Today’s Blog – Tuesday 9th June 2015

Introduction

Normal service is resumed today, following yesterday’s Queen’s Birthday public holiday (a belated Happy Birthday, Your Majesty, even though its not your birthday!).

A consistent theme in this blog is the current rapid evolution of LNG markets, after decades of stasis, as parties seek to extend their positions up and down the value chain.  Another example thereof came from last week’s Gas Conference in Paris, when the head of Novatek (operator of the Yamal LNG project in Northern Siberia) said that trading house Gunvor would soon enter into a purchase agreement with Yamal.

Gunvor is an opaquely owned, Swiss based but likely Russian controlled, commodity trading house whose foundation has been marketing oil from the likes of Rosneft.  It has previously flagged that it will enter LNG trading markets and buying Yamal LNG would not only allow it do to so – but will also improve the bank-ability of a project that is currently looking for Chinese bank support.

This blog will continue to seek out and report global developments in LNG markets, which clearly have an impact on Australia’s oil and gas sector, heavily weighted to LNG as it is.

Commodity prices

Crude prices fell overnight, with Brent closing at US$62.69 and WTI at US$58.14.  The key driver for the sell-off was a report from China that crude imports in May had fallen a substantial 11% from the same period last year.

This fall in demand seems likely to be related to a cessation – temporary or not – of the build up in the PRC’s strategic petroleum reserve (SPR), which although a State secret,  has been considered by many in oil markets to have been a key supporting prop for oil demand in recent times.

Henry Hub prices strengthened to US$2.70.  A recent report from Mexico notes that imports of US gas are expected to increase significantly by the end of this decade, as a new fleet of Mexican gas fired power stations is built, together with cross-border pipelines to supply them from the US.

The possible increase in demand for US gas is in the order of 5 BCF per day, which is significant in the overall US gas market of ~65 BCF per day.  LNG exports will of course be on top of such pipeline exports.

LNG

The Tanzanian Oil Minister stated over the weekend that the country’s estimated recoverable gas resources were now 55 TCF.  This quantum would clearly support a major LNG industry, as would neighbouring Mozambique’s.  But so would Western Canada’s gas resources, Iran’s, Alaska’s, Russia’s, etc, – even Australia’s Browse Basin.  The current issue for LNG markets is not whether one has a resource of scale, but where one sits on the overall development merit order, which factors in numerous other issues, such as sovereign risk.

Sitting over everything is the question as to whether US (Lower 48) LNG projects can continue to be developed without significantly increasing US gas prices and hence making themselves uncompetitive.

Company news – AWE Ltd (AWE)

AWE has announced that its Waitsia-1 appraisal well in the Perth Basin (assets held 50/50 with Origin Energy Ltd) has hit TD.

The well appears to have been drilled in only ~3 weeks, rather than the expected 6.  Wireline logging will follow and if positive, a flow testing program.

Company news – Carnarvon Petroleum Ltd (CVN) and Karoon Gas Ltd (KAR)

Both CVN and KAR have joint ventures with what was Apache Corporation Ltd’s Western Australian operations, under which Apache was due to carry the companies through an exploration well each.

Apache’s WA assets were recently acquired by a private equity backed company called Quadrant Energy.  My view had been that private equity might have less appetite for exploration risks than Apache did, and if possible Quadrant might seek to avoid drilling these wells.

However, in a recent interview Quadrant’s CEO has re-affirmed its interest in them.  They are due to be drilled later this year.

Quadrant has also flagged an appetite for further acquisitions in Western Australia.  Origin Energy’s (ORG) Perth Basin assets would make a good fit, given Quadrant’s existing gas position.  ORG’s credit rating is under pressure, which might encourage it to consider such a transaction.

Quote of the day

A quote on the opaque ownership of Gunvor, sourced from a previous US Ambassador in Moscow by Wikileaks:

“Its secretive ownership is rumoured to include Prime Minister Putin.”

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