Edition Fifty Three August 2016

Oil heads back to $30/bbl and probably lower

Oil Prices Lower Forever? Hard Times In A Failing Global Economy
2067: The end of the oil age

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Oil heads back to

$30/bbl and probably
lower
Written by Paul Hodges from ICIS

There was never any fundamental reason why oil prices should have doubled
between January and June this year. There were no physical shortages of product,
or long-term outages at key producers. But of course, there was never any
fundamental reason for prices to treble between 2009 - 2011 in the Stimulus rally, or
to jump nearly 50% between January - May last year.

Instead, prices once again rose because financial players expected the US$
to decline

They realised this meant they could make money by buying oil on the futures
market as a 'store of value'

Now, as the US$ has started to recover, they are selling off these positions

And so oil prices are falling again

The problem is that the financial volumes swamp the physical market - they were 7x
physical volume at their 2011 peak- and so they destroy the oil market's key role of
price discovery based on the fundamentals of supply/demand. As I worried in an
interview back in March:

'Now the central banks are doing it again. And so, once again, oil prices have
jumped 50% in a matter of weeks, along with prices for other major commodities
such as iron ore and copper, as well as Emerging Market equities and bonds. In turn,
this will force companies to buy raw materials at today's unrealistically high prices, as
the seasonally strong Q2 period is just around the corner. Some may even build
inventory, fearing higher prices by the summer.

'If this happens, and prices collapse again as the hedge funds take their profits,
companies will ... be sitting on high prices in a falling market in Q3 - just as
happened in January. Only Q3 could be worse, being seasonally weak, and so it
may take a long time to work off high-priced inventory.'

Today, just as I feared, the hedge funds are indeed now unwinding their bets and
leaving chaos behind them. As Reuters reports, they have already 'slashed positive
bets on US crude oil to a 4-month low':

Russia has confirmed the myth of an OPEC/Russia oil production freeze is

now officially dead

US oil and product inventories hit an all-time high of almost 1.39bn barrels

China's gasoline exports have doubled over the past year, and its diesel
exports tripled in H1

Saudi Arabia's Oil Minister has warned 'There are still excess stocks on the
market - hundreds of millions of barrels of surplus oil. It will take a long time to
reduce this inventory overhang'

Even worse is that the world is now running out of places to store all this unwanted
product, as Reuters reported earlier this month:

'Storage tanks for diesel and heating oil are already so full in Germany, Europe's
largest diesel consumer, that barges looking to discharge their oil product cargoes
along the Rhine are being delayed'.

Similarly, the International Energy Agency has reported a major backup of gasoline
tankers at New York harbor, due to storage being full, whilst Reuters added that
tankers are being diverted to Florida and the US Gulf Coast to discharge.

Plus, of course, the recent rally has proved a lifeline for hard-pressed oil producers,
who have been able to hedge their output at $50/bbl into 2017. As a result,
companies have started to increase their drilling activity again, and are expected to
open up many of the 4000 'untapped wells' - where the well has been drilled, but was
waiting for higher prices before it was sold.

Yet wishful thinking still dominates oil price forecasts. $50/bbl has always been the
'Comfortable Middle' scenario, as we noted in the Demand Study - and most
companies and analysts are most reluctant to break away from this cosy consensus.
Yet even in February this year, only 3.5% of global oil production was cashnegative at $35/bbl - just 3.4mbd. Today's figure is likely even lower, as costs
continue to tumble.

And in the real world, oil prices have already fallen more than 10% from their $50/bbl
peak. Unless the US$ starts to fall sharply again, it seems highly likely that prices will
now revisit the $30/bbl level seen earlier this year. Given the immense supply glut
that has now developed, logic would suggest they will need to go much lower before
the currently supply overhang starts to rebalance.

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the

global chemical industry.

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Oil Prices Lower

Forever? Hard Times
In A Failing Global
Economy
Written by Art Berman from The Petroleum Truth Report

Two years into the global oil-price collapse, it seems unlikely that prices will return to
sustained levels above $70 per barrel any time soon or perhaps, ever. That is
because the global economy is exhausted.

The current oil-price rally is over as I predicted several months ago and prices are
heading toward $40 per barrel.

Oil has been re-valued to affordable levels based on the real value of money. The
market now accepts the erroneous producer claims of profitability below the cost of
production and has adjusted expectations accordingly. Be careful of what you ask
for.

Meanwhile, a global uprising is unfolding.

The U.K. vote to exit the European Union is part of it. So is the Trump presidential
candidacy in the U.S. and the re-run of the presidential election in Austria. Radical
Islam and the Arab Spring were precursors. People want to throw out the elites who
led the world into such a mess while assuring them that everything was fine.

The uprising seems to be about immigration and borders but it's really about hard
times in a failing global economy. Debt and the cost of energy are the pillars that
underlie that failure and the resulting discontent. Immigrants and infidels are
scapegoats invented by demagogues.

Energy Is The Economy

Energy is the economy. Energy resources are the reserve account behind currency.
The economy can grow as long as there is surplus affordable energy in that account.
The economy stops growing when the cost of energy production becomes
unaffordable. It is irrelevant that oil companies can make a profit at unaffordable
prices.

The oil-price collapse that began in July 2014 followed the longest period of
unaffordable oil prices in history. Monthly oil prices (in 2016 dollars) were above $90
per barrel for 48 months from November 2010 through September 2014 (Figure 1).

Figure 1. Oil Prices in 2016 Dollars, 1950-2016. Source: EIA, Federal Reserve Bank
of St. Louis and Labyrinth Consulting Services, Inc.

That was more than 3.5 times longer than the period from September 2007 through
September 2008 just before the Financial Collapse. It was almost twice as long as
the period from September 1979 through November 1981 that preceded the longest
oil-price collapse in history.

