Today’s Blog – Tuesday 7th July 2015

Introduction

The “interesting” times that we noted yesterday have hit oil markets hard over-night, with the biggest falls for over three months as the previously reasonably stable ~$US65 Brent and ~US$60 WTI model has for just now come to an end.

The Greek crisis is perhaps the least significant contributor to the fall – certainly in and of itself – although arguably the related strengthening of the dollar is a more important second order affect than the prime cause.

The “deadline” for the latest round of Iranian nuclear talks closes today – but seems likely to be extended.  In my view, even after a deal is “done”, there will be lots of huffing and puffing from parties in both the US and Iran who don’t like the deal and will try to knock it over.  Amongst others, the views of Presidential candidate, Donald Trump, will be eagerly awaited….

And the Chinese stock market continues to show that gravity applies eventually to PERs that make the year 2000 in the US seem like 1930.  When it is the Communist Party that is trying to prop prices up in a stock market, Marx’s London grave must be rattling with all the sub-surface spinning.

Commodity prices

As noted above, yesterday was a day of big falls, with Brent closing at US$56.54 and WTI at US$52.53.

Henry Hub also fell, albeit only slightly, to US$2.76.

LNG

The AFR has today reported that UK based research group, Carbon Tracker, considers that there will be no market call on new Australian LNG supplies for ten years or more, as demand out to 2025 should be met by existing projects and some additional capacity from low cost US and East African sources.

This is certainly a more bearish view than the sort of industry consensus graphs that we tend to see in company presentations.  Carbon Tracker mentions the Woodside Petroleum Ltd (WPL) operated Browse LNG project specifically as being likely to be delayed.  That view would not be seen as controversial by most sophisticated industry observers (and by this unsophisticated blogger).

A more heartening story for LNG project proponents came from a recent Bloomberg story which contained quotes from an ex senior executive from China’s CNOOC, who noted that the PRC would not extend its demand for Russian gas excessively:

“People say: We can import gas from Russia but we have to keep it at a certain level, 15 percent, maximum 20 percent. Otherwise we will become too insecure, too dependent.”

Governments

A recent National Press Club speech was made by Agriculture Minister Barnaby Joyce about coal-bed methane (CBM – or CSG).  In my view the content of this speech shows that either he has not been adequately briefed on the issue or is being completely disingenuous.  For instance:

“[Australia] needed to develop a coal seam gas industry”.  Well Minister, if you look northwards from your State of New South Wales, you might see that >$30B has already been invested in Queensland in doing so.

“Farmers in the US have negotiated a 25% return”. That is because they generally own the sub-surface rights.  You may not know this – but in Australia the people do.  (And in any event a 25% ORR in the US would be exceptional.)

“Federal and State Governments had got too greedy and locals should reap more rewards.”  The Feds get income tax on profits (and these ventures aren’t that profitable – and PRRT is unlikely to be payable); the State gets a 10% royalty on well-head value – very low compared to other countries; and communities in Queensland where the industry has been allowed to develop have had massively increased economic activity, jobs, etc.

Company news – Karoon Gas Ltd (KAR)

KAR yesterday issued a first progress report on the Levitt-1 exploration well offshore Western Australia.  KAR has a 50% interest in the relevant licence, and is 90% carried by ex-Apache outfit, Quadrant Energy.  This is a deep-water well with a mid case target of 200 mmboe.

This is a true wild-cat well – but investors may note that KAR has had one good attribute that has carried in it good stead despite its poor corporate governance, nepotism, etc – it has been lucky.

Company news – AWE Ltd (AWE)

Another well report yesterday from AWE’s Perth Basin operations – on the Waitsia-2 appraisal well.  AWE’s drilling to date in this program has been problem free and observers will no doubt continue to follow what has been the best on-shore discovery of conventional gas in Australia for some time.

As usual, AWE felt the need to tell its readers that no plans were afoot for the fracking of the well.

Quote of the day

Given the current frosty relationship between Greece and Germany, it is pleasing to note the Socrates quote below that foreshadows the more recent (albeit fictional) Sergeant Schultz, by around 2,500 years:

“The ancient Oracle said that I was the wisest of all the Greeks. It is because I alone, of all the Greeks, know that I know nothing.”

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