Today’s Blog – Thursday 9th April 2015

Introduction

Its all kicking off in the oil and gas game, with yesterday’s media rumours of a Shell takeover of BG Group being confirmed as fact by the end of the day.  This looks like a done deal – Shell is paying a high premium.

Naturally speculation is already arising as to what this means for more widespread industry consolidation, as a re-run of the 1990s’s mega-mergers and creation of the current Super-Majors seems distinctly possible.

For instance – will Exxon take a run at the wounded BP?  Will companies like Anadarko (one of the relatively few independents of BG’s size) be next up?  Or will the Super-Majors consider that bulking up in on-shore US and Canada (where most of the large independents are focused) is not for them?

Commodity prices

Crude markets paid no notice to the presumed long term faith the Shell/BG deal showed in the future of the industry, with a large sell off overnight.  Brent fell to US$55.55 and WTI to US$50.92.  The simple causes of the falls were much larger than expected inventory growth in the US (an increase in the week of 11mmbbls) and an EIA report that showed US production still increasing in March.  It is not only in the US that the taps are being opened as wide as possible (to pay debts, etc) – the Saudis also reported record production of 10.3mmbbls/day and last week Russian production numbers came in at a post-Soviet high.  Bills (and potentially restive populations) need to be paid!

Henry Hub fell slightly to US$2.62 – again driven by warmish Spring weather.

LNG

In my view, the key strategic driver behind the Shell/BG deal is that it gives Shell the largest private sector LNG position in the world.  This is true not only in a simple annual production sense, but also, and critically, in terms of trading capabilities.

International gas markets are so demonstrably economically inefficient (e.g. based on the large spreads between Asian and European markets) that the arbitrage profits for those who could seize them would be massive.  What that would take are trading skills, a large balance sheet, multiple and diverse supply and sales positions, internal hedging capabilities, etc – and the new improved Shell will have a dominant position in these.

Shell/BG – some initial thoughts on implications for Australia

  • Once Prelude and QCLNG come fully on stream, Shell should have the largest production position in Australia, taking over from Chevron.
  • Shell’s Arrow Energy reserves/contingent resources in North Queensland (held with PetroChina) now have much increased optionality – to supply shortfalls in BG’s QCLNG, to add another train(s) to QCLNG, and/or to sell to others who are short.
  • Santos is generally considered to be in the latter category – so in a GLNG sense the Shell deal is bad news for Santos, as it may well eliminate its otherwise most likely source of shortfall gas.
  • The larger Australian oil and gas companies are arguably too small to be seen as prey for other Majors who might want to follow Shell and bulk-up.  In simple terms, they are also intrinsically not that attractive targets – Woodside is not cheap and has little upside, Santos although cheap only has a diverse collection of lower tier assets, Oil Search’s primary assets are non-operated and Origin Energy shareholders must rue the day they did not accept BG Group’s 2008 offer to them.
  • However – if my thesis above is correct and it is LNG positioning that has driven Shell’s strategy, what all of these Aussie companies have is LNG positions.  That is not the case for most of the World’s independents.  So larger companies who want to bulk up in LNG could see the Aussies as some of the few available targets.

Company news – AGL

AGL announced today that it has struck a deal with the Exxon/BHP Gippsland Basin JV to buy up to 198 PJ of gas in 2018-2020.  Pricing was stated as oil-price linked.  AGL also said the deal could free up some of its Queensland gas supplies to sell into that State’s market, so presumably there is an attractive arbitrage opportunity for AGL here – e.g. if GLNG was short in that period, it could pay up to full export pricing given its sunk position, whilst the Gippsland JV pricing is presumably more like $7-9/GJ.

Company news – FAR

FAR announced yesterday that Beach Energy’s recently retired MD, Reg Nelson, has joined its Board (bringing the number of geophysicists thereon to three – you can’t have too much of a good thing!).  This seems a good fit for both parties.

Company news – Apache Corporation

US based Apache has now sold its remaining Western Australian assets to a private equity consortium, including Macquarie Bank.  It is understood that the local Apache Management team will run the assets.   This divestment continues Apache’s strategy of selling off international and LNG assets to focus on on-shore US assets.  The WTI oil price and the Shell/BG deal might suggest that this strategy is out-dated!

Quote of the day

A quote for those considering the flow-on effects of the Shell/BG deal: “History does not repeat itself, but it does rhyme”.  Usually attributed to Mark Twain.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s