Today’s Blog – Friday 24th April 2015

Introduction

This blog frequently flags news about Gazprom, which some may consider irrelevant for an Australian-centric publication.  Today there is even more Russian news than usual.  My view however, is that gas supply developments from the Eurasian continent (dominated by Gazprom) are highly relevant to international LNG markets, in both the Pacific and the Atlantic, and hence have direct impact on Australia’s position as a major LNG supplier.

Commodity prices

Crude prices rose fairly sharply overnight, with Brent closing at US$64.85 and WTI at US$57.74.  The impact of crude inventory builds in the US were softened by a reduction in product inventories, leaving the price impact field more open to geopolitics.  Increasing Saudi bombing of Yemen appeared to be the main trigger for yesterday’s market fears over worsening Middle East instability.

Over in Brazil, Petrobras finally put numbers out on the effect of its recent corruption scandal – booking a direct corruption related cost of US$2.1B, amidst an overall loss of US$17B (with a good part of the latter arguably being caused by political interference in the organisation as well as the lower oil price).  This organisation is supposed to operate all Brazilian pre-salt crude production, which is a major expected supply component in crude markets in the years ahead.  Its financial weakness will not exactly assist it in doing so.

A common theme from this week’s CERA conference has been further calls on Washington to remove the US’s crude export ban.  Economically this is a no-brainer.  However, the politics of doing so – into what is likely to be a rising crude oil price environment – remain challenging to say the least.  In my view Congress will take no action on this – particularly as the Presidential election cycle is already ramping up.

LNG

As foreshadowed earlier in the week, the EU has now taken formal action against Gazprom over multiple potential breaches of competition law.  The Economist this morning quoted a view from the Czech Energy Envoy (with which I agree), which forecast a climbdown by Gazprom, masked by a showy but empty deal on future exports to China.

Russia has limited funds.  China has substantial funds.  The PRC will let Russian huff and puff, and meanwhile continue to build up a position in Central Asia/East Siberia/etc which will be as strong as at any time in the last 200 years.  In the medium term, I expect Russian gas exports to China to have a lot of PRC control – which will be used as leverage against China’s LNG suppliers.

Gazprom this week changed its auditors, replacing one of the Big 4 auditors, PWC (after many years) with a Russian firm.  What relevance does this have to LNG markets one might ask?  In my view, this change will likely allow the kleptocratic Russian regime’s friends to steal even more from Gazprom – but at the cost of reducing Gazprom’s access to international capital markets.  In the absence of “other people’s money”, Gazprom will not be able to pursue ventures such as the Turk Stream pipeline.

Company news – AWE Ltd (ASX: AWE)

AWE today announced that its Irwin-1 exploration well in the Perth Basin had reached target depth (around 2-3 weeks ahead of schedule it appears).  Gas shows were encountered and wireline logging will follow.  AWE (and its main partner, Origin Energy Ltd – ASX: ORG) continue to generate good news from the Perth Basin, which I would now expect to be the main focus area for AWE.

The credit rating challenged ORG might consider selling out of the Perth Basin if it can attract a cashed-up buyer – e.g. the PE group that recently bought Apache Corporation’s assets in WA, or equivalent.

Company news – BP PLC 

Bloomberg has reported that BP will now likely delay its offshore South Australian drilling campaign to the end of 2016.  Local media has been playing up the plight of whales, risks of spills, etc, etc (less mention seems to be made of the potential economic and other benefits).  However, the delay appears to be more to do with rig schedules rather than any reaction to this.

Quote of the day

Although facing political doom, the Labour Party in Scotland continues to generate all the best quotes in the current British election campaign, with The Economist reporting this new gem from a beleaguered Scottish Labour MP:

“Its like the last days of Rome.  Without sex.  Or wine.  In fact with none of the fun bits.”

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