Today’s Blog – Monday 20th April 2015

Introduction

The oil market had a great week last week, but drew back somewhat by close on Friday.  Daniel Yergin (of IHS and The Prize fame) has recently stated that he expects the crude market to be “W” shaped – i.e. a bumpy plateau rather than a V or U shaped recovery – and that feels right to me.  The ASX oil and gas stocks are generally in the red this morning following Friday’s crude price fall – and share market declines generally.

Commodity prices

Crude prices closed at US$63.45 (Brent) and US$56.19 (WTI) on Friday.  Overall the week saw a fairly hefty rise and some push-back on the optimism was eventually to be expected.  Reported OPEC production numbers were up (at 30.8mmbopd) – with an increase many times the size of the small reported fall in the US.

Saudi Arabia itself reported a 3 decade high production figure of 10.3mmbopd in March.  However, the KSA has a very seasonal call on its own oil production coming up – the use of crude for electricity generation.  This call approximately trebles in the Northern summer months, to up to 1mmbopd (that’s a lot of air conditioning!) – so around 600,000-700,000 bopd will be taken out of world markets by July – quite bit more than the largest possible case for US tight oil production declines.

In my view, the Saudi’s are likely to be filling their coffers from export markets as much as they can before the summer – and also positioning for potential OPEC quota battles if or when Iranian production might go up post a nuclear deal.

Henry Hub closed at US$2.59 last week.

LNG

Last week the Indonesian Industry Minister called for cheaper domestic gas in the archipelago (obviously for industrial users) – with “cheap” meaning US$6/mmbtu.

This in the context of Pertamina last year signing long term LNG purchase contracts (conditional on FID – supposedly due soon) from Cheniere’s Corpus Christi liquefaction plant in Texas – which at current Henry Hub pricing will deliver gas to East Asia for ~US$10/mmbtu (according to a Moody’s report of last week).

The politics are understandable – but could result in a big squeeze on Pertamina and/or other intermediaries such as PGN – just when the country has been getting out of expensive and economically inefficient energy subsidisation programs.

Company news – Schlumberger

Late last week the mightiest of oil and gas service companies, Schlumberger (NYSE: SLB) announced another substantial wave of job cuts – with 11,000 new redundancies being added to the 9,000 already cut earlier this year.

SLB is a bellweather for the overall service sector who are also enforcing large job cuts.

In my view, these sort of deep cuts will reduce the likelihood that the large inventory of drilled-but-uncompleted wells in the US will be capable of being quickly brought into production (as who will do all the completions?).  Additionally, less capex on exploration, etc, will naturally lead to tighter than otherwise markets in the years ahead.

Company news – Karoon Gas Ltd (ASX: KAR)

This morning KAR announced further promising news from its Echidna-1 exploration well offshore Brazil.  The well has encountered a 213M gross oil column, with very healthy net pay of 104M, good porosity and a light oil API of 39.5.  The KAR operated JV will conduct a flow test and then has an option to drill another well.  It should make a decision on the option well in the next few weeks.

Although KAR has a number of questionable features about it in terms of corporate governance history, it continues to be blessed with that incomparable (but unreliable) feature of being lucky!

Company news – Senex Energy Ltd (ASX: SXY)

SXY has today announced it has entered into an unsecured debt facility of A$80M with Westpac.  The company has no current plans to draw down on this – it is therefore clearly ammunition to be potentially used in the generally expected Great Game of Cooper Basin consolidation.

Last week the primary move in that Game was the securing of a 17% stake in Drillsearch Energy Ltd (ASX: DLS) by Seven Group Holdings.

Quote of the day

From Friday’s The Economist on comparative sovereign risks: “The huge penalties inflicted on BP…feed the perception that its [The US’s] legal system poses as serious a political risk to multinationals as anything they might encounter in emerging markets.”

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