There is nothing magic about $90 per barrel but major economic dislocations have
occurred following periods above that level. Few economists or world leaders seem
to understand this or include the cost of energy in their models and policies.

There is a clear correlation between oil price and U.S. GDP (Gross Domestic
Product) when both are normalized in real current dollar values (Figure 2). Periods of
low or falling oil prices correspond to periods of increasing GDP and periods of high
or rising prices coincide with periods of flat GDP.

Figure 2. U.S. GDP and WTI Oil Price. Source: U.S. Bureau of Labor Statistics, The
World Bank, EIA and Labyrinth Consulting Services, Inc.

Economic growth is complex and some will object to this correlation. Fine. But
energy is also complex. Most people think about it as an independent topic or area of
our lives. Like business, politics, economics, education, agriculture, and
manufacturing, there is energy. This is understandable but wrong.

Energy underlies and connects everything. We need energy to make things,

transport and sell things and to transport ourselves so that we can work and spend.
We need it to run our computers, our homes and our businesses. It takes energy to
heat, cool, cook and communicate. In fact, it is impossible to think of anything in our
lives that does not rely on energy.

When energy costs are low, the costs of doing business are correspondingly low.
When energy prices are high, it is difficult to make a profit because the underlying
costs of manufacture and distribution are high. This is particularly true in a global
economy that requires substantial transport of raw materials, goods and services.
The global economy expanded in the mid-1980s through 1990s when oil prices
averaged $33 per barrel. Then, oil prices nearly doubled to an average of $68 per
barrel from 1998 to 2008, and subsequently increased after 2008 to 2.5 times more
than in the 1990s. When oil prices exceed $90 per barrel, the global economy is no
longer profitable.

America's Golden Age

The United States experienced a golden age of economic growth and prosperity
during the 25 years following World War II. This period forms the basis for U.S. and
indeed global expectations that growth is the norm and that recessions and slow
growth are aberrations that result from mis-management of the economy. This is the
America that today's populists want to return to.

The Golden Age, however, was a singular phenomenon that is unlikely to recur. After
1945, the economies and militaries of Europe and Japan were in ruins. The U.S. was
the only major power that was largely unaffected by war. Having no competition is a
huge competitive advantage.

The U.S. was the first country to fully convert to petroleum, another competitive
advantage. A barrel of oil contains about the same amount of energy as a human
would expend in calories in 11 years of manual labor. Crude oil contains more than
twice as much energy as coal and two-and-a-half times more than wood. And it's a
liquid that can be moved easily around the world and put in vehicles for transport.

In 1950, the U.S. produced 52% of the crude oil in the world and was largely selfsufficient. Texas was the largest U.S. producing state and the Texas Railroad
Commission (TXRRC) controlled the world price of oil through a system of allowable
production that also ensured spare capacity.

Oil was cheap, the U.S. controlled its price and had a positive balance of payments.

Oil Shocks of the 1970s and 1980s

That began to change toward the end of the 1960s. A re-built Europe and Japan
rose to challenge American commercial dominance and the costs of fighting the
spread of communism-especially in Vietnam-weakened the American economy. In
1970, the U.S. economy went into recession and President Nixon took drastic steps
including the end of backing the dollar with gold reserves. The rest of the countries
that were part of the Bretton Woods Agreement did the same resulting in the largest
global currency devaluation in history.

In November 1970, U.S. oil production peaked and began to decline. In March 1972
the TXRRC abandoned allowable rates. The United States no longer had any spare
capacity. OPEC had long objected that oil prices were held artificially low by the U.S.
Now OPEC had the clout to do something about it.

In October 1973, OPEC declared an oil embargo against Israel's allies including the
U.S. during the Yom Kippur War. This was really was just an excuse to adjust oil
prices to the devalued Western currencies following the end of the Bretton Woods
Agreement.

The price of oil more than doubled by the end of January 1974 from $22 to $52 per
barrel (2016 dollars). When the Arab-Israeli conflict ended a few months later, oil
prices did not fall.

Real oil prices more than doubled again in 1980 to $117 when Iran and Iraq began a
war that took more than 6 million barrels off the market by 1981. The effect of these
price hikes on the world economy was devastating. World demand for oil decreased
by almost 10 million barrels per day and did not recover to 1979 levels until 1994
(Figure 3). Real prices did not recover to $40 until 2004 except for a brief excursion
during the First Persian Gulf War in 1990.

Figure 3. OPEC and world liquids production compared to 1979 and world oil prices.
Source: BP and Labyrinth Consulting Services, Inc.

The Miracle of Reagan Economics: Low Oil Price

Ronald Reagan is remembered as a great U.S. president because the economy

improved and the Soviet Union fell during his administration. Both of these
phenomena were because of low oil prices.

After U.S. oil production peaked, imports increased 5-fold from 1.3 to 6.6 mmbpd
from 1970 to 1977 (Figure 4).

Figure 4. U.S. crude oil production, imports and oil price in 2016 dollars. Source:
EIA, Federal Reserve Bank of St. Louis and Labyrinth Consulting Services, Inc.

When oil prices rose to nearly $110 per barrel during the Iran-Iraq War, the U.S.
went into recession from mid-1981 through 1982. Oil consumption fell more than 3
million barrels per day. Production from Prudhoe Bay began in 1977 and somewhat
dampened the overseas outflow of capital but it did not help consumers with price.

Federal Reserve Chairman Paul Volker raised interest rates to more than 16% by
1981 to bring the inflation caused by higher oil prices under control (Figure 5). This
worsened the economic hardship for Americans in the short term but also became
the foundation of the Reagan economic revival.

10

Figure 5. U.S. public and consumer debt and interest rates. Source: U.S. Treasury,
U.S. Federal Reserve Banks and Labyrinth Consulting Services, Inc.

