Today’s Blog – Monday 11th May 2015

Introduction

The end of last week saw an unexpected victory (i.e. a small absolute majority) for the Conservative party in the British election. Given the ongoing and inexorable decline of the relevance of the North Sea to international oil markets, this outcome does not appear to have any particularly material consequences outside the UK.  However, some points to note:

  • The oil companies likely favoured a Conservative victory – but more marginally than might otherwise be expected, given the naked tax grab made by the Tories (since reversed) in their last term.
  • The development of the UK’s prospective on-shore tight gas (and oil?) prospective resources will be supported by the Conservatives – but up to a point only.  In my view, there is little chance of any material tight gas production in such a densely populated, wealthy and frack-averse country as the UK.  So the UK will likely remain a large importer of LNG.
  • The dominance of the SNP in Scottish seats might cause some disquiet for North Sea investors, given the far left socialist views of the current leadership of the party.  However, the North Sea is in a late life phase and the Majors are reducing their positions therein anyway for reasons outside politics (such as materiality of investment opportunity, etc).
  • There are no ASX listed companies with any material UK oil and gas exposure, so no share market consequences ensue here.

Commodity prices

Crude prices were fairly flat at market close on Friday, with Brent at US$65.39 and WTI at US$59.27.  The rig count in the US continued to fall – but is bottoming out, with a reduced fall of only 11 rigs.

A number of US independents have recently signalled that a sustained ~$US60 oil price will warrant further investments in tight oil (both completing DUCs and  drilling new wells), so there could be a “capping” of the oil price at current levels.  That however assumes that “events” will be quiet and the US will be the driver on the supply side.

Henry Hub closed up at US$2.92, with some evidence of production declines from pipe-flow data.

LNG 

The visit of the PRC leadership to Moscow at the end of last week led to the signing of an another “agreement” with respect to further pipeline gas supplies from Russia to China.  However, this “agreement” was an MOU only in any legal sense, with pricing still likely to have to be resolved.

However, this is another step in the path towards the development of the Altai gas pipeline, which could deliver material quantities of gas from existing West Siberian producing fields to Western China, via the frontier between the 2 nations between Mongolia and Kazakhstan.  In my view the Altai pipeline is a far more realistic project than Turkstream – it actually delivers to a wiling and large customer (not Greece!).

If this occurs, it would be one factor that could support the thesis promoted at an influential US investment conference last week by well known hedge fund manager, Jim Chanos, that the LNG market is a “disaster waiting to happen“.  This was no doubt a US-centric view (looking at the numerous liquefaction projects in the country), but also has some resonance for broader LNG markets, which the oil companies are keen to promote as having inexorable and exponential growth qualities.

Company news – Beach Energy Ltd (ASX: BPT)

One of my rules of ASX reporting that I spoke of on Friday – i.e. that interesting announcements are rarely made on Fridays, was breached within a few hours of my pronouncement. This was the announcement of an increase in the stake Seven Group has in BPT.  Seven now has 18.29%.  This continual increase arguably reduces the likelihood that Seven is only a short-term on-market, rather than strategic, investor in BPT.

The Cooper consolidation game could therefore be on within months, if not sooner.  The most interesting question to my mind about this game, is what Santos Ltd (ASX: STO) might do.  BPT might well take-over Drillsearch Ltd (ASX: DLS) and Cooper Energy Ltd (COE).  That would make it a $2B company.  But what next?  Could it then make an offer to buy part or all of STO’s Cooper Basin assets – and take on operatorship.  The Cooper is a small part of STO by value – but a big part by hassle-factor, so a divestment could make sense for it.

STO would seem unlikely to do this under present leadership – but present leadership should change within a year.  Watch this space.

Quote of the day

My last one from the decimated Scottish Labour party:

“The people have spoken.  The bastards”.

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