New base 682 special 08 september 2015

Copyright © 2015 NewBase www.hawkenergy.net Edited by Khaled Al Awadi – Energy Consultant All rights reserved. No part of this publication may be reproduced, redistributed,
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NewBase 08 September 2015 - Issue No. 682 Senior Editor Eng. Khaled Al Awadi
NewBase For discussion or further details on the news below you may contact us on +971504822502, Dubai, UAE
Gulf oil ministers to meet Thursday amid price slide
Reuters + NewBase
Gulf oil ministers are due to meet this week in Qatar for an annual meeting, in the first gathering
by the heavyweight crude producers since the latest slide in oil prices.
But while the price drop is not on the agenda for the scheduled meeting of the six-nation Gulf
Cooperation Council (GCC) - Saudi Arabia, United Arab Emirates, Kuwait, Qatar, Bahrain and
Oman, it will be a chance for oil ministers to air views on the market.
Saudi Arabia Oil Minister Ali Al-Naimi has made no public comment on prices since June 18,
when the oil price was above $63 and he said he was optimistic about the market in coming
months.
Oil prices have more than halved since peaks hit in summer last year due to abundant supplies
and a policy change by producer group OPEC to defend market share and discourage competing
supply from rival producers, rather than cut its own output. Saudi Arabia and its Gulf allies led the
policy shift.
Last month, prices lurched to a more than six-year low near $42 a barrel due to concern about the
world's largest energy consumer China's economy and the persistent oil glut. Brent crude was
trading around $49 a barrel on Monday.

The latest fall has intensified calls by some members of the Organization of Petroleum Exporting
Countries (OPEC) for an emergency meeting. Top Gulf OPEC producers' policymakers have
remained publicly silent since it met last in June.
"The Doha meeting is central given what the international petroleum industry is going through from
volatility and to push towards stability," Kuwait's oil ministry tweeted in a statement on Monday.
The ministry's statement did not say crude prices would be discussed during the ministerial
meeting on Sept. 10, where topics such as unifying domestic gasoline prices, climate change and
cooperation in renewable energy sector are on the official agenda.
Venezuelan President Nicolas Maduro said on Saturday he had suggested to the Emir of Qatar a
summit of heads of state of OPEC countries to defend oil prices. Last year, the GCC oil ministers
held their meeting in Kuwait. Oil prices were trading then at slightly below $100 a barrel, a level
which had long been favored by OPEC members before last year's policy shift.
Saudi Arabia, Kuwait, UAE and Qatar are the main Gulf OPEC members. Oman and Bahrain are
both non-OPEC members. Oil prices fell Monday after recent volatility as markets assess the
outlook for US interest rates. US benchmark West Texas Intermediate for delivery in October
dropped 55 cents to $45.50 a barrel compared with the close on Friday.
Brent North Sea crude for October was down 57 cents to $49.04 in London afternoon deals. All
eyes were on the US, the world’s biggest consumer of oil, as a decision on interest rates is set to
influence financial markets whatever the outcome of the Fed’s policy meeting next week.
A rate hike would likely strengthen the greenback, making dollar-priced oil more expensive to
holders of weaker currencies, hurting demand and prices. Analysts said dealers are awaiting a
slew of global economic data this week for clues about crude demand, with ample oil supplies
boosted by relentless US and OPEC production.
Oil prices have fluctuated wildly in recent weeks on uncertainty about Fed monetary policy as well
as worries about the growth in world number-one energy consumer China

Qatar won't scale back infrastructure projects, subsidies
despite low oil prices
Gulf Times - Peter Alagos/Business Reporter
Backed by a strong national budget and cash reserves, Qatar will not scale back major
infrastructure projects or cut food and fuel subsidies despite declining oil prices, HE the Finance
Minister Ali Shereef al-Emadi said.
Speaking at the Dean’s Lecture Series hosted by Carnegie Mellon University in Qatar yesterday,
the finance minister stressed that many of the government’s $200bn infrastructure projects “are
already in the execution stage.”
“We’ve already put a public planned labour action that will oversee our projects in the next 10
years and that is very important for us. The government is bent on completing all of these main
projects, which is why it is business as usual for us,” al-Emadi explained.
On cutting fuel and other subsidies, the finance minister said: “Our budget is still that not far in
terms of deficit…the financial situation is very healthy and I don’t think we need to take extra
measures.”
“Our breakeven point when the budget (which is more than $300bn in 2014) was announced was
at $65 per barrel; today, we’re averaging below that, under $50 per barrel. “We have an almost
15-year surplus budget from 2000 to 2015, and Qatar never had any deficit. We’ve stuck with the
oil prices at this level…there is enough room for us to manage this,” al-Emadi emphasised.
The finance minister also expressed optimism in the continuous growth of Qatar Central Bank’s
cash reserves, which reached QR157bn in 2014.