Much of the developing world had survived the oil shocks of the 1970s by borrowing
from U.S. commercial banks. Higher U.S. interest rates put those countries into
recession and that helped keep oil demand and prices low. By 1985, oil prices had
fallen below $40 per barrel and would not rise above that level again until 2005.

Volker found an opportunity in the demand destruction from oil shocks. By raising
U.S. interest rates, he managed to roll back oil prices almost to levels before the
1973 oil embargo and created a great economic boon for the U.S.

'He [Volker] used the strategic price that America continued to controlnamely,
world interest rateas a weapon against the price of the strategic commodity that
America no longer controlled, which was oil.'
James Kenneth Galbraith

11

High interest rates attracted investment. Along with low oil prices, a strong dollar, tax
cuts and increased military spending, Volker and Reagan restored growth to the U.S.
economy. By 1991, the Soviet Union collapsed under the strain low oil prices, debt,
and military spending.

Things Fall Apart; The Center Cannot Hold

Treasury bonds became the effective reserve asset of the world. The U.S. put
economic growth on a credit card that it never planned to pay off. Public debt
increased almost 6-fold from the beginning of Reagan's administration ($1 trillion) in
1981 to the end of Clinton's ($6 trillion) in 2000 (Figure 5). By the end of Bush's
presidency in 2008, debt had reached $10 trillion. It is now more than $18 trillion.

The 1990s were the longest period of economic growth in American history. There
are, of course, limits to growth based on debt but the new economy seemed to be
working as long as oil prices stayed low. Then, Prudhoe Bay peaked in 1985. Total
U.S. production declined, and imports increased sharply as the economy improved
(Figure 4). Similarly, the world economy slowly recovered after 1985 with lower oil
prices.

Consumer credit expanded under President Clinton through mortgage debt.

Manufacturing had been progressively outsourced to Latin American and Asia, and
the evolving service economy was underwritten by consumer debt that increased 7fold from less than $0.5 trillion in 1981 to $2.6 trillion in 2008 (Figure 5).

The 'dot.com' market collapse in 2000 and the September 11, 2001 terror attacks
pushed the U.S. economy into recession and the Federal Reserve reduced interest
rates below 2%, the lowest levels in U.S. history to date. Mortgage financing
boomed.

12

The 1993 repeal of The Glass-Steagall Act allowed banks to package mortgage debt
into complex, high-risk securities (CDOs or collateralized debt obligations). In what
can only be described as out-of-control speculative greed and institutional fraud,
CDOs, synthetic CDOs that bet on the outcome of CDO bets, and the credit default
swaps that bet against both propelled the economy to levels of leverage and
instability not seen since the 1920s.

'This was the new new world order: better living through financialization.'
-James Kenneth Galbraith**

From 2004 through 2008, world liquids production reached a plateau around 86
million barrels per day (Figure 5). Increased demand from China and other
developing economies pushed oil prices higher as traders and investors worried that
Peak Oil had perhaps arrived.

Figure 6. World liquids production and oil price in 2016 dollars. Source: EIA June
2016 STEO and Labyrinth Consulting Services, Inc.

13

Oil prices soared to more than $140 per barrel and interest rates rose above 5%.
The adjustable interest rates that underlaid much sub-prime debt also rose.
Mortgage holders began to default and world financial markets collapsed in 2008.

The Second Coming

Debt and higher oil prices had spoiled the party. The problem was addressed with
more debt and higher oil prices.

The Federal Reserve Bank brought interest rates to almost zero, created money and
bought Treasury bonds while the government bailed out the banks and auto industry.
OPEC cut production by 2.6 million barrels from December 2008 to March 2009 and
oil prices recovered from $43 to $65 by May, and were more than $80 by year-end
propelled by a weak dollar and easy credit.

Tight oil, deep water and oil sands projects that needed sustained high oil prices
took off. Unconventional production in the U.S. and Canada increased 5 million
barrels per day between January 2010 and October 2015 (Figure 7).

Figure 7. Incremental world crude oil + lease condensate production. Source: EIA
and Labyrinth Consulting Services, Inc. after Crude Oil Peak.

14

Tight oil used the same horizontal drilling and hydraulic fracturing technology that
had been pioneered in earlier shale gas plays. The technology was expensive but
once oil price topped $90 per barrel in late 2010 and stayed high for the next 4
years, the plays were deemed successful by producers and credit markets.

U.S. tight oil and deep-water production resulted in a second coming of sorts with
monthly crude oil output reaching 9.69 million barrels per day in April 2015. That was
350,000 bopd less than the 1970 peak of 10.04 million bopd.

The difference of course was cost. In 1970, the market price of a barrel of oil in 2016
dollars was $20 per barrel versus $100 from 2011 to 2014, and $55 per barrel in
2015.

And this is precisely the problem with the almost universally held belief that
technology will make all things possible, including making a finite resource like oil
infinite. Technology has a cost that its evangelists forget to mention.

The reality is that technology allows us to extract tight oil from non-reservoir rock at
almost 3 times the cost of high-quality reservoirs in the past. The truth is that we
have no high-quality reservoirs left with sufficient reserves to move the needle on the
high global appetite for oil. The consequence is that to keep consuming and
producing as we always have will inevitably cost a lot more money. This is basic
thermodynamics and not a pessimistic opinion about technology.

READ MORE ON FORBES

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2067: The end of the oil

age
Written by Vagif G. Sharifov from Trend News Agency

The fear of losing a market share makes the oil countries play the oil price wars, glut
the market while the low prices reducing investments in the new oil reserves
exploration for the second year. The world proved oil reserves increased by only 2.5
times up to 1.7 trillion barrels during active crude oil production for the past 35 years.

