Today’s Blog – Thursday 2nd July 2015

Introduction

Your blogster has safely returned from the trip mentioned yesterday and can soberly report that “there’s graphite in them thar hills!”  However, deal-making is never easy across cultures (or indeed within cultures) and the owner has now adopted an Oliver Twist strategy of wanting “more!“.

Taking a wider helicopter view from where I’m sitting, a couple of recent regional developments:

  • China has formally commenced construction of its side of the mighty Power of Siberia pipeline, which will deliver vast quantities of Russian gas to Eastern China, possibly as soon as 2018.  Following on from our recent stories China Inc could have more than a few take-or-pay gas issues to juggle with on both the seaborne and pipeline fronts if its economy does not rebound.
  • China is also expanding the current crude oil pipeline that moves oil from Siberia to Eastern China.  China does not seem likely to give up its role as now the largest crude importer – and is keen to diversity supply routes as well as sources, given the potential for tension in the South China Sea.

Commodity prices

Crude oil prices received blows on both the “numbers” and “events” front yesterday, with Brent closing down at US$62.01 and WTI at US$56.96.

On the numbers side, the EIA’s weekly report revealed that crude inventories had reversed their recent draws and a build of 2.8 mmbbls occurred last week.

On the events side, the markets seemed to be factoring in the distinct possibility of a deal by next week on Iranian nukes.  This is notwithstanding recent comments about “red lines” from Ayatollah Khameini which seemed likely to make a deal impossible. As is often the case, such negotiations seem to be as much about factions on each side as between the up-front protagonists.

Henry Hub closed a touch down at US$2.80.

LNG

Cheniere Energy continued to show the benefits of developing LNG in the US from a brown-field position, announcing the FID on a fifth train at its Sabine Pass liquefaction facility in Louisiana.  First production from Sabine Pass is still on track for the end of this year.

Somewhat nearer to Australia, Indonesia’s Donggi Señora LNG facility has just announced its first spot cargo sale – to Pertamina for domestic use in the Archipelago.  The economics for this at present for Indonesia and for the third party JV parties could well be better for such a domgas sale than in trying to sell into the tight and low-priced Pacific LNG spot market.

Governments and fracking

The ASX’s own poster boy for sovereign risk in New South Wales, small CBM/tight gas explorer Metgasco Ltd (MEL) announced yesterday that it was in “discussions” with the NSW Govt over damages.  The Courts recently ruled that the NSW Govt unlawfully stopped a MEL drilling operation just before the last State Election.

Company news – Woodside Petroleum Ltd (WPL)

Yesterday WPL announced that the Browse JV (of which it is the Operator) had entered into FEED for a Floating LNG project over the large Browse gas fields offshore Western Australia.  Contemporaneously, the JV has aligned its equity interests across various licences and entered into a new Joint Operating Agreement (and it is no mean feat getting agreement on such things).

WPL is aiming for a FID by the second half of 2016.  In my view that is a highly optimistic target, given the likely difficulty in securing off-take contracts in the current LNG market.

FEED may therefore be as much about keeping retention licences and Governments warm as about a real view that a project will start next year.

Company news – Origin Energy Ltd (ORG)

ORG announced yesterday that it would be the recipient of $100M of funding from the Federal Government renewable energy funding body, the CEFC.  The funds will be used to develop ORG’s business model of “Solar as a Service” – i.e. it will effectively lease roof-top space for solar panels from households and businesses.

Dispensing cheap loans to an investment grade ASX 25 company is great business for ORG, but hardly seems the best use of my tax dollars.

Company news – Cooper Energy Ltd (COE)

COE today gave an update on its Sumatran oil-field operations.  Given its recent success, it will now drill the Bunian-4 well this month and considers that there is considerable upside over the recently reported “reserves” numbers it announced (apparently calculated on a working interest rather than PSC basis).  There seems little doubt that technically COE has a high quality asset here – but what is shrouded in mystery is how much that quality is diluted by the likely harsh fiscal terms imposed on the company.

Quote of the day

Continuing my Chinese theme of this week, but now turning from the intellectual pygmies previously quoted, such as Churchill and Napoleon, to the coming political man, GOP Presidential contender, Donald Trump:

“I’ve read hundreds of books about China over the decades. I know the Chinese. I’ve made a lot of money with the Chinese. I understand the Chinese mind.”

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