“The central bank’s cash reserves are still growing and this is a trend that we’ve seen in least in
the last seven years…we will not see a decline at any time, and this is a very important signal for
our economy,” al-Emadi noted.
Given the current fluctuation in global prices, which makes it difficult to predict future oil prices, al-
Emadi said: “Qatar will continue its conservative fiscal policies on maximising utilisation of
available financial resources; increase efficiency in public expenditure, and ensuring the
implementation of the budget as planned.”
In addition, he also said the government “will continue to implement capital expenditure plans on
major projects in health, education, and infrastructure; the implementation of 2022 FIFA World
Cup related-projects; support growth in non-oil sectors; and expand private sector participation in
different economic activities.”
Al-Emadi also allayed concerns that some infrastructure projects will be shelved due to falling oil
prices. He stressed that the government is prioritising major projects and added that “other
projects are still on schedule.”
“We have a 10-year budget from 2014 up to 2024, meaning there will be infrastructure projects
from now until 2022 and beyond, up to 2024…and these projects are identified and known; every
ministry knows exactly
where they stand in all of
these projects,” the
finance minister
explained.
Qatar, the world's top
liquefied natural gas
exporter, is in the
strongest financial
position and a Reuters
poll of economists last
month found them
predicting Doha would
run a state budget deficit
of only 0.7% of gross
domestic product this
year, the region's
smallest deficit.
Qatar’s real GDP growth is expected to accelerate to 4.7% this year and 6.4% in both 2016 and
2017 as the government expands its investment spending programme in the non-hydrocarbon
sector, QNB has said in its Qatar Economic Insight.
According to the report, Qatar is well-positioned to withstand lower oil prices thanks to its strong
macroeconomic fundamentals including relatively low fiscal breakeven price, the accumulation of
significant savings from the past and low levels of public debt.
Oil prices are also expected to stay lower for longer, averaging $55 for barrel in 2015-16 on
oversupplied markets, before rising to $60 in 2017 as US shale output growth weakens,

UAE: Five reasons Dubai is so interested in solar power
Vahid Fotuhi + The National
Thousands of the world’s experts on solar power will arrive in Dubai next week for the Global
Solar Leaders’ Summit, and that might seem strange.
Dubai would not even rank in the top 100 global cities in terms of solar power. So why choose a
city in an oil-rich country such as the UAE? Are these delegates using solar as an excuse to come
here and visit the indoor ski-slope at the Mall of the Emirates?
Not quite. Despite the lack of solar footprint in this country, there are five trends that are setting
the stage for an explosion in solar power in the region.
Fewer economic barriers
Throughout much of the GCC, electricity and water prices are subsidised by governments. Abu
Dhabi alone spent Dh17.5 billion last year on subsidising electricity and water. In Saudi Arabia,
the government is burning 900,000 barrels of oil per month to produce electricity, which is then
sold at a fraction of the cost.
Now that oil revenue has dropped with the fall in oil prices, these subsidies are making a dent in
government budgets. Dubai was the first to adopt cost-reflective pricing policies, and others will
follow. This will push up the rise of electricity and make solar, which is not subsidised, more
attractive.
Favourable policies
Slowly but surely, governments are starting to adopt solar-friendly policies. This year a string of
countries and cities have introduced regulations allowing home owners and businesses to install
rooftop solar systems. These include Egypt, Jordan and Dubai. In Dubai’s case, there will be more
than 10 megawatts of solar power covering 12,000 square metres of rooftop space launched by
the end of this year. Those jumping on to the solar bandwagon include ABB, Emirates, Dewa and
Aramex.
Lower prices
Solar energy’s penetration in this region is set to grow because the cost of solar equipment keeps
dropping. Five years ago I installed a 2-kilowatt system on my roof, enough to offset roughly 15
per cent of my home’s electricity consumption. The cost of this system was roughly Dh20,000.
Today, that same system would cost half as much. More contractors will enter the market as solar
regulations start to take root, which means more competitive prices and more variety. For
example, Ergosun is a new entrant in Dubai offering roof tiles with integrated solar cells – a new
technology that eliminates the extra costs for support fixings through the roof.