It seems that the major crude oil producing countries, which are so keen on a price
war, forgot that in reality the oil runs out very quickly. For better understanding: 1.7
trillion barrels of oil with a production of 90 million barrels per day are approximately
as the Indian Ocean from which two Gulfs of Mexico are scooped out every year.
According to the simplest calculations, it seems the current world's oil proved
reserves at a current production level will suffice for 50 years. By that time it will be
possible to find industrial raw commodity to replace the oil in the cycle of production
of goods, find and widely implement a cost-effective energy analogue. But in reality it
is not so smooth.

The annual production of each further oil barrel becomes more expensive, it is
technically becomes more difficult to produce and refine heavy oil, the new proved
reserves are exploring more and more slowly. A fabulous figure - $40 trillion
investments will be required during the next 20 years to compensate for falling oil
production at the existing fields and develop new ones to meet the growing oil
demand.

Although it is fairly clear that proved oil reserves cannot be evaluated in real time,
the situation is as follows: the world's proved oil reserves have been increasing from
a minimum of 0.02 percent up to 13 percent annually for the last 35 years. During
that period, the reserves have dropped only twice - in 1998 and in 2015. The volume

16

of reserves decreased by 0.1 percent or 2.4 billion barrels in 2015 as compared to

2014 and stood at 1.697 trillion barrels. It was a result of the decrease in estimations
in nine countries - Brazil, Colombia, Trinidad and Tobago, Denmark, Italy, Russia,
Saudi Arabia, Egypt and Indonesia. In total, the volume of proved reserves of these
oil producing countries has decreased by 5 billion barrels of oil. The decrease was
slightly offset by the growth of reserves of other countries, including Norway and
Oman at the yearend.

Taking into account the data in the BP Statistical Review of World Energy-2016, one
can assume that the oil era will end in 2067. Naturally, these simple calculations are
based on current proved reserves and the level of crude production. Any economic
model of world institutions which try to predict the economy situation for 30-50 years
ahead, shows that energy consumption will only grow steadily. For example, BP
believes that the energy consumption will grow by a third after 20 years as a result of
the growth of world GDP and population (by 1.5 billion people). Thus the demand for
oil will increase up to 122 million barrels per day by 2040 and the oil price will reach
$204 per barrel, EIA believes. BP assumes that some 80 percent of the world energy
demand will be covered by oil, gas and coal, while the EIA thinks the remaining 20
percent of this demand will be covered by nuclear and renewable energy. By the
way, the alternative energy is still in its infancy, therefore, it will be able to free only
one million barrels of oil per day from the electricity production industry only after 25
years.

Assumptions about the significant increase in oil prices in the long run period are
caused by reduction in the number of exporting countries while the energy demand
is growing. Too cheap oil will hinder the development of the world economy and will
not allow fully ensuring the energy security of the nations. The world population will
be nine billion by 2040 and everybody will need work, car, food, heat and
inexpensive Wi-Fi. As more than 60 percent of people will live in cities. For obvious
reasons, in cities people more often use cars, number of which will reach 2.6 billion
by 2040, according to OPEC. A major part of the population's growth and the
consumption of world resources will be accounted for developing countries. For
example, after 10-15 years India will be overpopulated than China.

17

Certainly, alternative energy will slightly reduce fossil fuel production for the mediumterm period. Of course, there will be discovered a few more fields with large
recoverable oil that will be able to meet the growing demand for some time. Gas
rational use will be expanded; gas will be produced in the Arctic, where gas reserves
are estimated at 1,500 trillion cubic meters.

Basic but the current scenario of oil resource availability of producing countries is
shown in the table below:
Resource

Proved oil reserves (billion

Oil production (in thousands of

barrels)

barrels per day)

US

55

12704

12

Canada

172.2

4385

107

Mexico

10.8

2588

11

Argentina

2.4

637

10

Brazil

13

2527

14

Colombia

2.3

1008

Ecuador

543

40

Peru

1.4

113

34

Trinidad & Tobago 0.7

110

14

Venezuela

300.9

2626

314

Azerbaijan

841

23

Denmark

0.6

158

10

Italy

0.6

115

14

Kazakhstan

30

1669

49

Norway

1948

11

Romania

0.6

84

19

Russia

102.4

10980

25

Turkmenistan

0.6

261

United Kingdom

2.8

965

Uzbekistan

0.6

64

25

Iran

157.8

3920

110

Iraq

143.1

4031

97

Kuwait

101.5

3096

90

Country

availability
(in years)

18

Oman

5.3

952

15

Qatar

25.7

1898

37

Saudi Arabia

266.6

12014

61

Syria

2.5

27

253

United Arab Emirates97.8

3902

69

Yemen

47

175

Algeria

12.2

1586

21

Angola

12.7

1826

19

Chad

1.5

78

53

Congo

1.6

277

16

Egypt

3.5

723

13

Equatorial Guinea

1.1

289

10

Gabon

233

23

Libya

48.4

432

307

Nigeria

37.1

2352

43

South Sudan

3.5

148

65

Sudan

1.5

105

39

Tunisia

0.4

63

17

Australia

4.0

385

28

Brunei

1.1

127

24

China

18.5

4309

12

India

5.7

876

18

Indonesia

3.6

825

12

Malaysia

3.6

693

14

Thailand

0.4

477

Vietnam

4.4

362

33

Total

1697.6

91670

51

Raw data: BP Statistical Review of World Energy-2016

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Nigeria's export woes,

attacks on oil majors
and why merger deals
have virtually halted
Written by Paul Harris from JWN Energy

Oil production has fallen dramatically and acquisition deals have ground to a virtual
halt so far in 2016 in Nigeria, as the country continues to grapple with militant attacks
on energy installations.

The concerns over export levels centre on oil installations in the Niger Delta that
have been repeatedly targeted in recent months, creating significant unrest and
threatening oil export volumes.

It hardly needs stating that energy production and exports are absolutely pivotal to
the health of the economy of Nigeria, where several major international operators
have significant stakes. Glacier Media's Evaluate Energy data indicates that
ExxonMobil produced 297,000 barrels a day (b/d), Royal Dutch Shell 275,000 b/d,
Chevron 271,000 b/d, Total 228,000 b/d, and ENI SpA 132,000 b/d during 2015.

