Today’s Blog – Monday 27th July 2015

Introduction

Unfortunately there has been no further gossip from The Australian Financial Review (AFR) this week about Occidental Petroleum (Oxy) jetting into Syndey to meet with Oil Search Ltd (OSH) about a potential takeover.

In my view, the likeliest reason for any such meeting would have been to discuss the potential sale of OSH’s Kurdistan assets to the highly experienced Middle Eastern player that is Oxy.

If that was the case, the recent escalation of conflict by Turkey with Kurdish groups (nothing to do with “Sultan” Erdogan’s domestic ambitions of course) would no doubt encourage OSH even more to get out of the region and instead focus on the tranquil haven that is PNG.

Various London listed companies with Kurdish assets are also currently considering divestment/takeover/etc, so for a party with  balls and a longer term vision, there should be a good opportunity to build a very material position in a real oil patch.  Oxy fits the role.

Commodity prices

Last week crude markets finished down on the day by more than 1% and down on the week by more than 5%, with Brent closing at US$54.62 and WTI at US$48.14.  The weekly Baker Hughes rig count numbers which came out on Friday had some bad news for the market – a material increase in oil rigs of 21 (with a net increase of 19 rigs).  In my view this was likely a deferred build based on relatively recent ~$US60 prices – but if I am wrong and rigs are getting added based on current prices – then prepare for ongoing pricing pain.

The latest escalation in Middle Eastern tensions – Turkey joining the fray against ISIS (and the Kurds) – did not provide any support for the oil price bulls.

The US Senate has now scheduled hearings in the next few weeks to consider lifting the 1970s era ban on crude exports from the Lower 48.  If this proceeds to legislation (which would still have to jump many hurdles) – then the WTI/Brent differential should in theory start to close.

Henry Hub also closed down – at US$2.78.

LNG

As this blog noted a few weeks ago, Turkmenistan is currently in dispute with Gazprom over the non-payment for gas supplies by the latter throughout this year.  Reuters has just reported that this dispute now seems to be going to a formal arbitration phase – with any process to be held in neutral Stockholm.

This dispute is multi-faceted – with one strand being the China market competition between Turkmenistan (China’s largest gas supplier) and Russia (only an aspiring gas suppler to China).

LNG suppliers such as Australia can only be reactive to the outcomes of this competition – as LNG will be the marginal supplier to China after pipeline take-or-pay obligations.

Governments

News from The West Australian newspaper today on a story which to my mind demonstrates the type of unexpected consequence that can result from a domestic gas reservation policy, as prevails in WA.

This concerns a change of regulation which now allows Government owned energy retailer Synergy, to try to capture gas customers currently served by private sector Alinta Energy on the Gold-fields pipeline.

What appears to have happened is that Synergy has bought an awful lot of gas from the Gorgon JV (thereby demonstrating to the public that domestic gas reservation “works”!) – but now can only sell it into a finite gas market – likely at a loss.

Other Government news – from the other side of the World – concerned the latest mis-adventure in Shell’s incredibly expensive offshore Alaskan exploration campaign.  This was a Hobson’s regulatory decision from the Federal Government – Shell can drill this summer – but only top sections.  That is, Shell is allowed to spend billions of dollars – but not allowed to actually penetrate a potentially oil bearing zone.

Company news – AGL Ltd (AGL) and APA Group Ltd (APA)

The AFR today provided an update on the sale process for the Iona Gas Storage asset in Victoria.  APA was still named as the likely best placed bidder, whilst AGL was considered as unlikely to be able to compete on cost of capital grounds (which is why in the view of this blog it needs to partner with an infrastructure fund).

Large Canadian pipeline and gas storage company Enbridge was said to be in the data-room.  If Enbridge was to buy this asset that would bring welcome competition into the energy infrastructure sector in Australia, where serial acquirer APA has a dominating position.

Company news – BG, etc

The AFR also reported today on marketing efforts by BG led QCLNG to sell off various parcels of agricultural land it has acquired over the years to host its Queensland CBM extraction activities on.

The Santos and Origin Energy led CBM-to-LNG projects in Queensland would also have marketable parcels of land to sell and it should be fairly simple for all parties to construct contractual arrangements that allow agriculture and gas extraction to operate side by side.

Agricultural land values are high just now – driven (as are most if not all markets) by prevailing very low interest rates – and views on growing demand for higher quality foods from China, etc.

Quote of the day

Sourced from The Economist – an analogue for Trump’s political strategy:

“Do I look like I have a plan?” says The Joker in “The Dark Knight”. “I’m a dog chasing cars. I don’t know what I’d do if I caught it”.

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