Today’s Blog – Tuesday 23rd June 2015

Introduction

Continuing this week’s theme of recent news from Russia that impacts on global energy markets, we outline below two recent rather conflicting stories about Gazprom’s plans for expansion on East Siberia’s Sakhalin Island:

  • On the one hand, Gazprom announced last week the entering into of a “global alliance” with Shell, which included building a third LNG train on Sakhalin (the two companies are in an existing LNG joint venture there, together with Japanese customer representatives).
  • On the other hand, Bloomberg recently reported that a “person with knowledge of the matter” said that Gazprom would delay certain Far Eastern gas projects – primarily a new LNG plant to be built in Vladivostok using gas sourced from Sakhalin. Instead Gazprom would focus on its two on-shore pipeline projects to China.

Gazprom does not have infinite funds and capabilities, and its various projects and announcements are political more than business orientated.  It is currently planning at least four (or more) major multi-billion new pipelines: Power of Siberia to China, Altai to China, Turk Stream to Turkey & Greece and an expansion of Nord Stream to Germany.

It does not have the ability to do all of them.  All have material geo-political rationales for Putin.  My view is that the Chinese ones will take priority – they have more commercial support and will be pushed strongly by the customer side.

Commodity markets

Oil prices crept up overnight, with Brent closing at US$63.34 and WTI at US$60.38.  The emergence of a potential “resolution” (i.e. can kicking exercise) of the latest Greek loan crisis gave support to the market bulls.

Recent comments about Saudi Arabian production increases (such as contained in yesterday’s blog) must be contextualised by:

  • The entry into the Saudi summer with its associated big call on crude to be used for electricity generation.  Therefore any production increases in the next few months won’t necessarily lead to higher exports.
  • The possibility of settling the Iranian nuclear dispute by the end of June (prediction: this deadline will be extended).  The KSA will want maximum production of its own as a starting point for negotiating any re-set Iranian OPEC quotas.

The Iranians are said to be currently storing at least 30 mmbbls of crude on tankers with a view to selling this as soon as sanctions are lifted.

In the rather more prosaic world of Henry Hub gas prices, we saw a fall last night to a closing price of US$2.73, with weather continuing to be the primary market driver.

LNG

The AFR reported today on what has been an emerging theme for some time: the lack of short/medium term demand required to underpin new LNG projects.

International LNG pundit Dr Fesharki summarised the issue as:

“There’s no buyer: I don’t see who is going to buy at any price.”

The only exception he gave was for the Petronas operated Pacific Northwest LNG project located in British Columbia.  The joint venture members here are all either customers or closely connected to customers: Sinopec, Japex, Indian Oil Corp and Petroleum Brunei.

Energy infrastructure

In our current effectively zero interest rate world, energy infrastructure investments are much more popular amongst investors than higher risk/reward oil and gas companies.

News from the US yesterday affirmed this, with pipeline company Williams knocking back an unsolicited takeover offer from Energy Transfer – for an enterprise value of a mere US$53B.

Energy infrastructure (for existing rather than new-builds) action should follow on in Australia.  In that vein, recent news about the planned sale of Energy Australia’s Iona gas processing and storage facility for a hoped for ~A$1B will be interesting to watch.

Company news – Woodside Petroleum Ltd (WPL)

WPL’s Browse LNG project (originally discovered in the 1970s) is one likely victim of the current LNG market, as characterised by Dr Fesharki.  WPL had previously stated that it planned for Browse to enter FEED in mid 2015 with a view to reaching a FID by the end of 2016.

However, Browse needs customers and it would be a brave Browse JV (which includes partners with a number of other putative LNG projects around the world) who would enter FEED without any convincing line of sight to sales contracts.

Quote of the day

Some (hyperbolic?) comments from Gazprom’s CEO, Alexei Miller, on the new Shell “alliance” with his company:

“Many of our traditional partners are positioning themselves as strong regional players… Shell is a global player. And as the global gas markets develop… we will be creating a global strategic partnership……We know about Brazil, Australia and about the Asian market. And that allows us to talk about a global partnership.”

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