Today’s Blog – Wednesday 10th June 2015

Introduction

It must be the season for (northern hemispheric) gas conferences, as in addition to the bash in Paris last week (“sorry dear, I’ve just got to go to Paris in Spring-time for a conference”), Canada also recently hosted its own LNG Conference.

Tokyo Gas was one of the presenters at this conference.  A representative made a number of key points, which demonstrate that even this conservative gas buyer is pushing for radical changes in LNG markets compared to the business-as-usual industry structure of the previous half century, as follows:

  • “We are interested in 5 to 10 year contract terms compared to our historical stance of 20 year deals”.
  • Limits on destinations for deliveries will not be accepted.
  • “We are open to either a fixed price along with a commodity price, or a floor price, or a mix of oil and hub-linked price.”
  • Supplies will be diversified away from traditional suppliers – but low costs will trump diversity.

Commodity prices

The crude oil price rebounded yesterday, with Brent closing at US$64.88 and WTI at US60.14.  The last month has seen volatility – but within a fairly tight trading range, and with an apparent ceiling of ~US$65 (Brent) and US$60 (WTI).  The causes behind the rally seemed to be a weakening of the US dollar, expectations of a big US inventory draw being announced tomorrow and a new EIA forecast of US tight oil declines materially starting to kick in.

Henry Hub also sharply rallied – to US$2.85.  A hot weather spell over a large part of the US – and hence expectations of sharp gas demand for electrically powered air conditioning – was the cause.

LNG

The SMH late last week reported a senior Citigroup banker as saying that LNG prices would inevitably rise because: “It’s the sponsors putting the $20 billion in the ground that require reasonable return for investment that are going to set where long-term pricing goes.”

To translate – LNG investors need certain returns so therefore they will get them.  In my view this is fundamentally wrong.  I need a higher return from my investments than I am currently getting – but the investment gods are not necessarily going to give me what I desire.

If low cost US tight gas processed through low cost US liquefaction plants is the marginal supplier – then that will set prices lower than for instance Browse gas resource owners would like.  (Of course, whether US gas prices can stay low if subject to much higher demand remains to be seen).

I’ll forgive Citigroup – its job is to win mandates from clients such as Woodside by telling it whatever it wants to hear – not to tell unpalateable truths.

Governments

Ongoing concerns from regulators about linkages between the disposal of fracking fluids (rather than the act of fracking itself) and increased seismic activity continue to emerge in places like Texas.

When Texan authorities have concerns about oil-field activities, that is more important for the industry than concerns from say the Major of Oregon or MPs from country New South Wales.

Company news – Origin Energy Ltd (ORG)

ORG put out a detailed strategy presentation today.  However, it was focused on downstream energy markets and said very little about the company’s upstream and LNG operations.  The presentation brought out in great detail the benefits that a vertically integrated company like ORG could obtain by occupying key points of the electricity value chain.

It will be interesting to see if ORG takes this sort of analysis to evaluate its position on the LNG value chain.  Arguably ORG is too small an LNG player to really make a difference here.  Solution: merge with Santos, Oil Search, etc?  Of course social issues would no doubt weigh heavy on this type of decision-making.

Company news – Santos Ltd (STO)

Following on from a recent story from STO itself, the AFR reported today that moves are afoot for STO to take a position in an undeveloped gas-field (P’nyang) proximate to the key PNG LNG fields in which it is already a party.  It makes sense for all parties to align LNG project equities, so a deal should be expected here.

Price will be interesting (although my unofficial ASX disclosure principles may render such a detail “immaterial”).

Quote of the day

Some investment words of wisdom from Peter Lynch, which provide a better insight than the above concept of “investors get the return that they need”:

“Never invest in any idea you can’t illustrate with a crayon.”

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