Today’s Blog – Tuesday 4th August 2015

Introduction

A few recent interesting news items from the coal industry that the oil industry will fervently hope does not foreshadow similar events in its own part of the fossil fuel patch:

  • Last week Australia’s Isaac Plains coal-mine was sold by its owners, Vale and Sumitomo, for the princely sum of $1.  Three years ago the mine was valued at A$860M.
  • US coal miner Alpha Resources filed for Chapter 11 yesterday.  It is one of the largest coal producers in the US.
  • Last week’s The Economist reported that: “180,000 Americans work in the burgeoning solar power industry. Only 93,000 work in coal”.
  • The Obama Administration is expected to announce new carbon-cutting regulations later this week which will further reduce coal’s market share in the US.

To date we have not seen producing oil & gas assets sold at bargain basement prices – generally equity/debt funding has been available ahead of fire sales.  However, the coal industry was itself supported by capital markets a few years ago.  A possible eventuality rather than a prediction.

Commodity prices

Crude oil prices continued their recent rout overnight, with Brent falling ~5% to US$49.61 (the first time it has fallen below US$50 for 6 months) and WTI closing down slightly less brutally at US$45.30.

Normally a fall in Brent of this magnitude would be caused by a signal “event” in the Middle East.  However, yesterday’s price reduction seemed to be caused by a confluence of more mundane factors: a strengthening US dollar; a further reaction to Friday’s poor BHI US rig count numbers; and, poor economic data from both the US and China.

Arguably the recent intervention of Turkey in the current “smiting” in the Middle East should provide fuel for oil market bulls looking for further regional instability.  The AK leadership of the country appear to be willing to risk what The Economist called “placing Turkey on the pyre of the Middle East”, arguably driven primarily by the personal domestic political aims of its President.

Henry Hub natural gas prices rose a few cents to close at US$2.75.

LNG

The otherwise unheralded Donggi LNG project on the Indonesian Island of Sulawesi recently delivered its first cargo – to what previously was the LNG export plant of Arun in Northern Sumatra.

Reuters recently reported on efforts to expand the Sakhalin 2 LNG plant (located, not surprisingly, on Russia’s Sakhalin Island to the North of Japan).  The JV, comprised of Gazprom, Shell and Japanese buyers Mitsui and Mitsubishi, plan to add a third train – with deliveries commencing in 2021.  This sort of brownfields expansion, supported by customers, with short and uncontested sea routes, seems to be further up the LNG development merit order than many more strongly promoted LNG projects.  Arguably its biggest obstacle could be rivalry from fellow Sakhalin Island occupant, and Russian competitor to Gazprom, Rosneft (with its JV chum, Exxon).

On such chummery, it was interesting to note that Rosneft and Exxon made a joint bid for gas prospective acreage off Mozamique last week, notwithstanding US-Russian relationship tensions.

Governments – and LNG

The Australian Financial Review (AFR) has today made further reports on escalating industrial action at the Chevron operated Gorgon LNG project (“why did we build it on a remote island which is a nature reserve – what were we thinking?!”).  The Comancheros (oops, I mean the CMFEU) are leading a charge for better rosters before the project finishes in the next 6 months or so.

The Government aspect of this story comes from a recent Western Australian Parliamentary inquiry that recommended big cuts to construction rosters to protect employee mental health.  Parliament will get its wishes soon, as WA resource industry workers will soon have a whole new roster: 30 days off followed by another 30 days off.

Unfortunately, this blog expects no new Australian LNG projects for many years.  (And incidentally, we blame management failures – such as locating Gorgon on Barrow Island, building 3 separate LNG plants at Gladstone, etc – far more than the workers).

Company news – Origin Energy Ltd (ORG)

ORG is one of the culprits for the complete stuff up that is represented by 3 separate liquefaction projects in Gladstone.  However, as foreshadowed yesterday, it has scored a win with imminent progress on plans to sell its majority stake in New Zealand listed Contact Energy. Macquarie Bank are building a book for a block sale and cash should shortly flow into ORG’s coffers, no doubt easing credit concerns and the potential need for it to raise equity.

Company news – Empire Oil and Gas Ltd (EGO)

Some otherwise minor news form ASX listed small-cap EGO yesterday that supports a recent theme of this blog about WA’s gas market.  This was the commencement of a second, and larger than expected, gas sale contract to Aluminium giant Alcoa.

Is the WA gas market going to see much more supply-side competition than it has for many years, driven by an influx of Gorgon domestic reservation gas as well as large consumers like Alcoa facilitating new entrants such as EGO?

Quote of the day

The blog eagerly awaits the Republican nominee debate due on Fox TV on Thursday night to see what new classics candidate The Donald might deliver us for this section.  However, in the meantime we have a Fox reference when Homer Simpson gets some stock quotes:

Operator: For automated stock prices, please state the company name.

Homer: Animotion.

Operator: Animotion, up 1 1/2.

Homer: Yahoo!

Operator: Yahoo!, up 6 1/4.

Homer: Huh? What is this crap?

Operator: Fox Broadcasting, down 8.

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