Crude oil production within the troubled West African state has plummeted during the
first half of 2016. In May alone, output had fallen by 461,000 b/d when compared to
fourth quarter averages in 2015, to 1.42 million b/d. May production was down
251,000 b/d compared to April as the slide continued, according to OPEC's report on
crude oil production from secondary sources.

20

Among Africa's OPEC-member nations, the same OPEC data indicates Nigeria
lagged behind Angola in terms of year-to- date crude oil production to May. Our
Evaluate Energy data indicates that oil exports from Nigeria topped out in 2010 at
2.25 million b/d. With the exception of a small increase in 2014, exports have fallen
every year since 2010, and stood at just over 2 million barrels in 2015.

As market uncertainty prevails in Nigeria, merger and acquisition activity has fallen
dramatically. According to our 2016 data, so far this year just two deals have been
announced. That compares to 13 deals announced in each of the two years prior.

The larger of the two deals in 2016 involved Canadian-listed Mart Resources Inc.
(TSX: MMT), which agreed a Cdn$367 million deal (including debt) to be acquired by
Midwestern Oil & Gas Company Ltd. and San Leon Energy Plc.

Midwestern had originally considered purchasing Mart in March 2015 - a deal that
would have been worth around Cdn$524 million (including debt) at the time. Later
that year, Mart was courted by Delta Oil Nigeria BV in a Cdn$394 million deal. That
deal, however, was terminated due to deteriorating oil prices. Our Canoils Canadian

21

asset team covered in-depth Mart's various agreements to sell the company in our
usual monthly M&A reviews.

The second Nigerian M&A deal so far this year saw MX Oil plc acquired by GEC
Petroleum Development Co. Ltd. for US$18 million.

While M&A deal-flow has dried up, the activities of a militant group, known as the
Niger Delta Avengers (NDA), have continued. The NDA's demands are varied and
are reported to include the ownership structure of oil blocks.

Unrest naturally breeds uncertainty. Production continues, but disruption to

operations has been painful.

In the past week, the militants struck again. According to reports, the NDA blew up
three manifolds operated by Chevron Corp. The NDA claims to have also blown up a
well and pipelines in the country's southern oil hub.

While efforts are made to tackle the disruption, markets will watch on in hope of a
resolution. As a side note, a Nigerian, Dr. Mohammed Sanusi Barkindo, takes the
helm as secretary general of OPEC next month. Dr. Barkindo is formerly a managing
director of state enterprise the Nigerian National Petroleum Corp.

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22

Oil market resists:

BREXIT presses, OPEC
ruins
Written by Vagif G. Sharifov from Trend News Agency

The dynamics of the North Sea Brent oil prices in June showed the smallest lag for
the recent year and a half and the highest average price since early 2016 - $48.24
per barrel. The last month was the first in a period of low prices when Brent average
spot price (FOB) decreased by a minimum of $13.23 per barrel compared to June
2015. All other months of 2016 showed a greater lag - from $17.06 per barrel to a
maximum of $25.91 per barrel compared to the same period of 2015.

Although Brent oil average price since early 2016 is still less than last year's price $39.8 per barrel compared to $57.84 per barrel, 2016 looks more resolute than the
previous one in terms of oil price stability. For example, the modal value for Brent oil
prices lag amounted to about $50 per barrel within six months of 2015 compared to
the same period of 2014; while the same value is nearly three times less - $17 per
barrel in 2016 compared to 2015.

The oil prices increased in June and on average in the second quarter due to a twofold decrease of the global market glut up to 1.09 million barrels per day compared to
2.58 million barrels oversupply in the first quarter. Besides a decrease in glut, the
growth of demand for crude oil up to 93.25 million barrels per day compared to 93.09
million barrels per day in the first quarter also contributed to an increase in oil prices.

These factors, as well as the BREXIT speculations, failures in oil supply from Nigeria
and Canada have led to the average price of Brent to $45.52 per barrel in the Q2 of
2016, which is by $11.83 more than in the Q1 of 2016.

23

Average prices for Brent (FOB, spot) in 2014-2016:

There are prospects for growth in oil prices in 2017, at least, due to OPEC's
expectations related to the growth in global oil demand up to 95.33 million barrels
per day compared to 94.18 million in 2016. However, the increase in oil prices can
be suppressed by Iran's plans to increase its own oil production to compensate the
income shortfall during the sanctions' period. One of the top managers of the
National Iranian Oil Company said in July that Tehran plans to increase oil export
from two million barrels per day to four million barrels per day. Obviously, Iran is
waiting for an economically attractive oil prices, so at the first advantageous
opportunity to supply additional two million barrels of oil per day on the market.
However, there are experts in Tehran who disagree with the country's energy policy.
For example, one of the members of the Iranian parliament thinks that it would be
more profitable to export only 400,000 barrels of oil per day while the rest 1.6 million
barrels could be sent to the refinery. The MP thinks Iran can significantly strengthen
its position in the European oil products market since there are the decline in refining
capacity in Europe.

24

Taking into account the Iran's plans to increase the oil output, OPEC's constantly
violating its own quotas, fears of Russia, Saudi Arabia and now the US to lose their
oil market share, the recent statements of OPEC heads about getting closer to the
world oil market balance look not clear. One of the reasons of this obscurity is
BREXIT which has a significant impact on the market. In fact, BREXIT's impact on
the market can be postponed, as it was in the case of Lehman Brothers' bankruptcy
when the commodity markets went down only after six months. Taking into account
London's role in the world financial market, one can presume that the delayed
influence of BREXIT will be significant.

International financial institutions and various consulting companies do not expect

the oil prices to exceed $60 per barrel in 2016 or 2017. The IMF has the lowest
forecast standing at $36 per barrel in 2016 and $42 in 2017.