Payment plan
The Achilles heel of residential solar systems has always been lack of financing. It is like trying to
buy a new car without having access to car loans. And since these systems are typically bolted
into place for up to 25 years, buying a second-hand one on Dubizzle is not an option. As a result,
a lot of potential solar customers have been kept out of the market. But not for much longer. The
Middle East Solar Industry Association is working with regional developers on financing plans
similar to car loans. The emergence of solar financing will revolutionise the market, much like it did
in North America.
Solar in other sectors
As solar becomes more competitive, this technology will branch out to other sectors beyond power
generation. One logical area is oil and gas. Petroleum Development Oman, Oman’s largest oil
producer, is partnering with GlassPoint Solar to build one of the world’s largest solar plants.
Miraah will be a 1,000MW solar facility in Oman, harnessing the sun’s rays to produce steam. The
steam will be used in thermal oil recovery at the Amal oilfield. This project underscores the
massive market for deploying solar power in the oil and gas industry today.
As these trends take shape, the next time the solar gurus come for a visit, they might find that Ski
Dubai is powered by the sun.

Nigeria: Lekoil announces first oil from Otakikpo in the Niger Delta
Source: Lekoil
AIM-listed Lekoil, the oil and gas exploration and production company with a focus on Nigeria and
West Africa more generally, has announced the start of oil production from the Otakikpo
Marginal Field in oil mining lease OML 11 which is located on the shore line in the south-eastern
part of the Niger Delta.
Following the successful re-entry of the Otakikpo-002 well, first oil flowed to surface late on 5
September 2015 with production testing being conducted over the weekend. The Otakikpo-002
well produced from only the first of four planned production strings, and flowed oil at various choke
sizes for over 24 hours at a peak rate of 5,703bopd at a 36/64 inch choke, significantly ahead of
expectations.
The Addendum to the Competent Persons Report prepared by AGR TRACS International
released by the Company on 21 January 2015 indicated that it expected to produce around
6,000bopd from the four strings at Otakikpo-002 and -003. Based on these preliminary results,
the Directors of Lekoil currently believe that this guidance is likely to be exceeded substantially,
although further testing and analysis will be required before the Company is able to provide formal
guidance.
It has taken just nine months for the Otakikpo Joint Venture (Lekoil as Financial and Technical
Partner and Green Energy International as Operator) to bring the Otakikpo field into production
since it began operations on the field in December 2014, and less than 16 months in total since
Lekoil entered into a farm-in agreement with Green Energy.
Otakikpo-002 will now be temporarily suspended to allow completion and testing of the upper C5
zone following which an official well-test programme will commence and the rig will move to start

