balancing volume used to reconcile discrepancies between reported exports and imports. With the exception of North America, non-seaborne coal trade, which accounts for about 10% of total world coal trade, is not shown in the graph.

Increases in exports from Indonesia and Australia met most of the expansion in international coal trade between 2008 and 2013. Indonesia's exports increased by 247 million short tons, accounting for 56% of world coal export growth. Australia's exports increased by 106 million short tons, accounting for an additional 24% of the global increase. Additional exports from Eurasia (49 million short tons) and the United States (36 million short tons) accounted for almost all of the remaining increase in coal exports during this period.

Lack of growth in global demand for coal imports in 2014 and 2015 has led to significant declines in coal export sales from Indonesia and the United States. Export sales from other countries/regions, including Australia, Eurasia, southern Africa, and South America, are on track to be near or slightly higher in 2015 compared with 2013.

U.S. coal exports are down primarily because of their higher production costs relative to other coal exporting countries. The decline in Indonesian exports is attributed primarily to China's reduced demand for imported coal accompanied by reduced demand in both China and India for Indonesia's lower-quality export coals.




NewBase 23 November - 2015 Khaled Al Awadi

NewBase For discussion or further details on the news below you may contact us on +971504822502 , Dubai , UAE

U.S. oil plunges more than 2 percent on supply glut woes Reuters + NewBase

Crude futures lost ground in early Asian trading on Monday, with U.S. oil plunging over 2 percent on festering worries over a global supply surplus.

U.S. crude's West Texas Intermediate (WTI) January contract CLc1 had dropped 78 cents, or 1.86 percent, to $41.12 a barrel by 0340 GMT. It hit $40.96 a barrel earlier in the session, near levels seen on Friday before the U.S. crude December contract expired.

Benchmark front-month Brent futures for January LCOc1 fell 47 cents, or 1.05 percent, to $44.19 a barrel, recovering from a session-low of $44.04. "The burden of carrying high U.S. crude oil inventories is large," Kang Yoo-jin, commodities analyst at NH Investment and Securities in Seoul, said in a note on Monday.

"The markets would likely rebound only if they saw a fall in U.S. crude inventories, while declining U.S. crude output and seasonal demand provide some support to oil at low prices."

Oil price special

coverage




Daniel Ang at Phillip Futures noted that a string of U.S. economic data scheduled for release this week could test the U.S. dollar's recent strength. A stronger greenback makes dollar-denominated oil contracts more expensive for holders of other currencies.

"With the U.S. dollar index hovering near 100, we expect to see slightly more downside than up. This would mean that oil prices should be holding steady this week and should mean that supports of $40 and $43 for WTI and Brent January 2016 should hold," he said.

Elsewhere, Venezuela's oil minister said on Sunday that OPEC cannot allow an oil price war and must take action to stabilize the crude market soon. When asked how low oil prices could go in 2016 if OPEC doesn't change its policy, he said: "Mid-20s."

BMI Research, part of the Fitch ratings agency, said: "What is underway now is a structural market rebalancing in which low oil prices clear out high cost production - a relatively small part of which is U.S. shale. It is not the result of OPEC policy, but of the basics of supply and demand."

The U.S. crude December futures CLZ5 that expired on Friday ended 15 cents down at $40.39 after hitting a low of $38.99, the cheapest since Aug. 27.

Markets were keeping an eye on developing geopolitical tensions in the oil-producing Middle East as Jordan's King Abdullah, a U.S. ally, will hold talks in Moscow on Tuesday with Russian President Vladimir Putin on how to tackle "terror groups" led by Islamic State in Syria, an official source said.

Cut Oil Supply or Drop Riyal Peg? Saudis Face ‘Critical’ Choice Bloomberg - Ahmed A Namatalla

The longer oil languishes, the more pressure builds on Saudi Arabia to abandon its currency peg.

Contracts used to speculate on the riyal’s exchange rate in the next 12 months climbed to a 13-year high on Thursday, before trimming the increase a day later, according to data compiled by Bloomberg. Six-month agreements rose to near the highest in seven years on Friday. The decoupling of oil prices and Saudi production has fueled speculation of a riyal devaluation




Saudi Arabia is pumping record amounts of oil this year, leading OPEC’s effort to defend market share even as Brent crude trades near the lowest level in six years.

The slide in oil revenue has forced the kingdom to tap savings and sell debt to preserve its 30-year-old peg to the dollar, and for Bank of America Corp., that may mean the country faces a “critical” choice next year: either cut production to help boost prices or adjust the riyal’s rate to stem the decline in foreign reserves.

“A depeg of the Saudi riyal is our number one black-swan event for the global oil market in 2016, a highly unlikely but highly impactful risk," Bank of America strategists led by Francisco Blanch in New York wrote in a Nov. 19 report. “It is a lot easier politically to implement a modest supply cut at first than allow for a full-blown currency devaluation."

One-year forward points for the riyal jumped 167.5 points to 525 on Thursday, before falling to 455 a day later. That reflects expectations for the currency to weaken about 1.2 percent to 3.7962 per dollar in the next 12 months. Six-month agreements rose on Friday to 152.5, near the highest level since 2008.