The UK Capital Economics believes that the price for Brent will be $42 per barrel and
$45 in the third and fourth quarters of 2016, respectively. The price for Brent will
reach $50, $55 and $57.5 per barrel in the first, second and third quarters of 2017,
respectively.

EIA experts believe that the price for Brent oil will be around $43 per barrel in 2016
and $51 in 2017.

Analysts of the US JP Morgan forecast that the average price for Brent will amount
to $45.3 per barrel in 2016 and $55 per barrel in 2017. Goldman Sachs believes that
the price for Brent can reach $50 per barrel only in the second half of 2016, while
according to the World Bank's forecasts, this is possible only in the first half of 2017.

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25

Why You Should

Examine Debt Levels to
Predict Next Oil & Gas
M&A Mega Deal
Written by Mark Young from Evaluate Energy

If I had to lay odds on which E&P powerhouse is going to secure the sector's next
major corporate acquisition I'd start by examining their ability to absorb substantial
levels of debt while still keeping debt-to-capital ratios in balance.

Sightings of large corporate mergers have been rare during the commodity price
downturn. During that time, the number of companies with high debt-to-capital ratios
has soared. To help understand which oil giants have the financial clout to pull
together a major M&A deal, we've shortlisted those with the greatest ability to
assume debt and remain 'healthy'.

For More: JWN Webinar Series - Review of Recent Transactions: Where is Money
Being Spent and Why

Companies with greatest debt capacity as of Q1 2016

By assigning an arbitrary debt-to-capital ratio of 35% as 'healthy' you can see which
companies are currently able to assume the most extra net debt for a corporate
acquisition either in Canada or internationally, and still keep debt levels in check. For
example, Tourmaline Oil Corp. (TSX:TOU) would be able to assume Cdn$799
million extra net debt in any acquisition in this model, based on its Q1 2016 balance
sheet, before its debt-to-capital ratio exceeded 35%.

26

Source: Evaluate Energy & CanOils, Q1 2016 Financial Data

Of course, this doesn't necessarily mean these companies will seek a merger deal.
But if they do, they'll have plenty of capacity for additional debt assumption.

More details on this can be found in the webinar I delivered last week, which can be
viewed here.

Why is debt important to consider NOW?

It's true that the general capital profile of an upstream oil and gas company has, on
the whole, changed dramatically since the price downturn began. Looking at U.S.
and international companies that report to the SEC as well as every TSX company,
we can see a general increase in risk since last year by looking at those debt-tocapital ratios. The findings are intriguing:

Source: JWN Webinar Series - Review of Recent Transactions: Where is Money

Being Spent and Why

27

In 2015, debt was a much greater proportion of their entire capital structure than
2014. That's hardly a major surprise given the downturn. Some companies even
moved into a negative equity position in 2015, as pressures from a longer period of
low commodity prices mounted.

Analysis: Biggest corporate deals of the downturn

The highest profile global corporate merger during the downturn was undoubtedly
Royal Dutch Shell's (LSE:RDSA) acquisition of BG Group for around US$81 billion.
In Canada, it was Suncor Energy's (TSX:SU) Cdn$6.6 billion acquisition of Canadian
Oil Sands Ltd. (COS) to become the largest stakeholder in the Syncrude project.

Both deals had a lot in common: a large issuance of stock in the acquiring company
to the target, as well as the assumption of significant debt.

Royal Dutch Shell, as well as 383 UK pence per share, offered 0.4454 B
shares in the company to BG, and took on just shy of US$10 billion in debt
according to BG's annual 2015 statements.

Suncor issued 0.28 shares in the company to COS in consideration for the
acquisition and also assumed Cdn$2.4 billion in debt, according to press
announcements.

June 2016 has also seen a couple more deals in Canada that follow this debt
assumption pattern.

Raging River Exploration Inc. (TSX:RRX) has agreed to acquire Rock Energy
Inc. (TSX:RE) in a deal where debt assumption of Cdn$67 million makes up
61% of the total deal consideration.

Gear Energy Ltd. (TSX:GXE) will be acquiring Striker Exploration Ltd. (TSXV:SKX) in a deal worth around Cdn$66 million by issuing 2.325 Gear shares
for every Striker share as well as assuming Striker's Cdn$10 million in debt.

It's this ability to assume debt and still remain healthy that we think is crucial in
identifying those most likely to take on a big corporate merger in the near future.

28

Both Suncor and Royal Dutch Shell appear in our above list of companies with high
debt capacity. Suncor has been linked to more acquisition activity in press reports,
while Shell has not - having actually been linked with more asset sales than
purchases. In fact, rumours came out of the company that Shell assets were going to
hit the market in ten countries worldwide in the not-too-distant future.

Of the other companies listed with greatest debt capacity, many have been selling
high-value royalty assets in Canada to bolster their activities with significant cash
through the downturn, while the international list includes some of the world's biggest
and most powerful companies.

With companies also having put copious funding into cost controls in recent times
and oil prices starting to trend upwards a bit, we might just be around the corner from
one of the companies on this list making the world's next big corporate merger in the
E&P sector and we should expect it to include the significant assumption of debt.

View more quality content from

Evaluate Energy

29

Australia's energy
sector is in critical
need of reform
Written by Tony Wood from The Conversation

Over the next few decades Australia, like many countries, faces the prospect of an
energy transformation that will challenge every aspect of stationary and transport
energy: from production, transmission and distribution to consumption and exports.

The ultimate imperative is to move our economy to a low-carbon footing, while

ensuring that consumers don't pay unnecessarily high costs. The COAG Energy
Council, the decision-making body of federal and state energy and resources
ministers, formally recognised the critical connection between energy and climate
policy last July. Later that year the world's governments brokered the Paris climate
agreement, with Australia promising to cut emissions to 26-28% below 2005 levels
by 2030.