re-entry operations on Otakikpo-003. During the well test, oil will flow into onshore storage tanks.
The second production well, Otakikpo-003, is expected to come on stream around year end.
Further operational details will be made available at the time of the Company's forthcoming Half
Year Results which will be published by 30 September 2015.
Lekan Akinyanmi, Lekoil's CEO, said, 'We are delighted to announce that Lekoil is now an oil
producer. We always believed in the potential of Otakikpo but the production rate from the first re-
entered well has exceeded our expectations. This is a real achievement for the Otakikpo Joint
Venture. I would like to thank the entire team that has worked so hard to deliver this result, our
partners Green Energy, investors and our host communities for their continued support.'
'However, there is a lot more to be done. We expect to finalize the evacuation infrastructure during
the official well test period and determine the optimal production rate that maximises value from
the two wells. Production at Otakikpo represents the first major step in fulfilling our strategy to be
the world's leading E&P company focused on Africa and maximising value for our stakeholders
and host communities in a sustainable manner. Safety remains our key priority and we will
continue applying the highest standard to our operations as we grow production to, and now
beyond, our initial Phase 1 target.'
Background to Otakikpo
Otakikpo is sited in a coastal swamp location in oil mining lease (OML) 11, adjacent to the
shoreline in the south-eastern part of the Niger Delta. Lekoil Nigeria exercises the rights and
benefits of its 40 per cent. Participating and Economic interest in Otakikpo via the Farm-in
Agreement and Joint Operating Agreement signed on 17 May 2014 with Green Energy
International. The Company holds 90 per cent. of the economic interests in Lekoil Nigeria. Lekoil
Limited's economic interest in Otakikpo therefore equates to 36 per cent. Ministerial consent was
granted by the Honourable Minister of Petroleum Resources of Nigeria in June 2015.
The Field Development Plan consists of two phases: Phase 1 comprises the recompletions of two
wells, Otakikpo-002 and Otakikpo-003 with the installation of an Early Production Facility of 6,000
bopd capacity and export via shuttle tanker. Phase 2 covers the subsequent incremental
development of the rest of the field with a new Central Processing Facility and seven new wells
expected to come on stream during 2017.

NewBase 08 September - 2015 Khaled Al Awadi
NewBase For discussion or further details on the news below you may contact us on +971504822502 , Dubai , UAE
Weak economic outlook and oversupply weigh on oil markets
Reuters + NewBase
Oil prices remained weak on Tuesday as the global economic outlook darkened further and
cooperation between oil producing countries to curb oversupply looked unlikely. In China, Asia's
biggest economy and the world's top consumer of energy and commodities, crude oil imports fell
13.4 percent in August to 26.59 million tonnes (6.29 million barrels per day) from the previous
month, although underlying demand remains strong.
In the first eight months of 2015, China's crude imports were up 9.8 percent to 6.63 million bpd,
indicating still-solid demand for gasoline as the growing middle class drive and fly more often. In
Japan, the economy shrank an annualized 1.2 percent in April-June despite ongoing government
and central bank measures to support growth.
U.S. crude CLc1 was at $44.31 per barrel at 0425 GMT, down $1.74 since Friday's close, weighed
down by the closure of the largest crude distillation unit at Exxon Mobil Corp's (XOM.N) 502,500
barrel-per-day (bpd) Baton Rouge, Louisiana, refinery.
U.S. markets were closed on Monday for a holiday.
Brent futures LCOc1, unaffected by the refinery closure, added 20 cents to $47.83 barrel,
although the global benchmark was still down $1.44 from its opening value on Monday. "Brent will
likely be range-bound and volatile over the next 12 months as the supply overhang is worked off,"
Morgan Stanley said, adding that it expected the glut to be worked off and result in higher prices
by the fourth quarter of next year.
Oil price special
coverage

"In the interim, non-fundamental factors (FX, macro themes, fund flows, etc.) and headlines will
likely remain key price drivers," the bank said.
Oil prices have fallen almost 60 percent since June 2014 on a global supply glut, with prices
seesawing in recent weeks as concerns about a slowing Chinese economy caused turmoil in
global stock markets.
On the supply side, recent speculation that Russia might be willing to cooperate with the
Organization of the Petroleum Exporting Countries (OPEC) to curb output in support of prices was
given a blow on Monday after the chief executive of Russian oil major Rosneft ruled out a Russian
cut.
Igor Sechin said that unlike the Middle East, where most oil companies are totally government-
owned and controlled, Russia could not easily cut its output as its oil firms had strong foreign
shareholders and the corporations were responsible to shareholders rather than the government.
OPEC is producing close to records to squeeze out competition, especially from U.S. shale
drillers, which have so far weathered the price plunges to keep pumping .

