Rising Exploration Gets Adriatic On The E&P Map

BMI View : We see Global Petroleum's bid for exploration licenses in the Adriatic Sea as part of a broader resurgence of interest in the Adriatic Basin. With highly prospective and largely untested oil and gas plays opening up to the east, we reiterate that interest is expanding further afield from Italian waters and offshore Croatia, Montenegro and Albania will emerge as major European exploration hotspots over the coming years.

Australian independent Global Petroleum has announced progress in its bid to acquire four exploration permits in the southern Adriatic Sea, offshore the south-eastern Italian coast. As no other competitive bids for the permits were made, the Italian government has allowed Global to move forward in their application, and has called for an environmental compatibility submission. A timeframe for the final award of the permits has yet to be offered, pending satisfactory completion of the environmental report.

Resurgent Interest In The Southern Adriatic

Consistent, But Bleak
Italian Oil Production and Consumption (000b/d) and Gas Production and Consumption (bcm)

Rising Exploration Gets Adriatic On The E&P Map

BMI View : We see Global Petroleum's bid for exploration licenses in the Adriatic Sea as part of a broader resurgence of interest in the Adriatic Basin. With highly prospective and largely untested oil and gas plays opening up to the east, we reiterate that interest is expanding further afield from Italian waters and offshore Croatia, Montenegro and Albania will emerge as major European exploration hotspots over the coming years.

Australian independent Global Petroleum has announced progress in its bid to acquire four exploration permits in the southern Adriatic Sea, offshore the south-eastern Italian coast. As no other competitive bids for the permits were made, the Italian government has allowed Global to move forward in their application, and has called for an environmental compatibility submission. A timeframe for the final award of the permits has yet to be offered, pending satisfactory completion of the environmental report.

Resurgent Interest In The Southern Adriatic

As we have highlighted previously, industry interest in the Adriatic Sea is seeing an impressive revival. The bulk of prior exploration has been concentrated in the north-western Adriatic, offshore Italy. However, in recent years exploration activities have begun to lag, with burdensome regulatory procedures dampening investor interest. However, several factors are beginning to reverse the trend. The Adriatic offers an attractive arena for exploration: the majority of the basin lies under less than 200m of water, deepening to 1000m in the south, and it holds proven hydrocarbons systems.

The blocks applied for by Global Petroleum lie slightly north west of highly prospective Albanian offshore acreage, including the Durresi block. In April 2013, San Leon Energy, which has a 100% operated interest in the block, signed a Petroleum Sharing Contract Amendment with the Albanian government, extending their exploration licence by two years. The first exploration well will be spudded in 2014, and the results of extensive 2D and 3D surveying have identified a number of highly material oil and gas prospects. The company estimates total resources in place to be around two billion barrels of oil equivalent (boe). In addition, the recent discovery by Shell and Petromanas at the onshore Shpirag-2 well has further raised the profile of Albania as potentially a nascent upstream region.

Crucially, Global Petroleum noted in their press release that the source rock of Shpirag-2 well is thought to be linked to the petroleum systems found offshore in the Adriatic, therefore suggesting a much larger oil play extending in the region.

The area's apparent prospectivity augurs well for Italy's longer-term hydrocarbons prospects. With no major oil or gas discoveries since the 1990s, and limited exploration activities, we forecast a steady decline in both oil and gas reserves over the next ten years, with oil reserves falling from an estimated 523.2mn barrels (bbl) in 2012, to 109.6mn bbl in 2022. Gas reserves follow a similar trend, decreasing from 66 billion cubic metres (bcm) in 2012, to 21.5bcm in 2022. Global's southern Adriatic exploration could pose a significant upside risk to our reserves forecast.

Consistent, But Bleak
Italian Oil Production and Consumption (000b/d) and Gas Production and Consumption (bcm)
Consistent, But Bleak
Italian Oil Production and Consumption (000b/d) and Gas Production and Consumption (bcm)

The Industry Begins To Look East

As, historically, the focus of exploration has always been the Italian west Adriatic, the eastern margin has been left as largely virgin territory. It is from here that much of the upside in exploration is currently coming, notably in Albania, Croatia and Montenegro. In the past, part of the problem with exploration in the east Adriatic was the poor quality of seismic data available. However, services company Spectrum is in the process of acquiring 12,000km of 2D seismic data, as well as reprocessing 9,000km of legacy data. This is being tied to data from the Italian margin, allowing for a pan-Adriatic mapping of the basin. Spectrum has announced that the data will be fully processed by the end of Q114, and has indicated that early results are revealing a wealth of new oil and gas plays.

The positive developments offshore are matched by attractive conditions onshore too. The Adriatic is in Europe, close to significant energy markets. With European countries currently looking to diversify away from Russian oil and gas imports, any discoveries here would meet with a healthy level of demand. There has also been some marked improvement in the regulatory environments of countries on the eastern margin.

Croatia is to launch an offshore licensing round by Q214, following completion of Spectrum's seismic survey. In July 2013, the government passed a new hydrocarbons law, which clearly delineated regulation of the oil and gas sector, removing a major deterrent to upstream investment ( see 'Regulation A Stumbling Block As Majors Take Notice Of Adriatic Potential', May 2 2013). This followed a broader process of restructuring and privatisation of the national oil and gas industry, INA, which started in 2003. Although several major weaknesses remain, not least the high level of corruption, the impacts of energy sector reform are already being felt. Oil majors such as ExxonMobil and ConocoPhillips have expressed their interest in the country's offshore potential and we anticipate a high level of interest in the country's upcoming licensing round ( see 'Small Onshore Upside, But Key Lies In Adriatic', January 15 2014).

Croatia has extremely limited oil and gas reserves, estimated at 70mn bbl and 20 billion bcm in 2012, respectively, by the EIA. In the absence of significant new discoveries, oil and gas reserves will see a steady decline over the next ten years, reaching 37.5mn bbl of oil and 6.8bcm of gas by 2022. We also forecast total hydrocarbons production to see a comparable decline over the same period, falling from 50.3boe in 2012 to 39.7boe in 2022.

A Bleak Outlook
Croatia Gas Production, Consumption and Trade (bcm), 2012-2022

Montenegro is also in the process of licensing 13 offshore blocks in the Adriatic. The bidding process has been slightly delayed, due to the adoption of a new tax and concession framework, but the level of interest has been encouraging. By 2011, 15 international companies had already expressed a desire to enter the country's offshore acreage, including majors such as Eni and Total. The results of exploration could have huge implications for the country, which currently has no oil or gas reserves or production. It currently is entirely dependent on imports for its fuel, posing a heavy drain on the country's fragile economic recovery ( see 'Riding The Western Balkans E&P Wave', January 10 2014).

Fuel Imports: A Weighty Fiscal Burden
Montenegro Real GDP Growth (% y-o-y) and Goods Imports and Balance of Trade (US$bn)

We see considerable upside to oil and gas reserves and production following on from exploration along the eastern Adriatic margin. Although development of any discovery is unlikely to progress in time to impact our ten-year forecast, we believe the basin's high prospectivity and increasingly attractive above-ground conditions could significantly improve the region's longer-term prospects.

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