Yet this need for wholesale transformation has emerged at a time when Australia's
policy structures are already struggling to maintain the delivery of affordable and
reliable electricity, after the reforms of the 1990s lost momentum in the 2000s.

It also comes at the end of a three-year period in which the Coalition government's
actions to address these challenges made modest progress at best. Tony Abbott's
administrationrepealed the carbon price, wound back the Renewable Energy
Target and established the Emissions Reduction Fund (ERF), which has contracted
for more than 100 million tonnes of CO? emission reductions at less than A$14 per
tonne. But it largely sidestepped the reforms needed to address emerging energy
trends such as low demand growth, the rise of distributed wind power generation, the
boom in domestic solar power and the dramatic growth of coal seam gas.

30

The upshot was that 2013-16 has left the energy industry with huge uncertainty
about what is in store, at a time when it craves reassurance more than ever.

This leaves the new government with three key priorities. As elsewhere, its capacity
to deliver will be constrained by the reality of the new parliament.

The first priority will be to build on its current climate change policy to create a stable,
long-term approach that will lead the transition to a low-emissions economy. The
government will be able to do this through a combination of administrative action and
bipartisan support.

The second priority is to revive energy market reform through the COAG Energy
Council. The third is to maximise the value of Australia's gas resources and ensure
continuity of supply.

These are not politically partisan issues but they do require galvanising cooperation
across state and territory governments.

In addition, the government should develop a renewed reform agenda for the COAG
Energy Council - one that addresses all these issues with a focus on outcomes,
rather than being mired in process as it has been so far.

Climate policy

For most of this century Australia has lacked a credible, long-term climate policy.
Instead we have had toxic debate, policy bonfires and a mishmash of unstable and
unpredictable federal and state policies that have threatened industry investment,
not to mention the environment itself.

Existing government policy (the ERF and its new safeguard mechanism, plus the
reduced Renewable Energy Target) is likely to be enough to meet Australia's 2020
emissions target - a 5% reduction on 2000 levels by 2020 - but far from enough to
meet the stronger 2030 target, or indeed to get us to zero net emissions thereafter.

31

An economy-wide carbon market is the best way to cut emissions and meet
Australia's targets without excessive cost to the economy. But in the absence of the
political will to implement this, we must work with what we have.

The government should therefore strengthen the safeguard mechanism, which puts
pollution limits on 140 of Australia's biggest-emitting businesses, so that it becomes
an effective market mechanism. This approach has the potential to gain the
bipartisan support that energy companies seek as they consider investments in longlived assets.

Technologies that might produce plentiful low-emission electricity will still be

expensive and risky in the short term. To overcome these market barriers, the
government will need to expand its existing clean energy research funding to reduce
the costs of moving to a low-emissions economy.

32

Electricity reform

Energy market reform began in the early 1990s but stalled in the 2000s. Privatisation
became politicised and governments baulked at introducing electricity prices that
more closely reflect the costs of producing power. Meanwhile, prices climbed by 60%
in real terms for all customers.

The government should work through the COAG Energy Council to push for network
privatisation and tariff reform, with the goal of delivering fairer and cheaper electricity
bills.

In reforming power networks, two issues come first.

The process for defining the costs that networks can recover from customers takes
too long and encourages networks to overspend. It must be overhauled.

Second, governments must decide who will pay for surplus network infrastructure
that was built to meet overly cautious reliability standards and exaggerated demand
forecasts. This 'gold-plating' is one of the main causes of power price rises over the
past decade.

33

Network infrastructure has been built to meet the peak demand that occurs only
once every summer in most states, yet customers are charged on their year-round
use. Pricing to reflect the cost of meeting this peak would make electricity
prices fairer and cheaper for all consumers in the long term.

Federal and state governments have agreed to introduce new network tariffs from
the start of 2017. But progress is slow, as the losers from policy changes have loud
voices that have deterred risk-averse state ministers.

This lack of tariff reform is one of the factors (alongside the large subsidies on offer)
that have prompted so many Australian households to install solar panels. By our
analysis, the benefits have fallen far short of the costs so far.

Yet as solar panels and battery storage continue to get cheaper, cost-reflective
network tariffs will encourage consumers to combine them fairly and effectively.

Since its creation in 1998, the National Electricity Market has helped to provide
affordable, reliable and secure electricity supplies. But now it faces new challenges
that were not envisaged when it was established.

Thanks to the surge in household solar and other factors, more and more electricity
is now generated at zero or even negative marginal cost. A similar situation in
European markets has led to serious financial losses for major energy companies in
Germany. This is forcing governments in Britain, Germany and elsewhere to
introduce supplementary markets for generation capacity even if it is not used.

Although Australia is not yet in this situation, the government should initiate a review
of the National Electricity Market to avoid such threats arising.

Gas markets

Opening the east coast domestic gas market to international buyers has pushed up
prices. These pressures are exacerbated by the lack of progress toward a
transparent and liquid wholesale market and by patchwork regulation

34

of unconventional extraction such as fracking.

The government should lead the implementation of recommendations from the

recent Australian Competition and Consumer Commission's East Coast Gas
Inquiry to create a more effective and efficient market. Reverting to protectionism by
reserving a proportion of gas for domestic use is not the answer; in the long run this
would reduce the availability of domestic gas and drive up prices, while also reducing
export revenue.

Fixing the COAG Energy Council

A recent review of how Australia's energy markets are governed identified problems
with the COAG Energy Council and the operation of the government agencies that
implement its decisions.

In a way this serves as a neat illustration of the problems facing the government if it
is going to get energy policy right. Governance, rules, regulations and policy settings
are desperately dry issues. But if Australia gets them right, the problems people
really care about - like expensive energy bills and climate change - will be much
easier to solve.