Surging Atlantic crude adds to seasonal pressure on prices
Bloomberg
The North Sea and Nigeria will ship the most crude in more than three years in October, adding to
downward pressure on oil prices just as demand wanes from refiners shutting down for seasonal
maintenance.
Output of North Sea grades will
reach the highest since May
2012 next month, according to
loading programmes compiled
by Bloomberg. Supplies from
Nigeria, the biggest oil
producer in Africa, are set to
reach a level not seen since
August of that year. “It’s
directionally bearish for crude,”
Vikas Dwivedi, an analyst at
Macquarie Capital said by e-
mail. “The large loading
programs will need buyers.”
Production in the North Sea is rising as projects come online that were sanctioned with oil prices
above $100 a barrel, according to the International Energy Agency. This coincides with the end of
a shutdown in Nigeria caused by a pipeline leak, allowing supplies to flow back to the market,
Dwivedi said. Demand for crude will weaken as refiners shut down for seasonal maintenance,
although this year’s schedule will be lighter than usual as companies take advantage of high profit
margins.
Shipments of Brent, Forties, Oseberg and Ekofisk and other North Sea grades, will average 2.1mn
barrels a day in October, according to data compiled by Bloomberg. Nigerian supplies will total
2.2mn and Angola will ship 1.77mn, the data show.
There is an “existing overhang of the crude in the northwest of Europe, as well as in West Africa,”
Abhishek Deshpande, an analyst at Natixis said by phone. Together with refiners going offline for
seasonal maintenance, that “only tells you one story — pressure on Brent and West African
prices.”
Brent crude fell 59¢ to $49.02 a barrel on the at 12:09pm on London-based ICE Futures Europe
Exchange. The North Sea benchmark has fallen more than 50% in the past year amid a persistent
global production surplus.
Refineries in Europe are expected to halt an average of 162,000 barrels a day of processing capacity from
this month through to the end of the year compared with 768,000 a day in the same period of 2014, energy
consultancy Wood Mackenzie said on August 25. Maintenance, which usually starts in the third week of
September or first week of October, may also be pushed back, Deshpande said.
The current increase in North Sea production is temporary relief for an industry facing long-term decline in
output from ageing fields and high production costs.The collapse in oil prices has forced companies in the
region to cut costs costs, resulting in the loss of about 5,500 jobs since late 2014, the UK Oil & Gas
Authority, the industry regulator, said in a report yesterday. The organisation was set up to lay out a plan
for improving the competitiveness of the North Sea.

NewBase Special Coverage
News Agencies News Release 08 Sep. 2015
IRAN SANCTIONS SEEN LIFTED IN EARLY 2016 BY NUCLEAR ENVOYS
Iran is preparing to ramp up production once sanctions are eased
+ Bloomberg
London: Oil and financial sanctions on Iran will probably be lifted within the first three months of
2016, according to four western diplomats familiar with the nuclear monitoring process.
Under the terms of a July 14 accord between world powers and Iran, sanctions imposed
internationally on the nation will be lifted in return for restrictions on nuclear work. The Vienna-
based International Atomic Energy Agency will assess when Iran has fulfilled the terms of deal,
paving the way for the removal of restrictions.
The monitoring necessary for that
to happen will probably be in
place by January or February,
according to three of the envoys.
A fourth saw restrictions lasting as
late as March. All of the officials
have knowledge of the IAEA’s
verification regime in Iran and
asked not to be named discussing
confidential estimates.
Iran, with the world’s No. 4 oil reserves, is preparing to ramp up production once sanctions are
eased, and European business executives and politicians are already shuttling to Iran to lay the
groundwork for investment and trade.
All four envoys dismissed assertions made by sceptics of the deal that it doesn’t give IAEA
investigators enough access to suspect Iranian facilities. The agency has already begun to
receive significantly more information, one person said. The IAEA declined to comment when
contacted by phone on Monday.
The seven nation accord, already approved by the United Nations Security Council, will be
officially adopted by next month and IAEA investigators will give their final assessment of Iran’s
past nuclear activities by December 15, according to the timeline. The US Senate, which
President Barack Obama has urged to back the deal, has until September 17 to pass a resolution
to block its implementation.
Iran plans to produce 3.8 million to 3.9 million barrels of oil a day by March, with output rising by
500,000 barrels a day soon after sanctions are lifted and by 1 million barrels within the following
five months, Oil Minister Bijan Namdar Zanganeh said in a September 2 interview. It’s currently
producing 2.8 million barrels a day, its highest level in three years, and is exporting more than 1
million barrels a day, he said.

