Today’s Blog – Wednesday 27th May 2015

Introduction

The lack of much market chatter about next week’s OPEC meeting foreshadows a pretty wide consensus that the outcome of the meeting will be “no change”.  OPEC will continue to produce its ~30 mmbopd (or slightly more than that – and even Saudi Arabia is producing more than its notional quote of 10 mmbopd).

The jury is far from in on the extent of US tight oil production declines that we might see following the recent large rig count decline.  What I call the “Exxon view” is that US gas production did not fall despite a very large reduction in gas rigs and so tight oil might be the same.

Arguably, fellow OPEC members such as Venezeula are hurting more from the fall in price since last November than private US oil companies, who are still accessing capital markets.

Commodity prices

Crude prices pulled back overnight, with Brent at US$63.72 and WTI at US$58.38.  Market commentary attributes the fall to the strengthening US dollar.

Goldman Sachs is actively promoting its view that US$60 oil is the “new norma”l.  It points to the bottoming out of the rig count as evidence that at this price US tight oil players will cap the market.

As always, market serenity is all subject to “events”, with the situation in Iraq particularly being highly volatile.

Henry Hub continued a small recent decline trend, closing at US$2.82.

LNG

British Columbia’s Pacific NorthWest LNG project (led by Petronas) has recently introduced a new business concept (to me anyway): a “conditional” final investment decision.  This is supposed to be reached in a few weeks time.

In the meantime, the opposition party in BC has raised concerns about the long term stability agreement reached between the Province and the Project.  And, indigenous groups are not happy with the Project.  Did I mention customers and financiers?

This sets an interesting precedent for the optimistic sorts who run junior resource companies – can we expect ASX announcements along the lines of “we are pleased to announce a conditional FID on our exploration project, subject only to minor factors such as finding anything, etc“.

Company news – AGL Ltd (AGL)

As noted previously, AGL has foreshadowed a $1B asset divestment program, and media speculation has arose as to whether this could include upstream gas assets.

As this blog has said before, it could be very difficult to sell AGL’s New South Wales CBM assets at present.

However, the company’s Queensland CBM asset – Moranbah in North Queensland, operated by the Shell/Petronas joint venture, could be more marketable.

This asset has some features in its joint venture operating agreement (JOA) which could be of interest to potential buyers (and the HV partners) – such as a penalty free back-in right, royalties, etc.  JOA’s pre-emptive rights clause is likely to be robust but will no doubt be the subject of some scrutiny.

Company news – Santos Ltd (STO)

A recent Tudor Pickering note to clients stated that the results from STO’s Malaysian well, Lawa-1, seemed to have gone un-reported.

Possibly that is because it was a massive discovery?!  Or alternatively it was dry and as such was clearly immaterial and did not require ASX disclosure, as is the case with most bad news.

Company news – Strike Energy Ltd (STX)

Well supported Sydney based company STX today reported a positive development – a decision by putative gas buyer Orica Ltd to make a $7.5M pre-payment under a conditional gas contract it has with STX.

STX is undertaking an appraisal program on a deep CBM play in the Southern Cooper Basin, whose private results are presumably positive enough to induce this payment.  Naturally the public results are “very encouraging, etc”  as one would expec).

Quote(s) of the day

A recent quote from a Citi analyst (in the context of the imminent OPEC meeting):

“Saudi Arabia—the only vote that really counts—seems determined to stick with its new [emphasis added] ‘market share’ driven policy.”

From King Fahd in 1985:

“[The KSA would not abide other countries’ actions that] “led to a loss of markets for Saudi Arabia”.

T

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