Tony Wood - Program Director, Energy, Grattan Institute

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The Conversation

35

Brexit latest:
Disentangling energy
policy after UK votes to
leave EU
Written by Paul Harris from JWN Energy

UK energy policy has become rather entangled in the dramatic reorganization of

government that has taken place since the nation opted out of the European Union.

It's barely a week since Theresa May became the new leader of the Conservative
party, and by extension the new Prime Minister.

By all accounts, she's settled in quickly: a major cabinet reshuffle involving major
(and controversial) new roles for Brexit campaigners, early talks with Scotland's first
minister in view of Scotland's significant pro-EU support, and preparations for
meetings with German and French leaders this week.

She's also found time to replace the Department of Energy and Climate Change
(DECC) with a larger, more extensive and over-arching Department for Business,
Energy and Industrial Strategy (BEIS).

There are two broad schools of thought about whether the switch is a good thing.
One is that it is sensible to tie the energy needs of the country ever more tightly with
business and industrial development. The flip side is concern that climate change as an agenda issue - will slide down the priority list, subsumed by pressing business
and industrial growth demands.

36

The creation of the new BEIS department has divided opinion between political
groups and environmentalists.

Greg Clark will lead the new department. Under the reshuffle, government energy
lead (and recent contender for Prime Minister) Andrea Leadsom becomes
environment secretary.

Prime Minister May gave us some clues to her energy priorities at the launch of her
national campaign to become Tory leader last week, where she spoke of the need
for an energy policy 'that emphasizes the reliability of supply and lower costs for
users.'

The UK, with its history of offshore production, was a net exporter of oil, natural gas
liquids and gas until 2005.

Since that time, however, the UK has been reliant on overseas imports to meet
energy needs.

37

Source: Evaluate Energy

Data from our Evaluate Energy team confirms that in the past decade that disparity
has been greatest in 2013, when the UK imported 1.2 million boe/d more than it
exported. In 2015, that figure was down slightly, at 1.05 million boe/d.

Overall UK consumption of oil/NGL/gas peaked in 2005, at 3.5 million boe/d. It has

declined virtually every year since, and stood at 2.6 million boe/d in 2015.

Meanwhile, our data confirms that UK oil/NGL/gas production has declined every
year since 2000, when it stood at 4.45 million boe/d, to 1.44 million boe/d in 2014. It
increased slightly in 2015, to 1.6 million boe/d.

Prime Minister May's tone feels very much in tune with the former DECC list of
energy priorities, where security of domestic energy supply ranked very high indeed.

38

Earlier this year, as energy minister, Leadsom reinforced the need for UK energy
security. She was addressing the Shale World UK conference, which focused upon
the potential for on-shore UK shale gas.

Leadsom positioned shale gas as an 'effective low-carbon bridge' amid broader

goals to reduce the nation's reliance upon coal and secure alternative future power
supplies. She viewed shale as a homegrown solution that would in turn create many
thousands of jobs during development and ongoing production phases.

View more quality content from

JWN Energy

The future of the oil

industry: an insight
from oil and gas
professionals
Written by Matt Cook from Energy Jobline

Since the drop in oil prices the general feelings within the oil and gas industry have
continued to remain relatively negative. Unfortunately many oil and gas companies
have admitted that further reductions in oil and gas jobs will occur this year. As a
consequence of these cuts some oil and gas workers in the North Sea and
elsewhere have left a once thriving industry and are now exploring new
opportunities, some that greatly differ from their typical roles within the oil and gas
sector.

39

Energy Jobline, the specialist energy jobsite wanted to discuss the feelings with
professionals in the oil and gas industry. Thousands of oil and gas workers were
struck off during 2015 and those more fortunate ones who have continued with their
jobs suggest there are still levels of uncertainty concerning the future of the industry
and their roles. Many workers highlighted how they were attracted to the industry
due to abundant opportunities within the industry i.e. the 'higher-than- average'
salaries, flexible hours and how they were now struggling to find opportunities with
similar benefits in other industries.

Alternative options to oil and gas

After hearing the thoughts of oil professionals and researching opinions from leading
companies it seems that the oil and gas industry is and will be for some time going
through a stage of volatility. Within this period of time oil and gas workers, whether
they are currently employed or seeking work need to be adaptive and flexible to
these changes.

Oil and Gas workers also need to be made completely aware of additional training
opportunities within the wider energy industry, have the ability to utilise their skills
and potentially make the transition into an alternative energy sector. Earlier this year,
Energy Jobline carried out a study into making the transition from oil and gas to
renewable energy. It turns out that many oil and gas workers are interested and even
considering working in renewable energy but lack the knowledge and support to
make this move.

However, it's not necessarily about staying in the energy industry. Individuals need to
be aware of alternative career options that may have little or no connection to the oil
and gas industry. Recently, in Aberdeen, there has been a surge of unemployed oil
and gas workers retraining as hairdressers.

40

What is the future in the industry?

Experts are still confident that the oil and gas industry will make a revival and as a
result oil and gas jobs will start to increase once again. However it is difficult to
predict exactly when this period of revival will happen and will not help with oil and
gas workers who have recently lost their jobs.

Let's try to look at this in a more positive light. Generally oil and gas workers who
have unfortunately lost their jobs are due to the cut backs and not from an ability to
perform on the job. These individuals have acquired great skills and experience that
will be vital once again to the industry once prices and the sector do make a
comeback.

In the meantime oil and gas workers will need to be adaptive and flexible to new
career options, further training and possibly the idea of relocating. Changing careers
within our working life is actually more common than you may think. According to the
bureau of statistics the average worker will remain in a certain job for just over four
years. A further ninety-one percent expect to stay in a job for less than three years.
Although this figure is likely based on moving at will it does suggest that we as a
society are willing and capable to changes and reshaping our career paths and
highlights the increase of career paths available to us today.

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Energy Jobline

41

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