US Shale Industeries – Special Coverage
Gulf News + Agencies
With the benefit of hindsight, last quarter may have been the best chance for cash-strapped US
shale oil producers to ensure they would get at least $60 (Dh220) a barrel for the next year or two.
Barely a third did so.
According to a Reuters
analysis of hedging
disclosures by the 30
largest such firms, more
than half of them did not
expand their hedges during
the three months ended
June or had no hedges at
all, exposing them to a
plunge that wiped more
than $20 off the price of oil
in the following months.
In total, 12 companies
increased their outstanding
oil options, swaps or other
derivative hedging
positions by 36 million
barrels at the end of the
second quarter compared
with the end of the first quarter, according to the data.
Another 14 companies ended the quarter with hedging positions reduced by a total 37 million
barrels, mainly as a result of expiring past hedges, the data show. The remaining four companies
did not hedge oil production at all. As a whole, the group remains more vulnerable to tumbling
spot market prices than a year ago, with a third fewer barrels hedged, the data show.
“The general feeling among producers is that if you aren’t hedged today... [you are] not going to
start tomorrow and lock in lower levels,” said Mike Corley, president of energy trading and risk
consultancy Mercatus Energy, which advises energy producers, consumers and refiners.
Producers buy a variety of financial options to secure a minimum price for crude and safeguard
future production. Typically, market rallies, such as one in April, allow producers to lock in prices
at a lower cost.
Market reversal earlier this quarter, with oil prices crashing to 6-1/2-year lows below $40 a barrel,
has made hedging positions increasingly critical for understanding which shale firms are most
affected by the worst slump in a generation.
Several firms that tend to run large hedging positions increased them during the second quarter,
including Pioneer Natural Resources and Concho Resources. However, some other usually
significant users refrained from building a larger buffer. Noble Energy, Devon Energy, EOG
Resources and Newfield Resources among those which let the number of insured barrels fall the
most.

For oil traders, the derivatives disclosures serve as an leading indicator of future shale supplies.
Many analysts expect US oil drilling to decline further as old hedge positions begin to wind down,
leaving more small producers exposed to market prices at below break-even levels.
NEW ENTRANTS, OLD PLAYERS
In total, the data show the 30 biggest publicly listed shale-focused producers by output held
hedged positions equivalent to about 366 million barrels of oil as of June 30, compared with 367
million at the end of March. A year ago, they had 562 million barrels, according to the data.
While markets have
been aware of the
industry’s reduced
hedging for
months, the new
data show which
companies chose
to cover more of
their production
when the 2016 US
oil swap
was trading at
around $64 a barrel. By last week, it had fallen to $43 and even though it came back to around
$50 on Wednesday, many analysts expect prices to slide again. It is not clear why some
producers chose to hedge aggressively during the quarter, while others passed up on the
opportunity. The producers contacted by Reuters declined to elaborate on their filings or
comments made during last month’s earnings calls.
Marathon, the sixth-largest producer in the group analysed, did not have any hedges in 2014, but
added some in the first quarter and extended protection into 2016 in the second. “We really just
were able to begin to establish a position in 2016 before the market fell on us, but it’s definitely
going to be a tool we’re going to continue to use,” chief financial officer John R. Sult told analysts
last month.
In contrast, EOG Resources, which typically carries a large volume of swaps on its books, has let
most of them expire and kept only 10,000 barrels per day for the third and fourth quarter, its report
shows.
Devon, which picked up small volumes in the second quarter, said it was confident it would
continue increasing oil production despite hedges rolling off, its chief executive said in an earnings
call in August.
US shale producers are more leveraged than most big oil majors and operate in basins with
relatively higher costs and have used hedging to a greater degree than most of their rivals around
the world.
It will take several more months to find out which companies may have increased their hedges
during oil’s renewed slide in the past two months. Some highly-leveraged drillers may be forced
to boost hedging to safeguard cash flow ahead of October, when many will be locked in critical bi-
annual credit negotiations with lenders, dealers say.