Weaker global growth and inflation as well as the strength of the dollar will remain “huge" headwinds for dollar-based commodity prices, Bank of America said. Brent crude, the benchmark for more than half the world’s oil, closed last week at $44.66 per barrel, down 44 percent from a year earlier.

Robust Reserves

Still, Saudi Arabia’s reserves are hardly depleted. Though net foreign assets fell to a near three-year low in September as the government drew down financial reserves accumulated over the

past decade, they’re among the highest in the region at $646.9 billion.

The country’s peg survived lower oil prices in the 1990s and revaluation pressure resulting from surging prices in the late 2000s, Shaun Osborne, the Toronto-based chief foreign-exchange strategist for Scotiabank, wrote last week.

Pressure may also build on the Chinese yuan as reserves at central banks across the world decline against a backdrop of looming U.S. interest-rate increases, Bank of America said. A slump in the yuan may ultimately force Saudi Arabia’s hand because of the “very high

sensitivity" of commodities to the currency, the bank said.

Saudi Arabia, the biggest member of the Organization of the Petroleum Exporting Countries, produced more than 10 million barrels of oil a day in each of the past eight months and pumped a record 10.57 million barrels a day in July, according to data compiled by Bloomberg.




NewBase Special Coverage

News Agencies News Release 23 Nov.. 2015

Oil companies announce significant write-downs in third-quarter 2015

International and U.S. upstream oil companies wrote down $38 billion in assets in the third quarter of 2015, the largest for any quarter since at least 2008 for this set of 46 companies (Figure 1). Low oil prices continue to have a significant effect on the value of companies' assets and future prospects as well as on current revenue.

Although the volume of total liquids output for this group of companies increased over third-quarter 2014, the fall in oil prices contributed to a year-over-year decline in revenue. Lower oil prices also contributed to a 33% decline in cash flow from operations in the third quarter from the previous year. However, companies reduced capital expenditures by 34% over the same period, and for the first time in a year, these 46 companies showed a surplus of cash from operations over capital expenditures. Large write-downs—also called impairments—as well as reduced cash flow suggest that investment spending will continue to decline absent a meaningful increase in crude oil prices.

The significant increase in impairment charges was an important factor many companies discussed in their third-quarter earnings releases. An impairment charge represents the decrease in value of assets a company owns, typically its amount of proved reserves.

Proved reserves are estimated quantities of oil and natural gas that analyses of geologic and engineering data demonstrate with reasonable certainty are recoverable under existing economic and operating conditions. Because oil companies must publish the amount of proved reserves




they own every year, an impairment charge reflects assets that have estimates of future net cash flows below what the company already spent to develop them. This situation could result from a combination of geologic and economic factors, but regardless is something that lowers the value of the company.

Impairments are nonrecurring reductions in asset values reflected on a company's income statement but do not represent cash outflows. In the third quarter, impairments represented over 40% of the $85 billion in non-cash adjustments.

This is higher than in 2011-13, when impairments averaged only 10% of all non-cash adjustments. Further, the increase in impairments contributed to negative net income for this set of companies for the fourth consecutive quarter (Figure 2).

One example of an impairment charge is Royal Dutch Shell's announcement to discontinue a Canadian oil sands project, reducing its proved reserves by an estimated 418 million barrels, according to company filings. A different company, Whiting Petroleum, wrote down the value of some assets it acquired from Kodiak Oil and Gas when the two companies merged last year. Large impairment charges represent acknowledgement by a company that some of its projects are no longer profitable and are being discontinued. While this adjustment reduces the investment expenditures that the company would incur, it also reduces the future estimated cash flow from these projects.

Options for conserving cash include reductions in dividends to shareholders, elimination of share repurchase programs or increases in cash through share issuance, increasing debt, or sales of assets. Since 2014, these 46 companies reduced dividends by 16% and share repurchases by 92%. Impairments make increasing debt and selling assets more difficult. Lenders may be less willing to lend if a company's assets declined in value, or may only be willing to lend up to a certain percentage of the value of a company's proved reserves, which declined in value from impairments. Selling assets becomes difficult because they are typically sold at a lower valuation than when the company purchased them because of the impairment charge, raising less cash than otherwise would be expected.




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Khaled Malallah Al Awadi, Energy Consultant MS & BS Mechanical Engineering (HON), USA Emarat member since 1990 ASME member since 1995 Hawk Energy member 2010

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Khaled Al Awadi is a UAE National with a total of 25 years of experience in the Oil & Gas sector. Currently working as Technical Affairs Specialist for Emirates General Petroleum Corp. “Emarat“ with external voluntary Energy consultation for the GCC area via Hawk Energy Service as a UAE operations base , Most of the experience were spent as the Gas Operations Manager in Emarat , responsible for Emarat Gas Pipeline Network Facility & gas compressor stations . Through the years, he has developed great experiences in the designing & constructing of gas pipelines, gas metering &

regulating stations and in the engineering of supply routes. Many years were spent drafting, & compiling gas transportation, operation & maintenance agreements along with many MOUs for the local authorities. He has become a reference for many of the Oil & Gas Conferences held in the UAE and Energy program broadcasted internationally, via GCC leading satellite Channels.

NewBase : For discussion or further details on the news above you may contact us on +971504822502 , Dubai , UAE

NewBase 23 November 2015 K. Al Awadi




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New base 734 special 23 november 2015