Today’s Blog – Tuesday 28th July 2015

Introduction

The smashing of the Shanghai stock market yesterday – an 8.5% fall (the biggest one day decline in eight years) – has reverberated around the world in both stock markets and commodity markets, and oil was not left out of the carnage.

The Chinese authorities’ efforts to hold up the market (what’s Mandarin for “Project Canute”?) was put under question by some reports – and more fundamentally, Chinese growth numbers are now widely considered to be as reliable as OPEC reserve figures.

Commodity markets

Crude oil prices closed materially down again yesterday, with Brent at US$53.47 and WTI at US$47.39.  In the month to date, prices have fallen in July by a higher percentage than any month since the GFC.

The Chinese stock market drop was the latest kick in the guts, but the fundamental driver is that Wile E Coyote has in recent weeks looked down from over the cliff and has seen that over-supply has not changed in any material sense in the last six months.

Last week’s unexpected and meaningful addition to rig count numbers is still reverberating in the markets.  As noted yesterday, I consider this re-hiring of rigs was driven by WTI prices of US$60 of a few weeks ago, but there is still much “irrational exuberance” in the US oil patch.

A number of commentators think that fiscal carnage will hit the US corporate tight oil sector later this year, with a gathering perfect storm of: lower prices; remaining hedges falling off; credit reviews using new pricing decks; evidence of negative cash-flows for yet another quarter; etc.  Unpleasant as this will be for the participants, the rest of the global oil market needs it.

Henry Hub was flat at US$2.79.

LNG

Japan’s average LNG price (per mmbtu) for June was down again – at US$8.65.  Volumetrically this figure is largely driven by contract purchases.  At this price, few if any Australian LNG projects would have been sanctioned in the last decade.

As Japan brings back on its nuclear fleet, starting next month, spot sales will reduce and this average will go up (spot sale prices being less than contract at present).

The latest seemingly crazy pipeline story is the proposal to build a deepwater sub-sea pipeline 3,000 km from Iran to India.  Or is this less crazy than any pipeline story that involves transit through countries such as Pakistan, let alone North Korea?  Australia’s Icthys LNG project involves a sub-sea pipeline of ~900km in length.  This low sovereign risk project is still technically challenging and expensive, so best of luck to the Iran/India venture.

Governments

Last week’s Australian Labor Party conference came up with a gas policy that fell short of domestic gas reservation – but rather introduced a mechanism of a “national interest” test to be passed before new LNG projects could go ahead.

In LNG market terms, this policy is meaningless.  International gas markets are such that any Australian LNG project that goes ahead in the next decade or so (if any – a big if) will likely only be gas from areas such as the Browse Basin that are not connected to East Coast gas markets.  Globally, LNG supplies – and rival pipeline projects – are loooooonnnngggg.

Company news – AWE Ltd (AWE)

AWE’s latest drilling report on its Waitsia-2 appraisal well in the Perth Basin flagged that the well has reached TD of 3,530M and that wireline logging will commence shortly.

As always, AWE flagged that no fracking was planned for the well.  AWE’s development plans for the Perth Basin will no doubt be framed by management of fracking concerns as much as by normal economics of production optimisation – e.g. produce first from non-fracked wells/zones and then when everyone is comfortable with the ongoing production, start to frack to meet production/contract levels.

Company news – BG Group

The Shell/BG takeover has passed a significant regulatory hurdle – approval from the Brazilian regulatory authorities. Australia, the EU and China are to follow.

Australia should not be a problem – at worse maybe the divestment of some assets that unkinder souls than me might call Moose Pasture.  The PRC will be the interesting one – but likely a case of politics rather than economics, which Shell should be able to manage without getting stiffed too hard.

Company news – Cooper Energy Ltd (COE)

COE announced yesterday the spudding of another well (Buniah-4) in its highly productive oil-field in Sumatra.  TD is 1,712M and time to drill is estimated at a lazy month.  Production from the field is currently running at a facility constrained 650 bopd.

As in previous disclosures, COE’s announcement gives no hint as to the economics of this field under Indonesia’s very large Government take for the type of licence.

Company news – Pura Vida Energy Ltd (PVD)

Junior explorer PVD went into a trading halt yesterday pending the release of some news on its free-carried offshore Morroco well, MZ-1.  The market would love a genuine high-impact wild-cat for a junior to finally come in.  However, it could be somewhat early days for this well and the news might well related to something like “shows in a secondary formation” or some such.

Quote of the day

A quote from the classic play (and movie) Glengarry Glen Ross, which captures something of the atmosphere within employee ranks in oil companies at present:

“As you all know first prize is a Cadillac El Dorado. Anyone wanna see second prize? Second prize is a set of steak knives. Third prize is you’re fired”.

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