That could further weigh on oil prices by allowing stretched producers to pump oil for longer and
thus maintaining ample supply. Producers selling forward production may also depress newly
resurgent prices.
“When a rebound does come for oil, it’ll face additional headwinds on its way up from producer
selling,” said Michael Cohen, head of energy commodities research at Barclays.
US SHALE INDUSTRY BRACED FOR BANKRUPTCIES
The world may run on oil, but the oil industry runs on capital, and for US shale producers that
capital is starting to dry up.
Earlier in the year it was still relatively easy for US exploration and production companies to raise
capital by selling debt or equities, in spite of last year’s oil price crash caused by a global glut.
Now those sales have slowed sharply, and the financial strain on the industry is growing.
The next turn of the screw
is approaching, in the
shape of another round of
redeterminations of
“borrowing bases”: the
valuations of companies’ oil
and gas reserves used by
banks to secure their
lending.
The shale industry, which
has been responsible for
rapid growth in US oil
production since 2009, is
not about to die. There are
plenty of strong companies that have healthy balance sheets, low costs, or both, and they should
be able to ride out the downturn. But there are very wide differences in resilience between
companies. Those with high costs or high debts, or both, face a turbulent future.
“In retrospect, easy money and a difficult time for finding the right thing to invest in led to an
overshoot in US [oil] production growth,” says Edward Morse, global head of commodities
research at Citigroup. “Companies that should never have been brought to life were brought to
life.”
Now that overshoot is heading for a correction. Analysts expect a wave of asset deals,
acquisitions and corporate bankruptcies, as weaker companies struggle to avoid collapse, not
always successfully.
Already 16 US oil production companies have defaulted this year, according to Standard & Poor’s,
the rating agency. The biggest failure has been Samson Resources, which was bought by a
consortium led by KKR in 2011 for $7.2 billion, and said last month it intended to seek bankruptcy
protection in September.
There are eight oil producers with credit ratings of triple-C or lower, meaning that “they’ve got
about a year or less before they burn out of cash”, says Thomas Watters, a managing director at

S&P. The next hurdles facing many of those companies will be their borrowing base
redeterminations, which typically take effect on October 1.
The previous round in March and April was less brutal for the companies than some had feared.
This one is likely to be significantly tougher, draining liquidity away from struggling companies.
Since the spring, expectations that oil prices might rebound have quickly faded, meaning that
banks will be using lower assumptions when valuing reserves.
The banks are also being warned by the Office of the Comptroller of the Currency, the federal
regulator, to watch out for the risks involved in lending to oil and gas companies, prompting fears
that loans could be withdrawn from businesses that would be financially viable if they were given a
little more time.
Mark Sadeghian of Fitch, the rating agency, argues that banks will again try to avoid cutting back
their lending too sharply. “We don’t expect anything cataclysmic,” he says. “It makes sense for
banks to broker a deal, as opposed to driving companies to the wall.”
Even if they keep fragile companies alive, though, the banks are still likely to want to cut their
lending, he adds.
Buddy Clark, chair of the energy practice at Haynes and Boone, a law firm, says that when
companies announce their new borrowing limits, investors should make sure they read the fine
print. In some cases borrowing bases will be set at a comfortable level, but could be scheduled to
reduce over six months, or have a shorter review period.
“The hope is that the market will pick up in time to allow them to sell equity to shore up the
balance sheet,” says Mr Clark.
As companies seek to persuade investors and banks to back them, their costs are critical. Under
pressure from the slump in the prices of both oil and natural gas, US exploration and production
companies have achieved remarkable feats in cutting costs — in some cases by as much as 25
per cent — and raising productivity.
EOG Resources, the first company to produce shale oil successfully, said last month that it had
reduced the cost of drilling a well and starting production in the Eagle Ford formation of south
Texas to $5.5m, down from $6.1m last year, while making it yield more oil.
Whiting Petroleum, the largest producer in the Bakken formation of North Dakota, said earlier this
month that “enhanced completions” — using higher volumes of sand when fracturing wells to
release oil — could raise production by 40 to 50 per cent while increasing costs by only 15 per
cent.
However, the sector is a heterogeneous group. A recent study found that the oil producer with the
lowest full-cycle cost per barrel — a measure that combines the expense of extracting crude plus
the investment needed to replace reserves — was Seven Generations, at about $20. The highest-
cost producers were Breitburn Energy Partners and Denbury Resources, at about $70, according
to Moody’s, the rating agency responsible for the study.
The median full-cycle cost per barrel was about $51 for oil-focused companies, implying that at
present prices of about $46 for US crude, more than half of the producers are losing money.

