Today’s Blog – Wednesday 15th July 2015

Introduction

The ACCC has recently sought submissions from parties interested in the Australian East Coast gas market.  Most submissions to date are the usual anodyne statements from the Producers that say: the market is working fine, nothing to see here, move along please.

Today’s AFR has picked up on a rather different view, from large South Australian based gas consumer, Adelaide Brighton Cement, whose submission emphasises the negative effects of a concentrated supply side – and a very concentrated gas pipeline side (that’s you APA Group).

So no surprises there.  The industry (like nearly all other businesses in Australia) is oligopolistic in nature and the relevant State and Federal politicians and regulators have not been particularly good at ameliorating that concentration.

Commodity prices

The Iranian nukes negotiations finally delivered a deal last night (subject to approval back home).  Initially oil markets reacted negatively, but by the end of the day, actually closed up, with Brent at US$58.76 and WTI at US$53.43.  Not surprisingly, Israel’s PM and Congressional Republican leadership were dis-satisfed with a deal that delivered something short of unconditional surrender from Iran.

In addition to the political hurdles the deal has still to go through, Goldman Sachs said that Iran would take around one year to bring back on 0.5 mmbbls/day and would need new investment and more time for production increments on top of that.

The Saudis have meanwhile been pumping at their highest rate for over 30 years, with OPEC reporting the KSA’s June production as being 10.4 mmbbls/day.  This rate reflects not only a desire for money (the country is now liquidating its sovereign wealth fund and issuing new debt) – it also is a pre-positioning move against Iran in OPEC quota discussions to come.

Henry Hub gas prices fell a few cents to close at US$2.84 last night.

LNG

As part of its ongoing strategy of widening and deepening its international gas business, last week Shell bought the European gas trading book of bulge bracket bank, Morgan Stanley.  As and when the BG purchase is closed, Shell will have an unrivalled number one position in LNG – as a producer and trader.

Reflecting this, last week Bloomberg reported a senior Shell executive as saying the company was considering dropping the word “Oil” from the name of its US subsidiary, Shell Oil.

Company news – BHP

BHP today announced another write-down in the value of its on-shore US tight gas assets – this time for US$2.8B.  The company said in its announcement that its US onshore business was free cash-flow positive at an oil price of US$60 and a gas price of US$3 – i.e. at prices higher than current market prices.

BHP appears to be the only Australian company that has been pre-approved by the Mexican authorities for this week’s bidding process for shallow water petroleum concessions in the country.  This is the first time in ~70 years that Mexico has permitted foreign investors to acquire oil and gas assets – and could well prove to be a great counter-cyclical opportunity.

Company news – Origin Energy Ltd (ORG)

ORG today announced the spud of a first exploration well in a three well farm-in program in the Northern Territory’s Beetaloo Basin.  The farm-out company is AIM listed Falcon Oil and Gas (and the other faminee is South Africa’s Sasol).  This is a true wild-cat well in a grossly under explored area that is considered to be prospective for shale gas and/or oil.

Quote(s) of the day

With peace and love breaking out over the Iranian nukes issue (at least for just now), we can turn to some quotes from nuclear war classic, Dr Strangelove:

President Merkin Muffley: “Gentlemen, you can’t fight in here! This is the War Room!”

General “Buck” Turgidson: “Doctor, you mentioned the ratio of ten women to each man. Now, wouldn’t that necessitate the abandonment of the so-called monogamous sexual relationship, I mean, as far as men were concerned”?

Dr. Strangelove: “Regrettably, yes. But it is, you know, a sacrifice required for the future of the human race. I hasten to add that since each man will be required to do prodigious… service along these lines, the women will have to be selected for their sexual characteristics which will have to be of a highly stimulating nature”.

Ambassador de Sadesky: “I must confess, you have an astonishingly good idea there, Doctor”.

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