Eventually, supply and demand in the global oil market are expected to come back into balance,
sending crude prices higher. US oil production is already falling, according to the government’s
Energy Information Administration, reflecting the 58 per cent drop in the number of rigs drilling for
crude since last October.
But this rebalancing of the market could be a lengthy process. While it is working through, more
US shale producers are sure to fall by the wayside.
US SHALE OIL INDUSTRY HIT BY $30B LOSSES
US shale producers lost more than $30 billion (Dh110 billion) in the first half of the year, in a sign
of the challenges facing the US’ once-booming industry as the slump in oil prices begins to take
effect.
The cash shortfall points to a rise in bankruptcies and restructurings in the US shale oil industry,
which has expanded rapidly in the past seven years but has never covered its capital expenditure
from its cash flow.
Capital spending by listed US independent oil and gas companies exceeded their cash from
operations by about $32 billion in the six months to June, approaching the deficit of $37.7 billion
reported for the whole of 2014, according to data from Factset, an information service.
US oil production fell in May and June, according to the US Energy Information Administration,
and some analysts expect it to continue falling as financial constraints limit companies’ ability to
drill and complete new wells.
Companies have sold shares and assets and borrowed cash to increase production and add to
their reserves with the aggregate net debt of US oil and gas companies more than doubling from
$81 billion at the end of 2010 to $169 billion by this June, according to Factset.

Terry Marshall of Moody’s, the rating agency, said: “The capital markets have been so strong and
so open for these companies that a lot of them were able to raise a lot of debt.” Capital markets
have remained open for US oil and gas companies despite the crude price more than halving in
the past year.
However, there are now signs that the flow of capital is slowing. US exploration and production
companies sold $10.8 billion of shares in the first quarter of the year, but that dropped to $3.7
billion in the second quarter and under $1 billion in July and August, according to Dealogic.
Similarly, those companies were selling an average of $6.5 billion worth of bonds every month in
the first half of the year, but the total for July and August was just $1.7 billion. The next hurdle
facing many US oil companies is the resetting of their borrowing base: the valuation of their oil and
gas reserves that banks use to determine how much they will lend.
Borrowing bases are generally set twice a year, and the new levels, which will typically take effect
from October 1, will reflect significantly lower expectations for oil prices than the round agreed in
the spring.
Edward Morse, global head of commodities research at Citigroup, said there would have to be a
shake-up in the US shale oil industry to separate the good companies from the bad. “Just as it
drove the industry to spectacular growth, the financial sector is going to drive the industry to
consolidate and contract,” he said.
US shale oil producers have reported steep improvements in the productivity of the rigs they use
and the wells they drill. In the Eagle Ford shale of south Texas, the volume of oil produced from
new wells for every rig running has risen by 42 per cent in the past year, from 556 barrels per rig
per day to 792, according to the EIA.
However, the number of rigs drilling for oil in the US has fallen 59 per cent from its peak last
October, and that now appears to be having an effect on the country’s oil output. Virendra
Chauhan, of consultancy Energy Aspects, said he expected fourth-quarter oil production in the US
to be running at a lower rate than in the same period last year.

NewBase For discussion or further details on the news below you may contact us on +971504822502, Dubai, UAE
Your partner in Energy Services
NewBase energy news is produced daily (Sunday to Thursday) and
sponsored by Hawk Energy Service – Dubai, UAE.
For additional free subscription emails please contact Hawk Energy
Khaled Malallah Al Awadi,
Energy Consultant
MS & BS Mechanical Engineering (HON), USA
Emarat member since 1990
ASME member since 1995
Hawk Energy member 2010
Mobile: +97150-4822502
khdmohd@hawkenergy.net
khdmohd@hotmail.com
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 08 September 2015 K. Al Awadi

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