Today’s Blog – Friday 7th August 2015

Introduction

More and more news is emerging about pain within OPEC countries following last year’s dramatic fall in oil prices.  And it is not only the appalling governed basket cases like Venezuela who are suffering.

Saudi Arabia has recently announced plans to borrow US$27B, as its oil revenues are no longer sufficient to fund its extensive welfare state (and, inter alia, fund its war in neighbouring Yemen).

The KSA still has reserves of US$672B – but this is down an incredible US$65B since the second half of last year.  Clearly this pace of liquidation is unsustainable fiscally – but a bigger issue is whether the House of Saud itself is sustainable in a political structure that does not subsidies its citizens so generously.

News reports have also pointed to the effect of the recent flattening of the oil futures curve on the KSA – such that the 2020 futures price is now only US$62.  This is a figure well below what many estimate is required to balance the KSA’s books.

However, the view of this blog is that the futures markets is a remarkably poor predictor of what oil prices will be in the future and that I expect depletion and cut-backs to deliver a higher price than that within the next 5 years.

Commodity prices

The short term crude oil price continued to fall overnight, with Brent closing at US$49.52 and WTI falling harder to US$44.66.  No particular “numbers” or “events” drove this fall, although the market may have paid notice of Goldman Sachs updating their view yesterday that the extent of the current excess of supply over demand is 2mmbopd rather than 1.8mmbopd.

No self-respecting investment banker can have a thesis these days without trying to dub it with a catchy phrase (a la ex-PIMCO boss Bill Gross) and Goldmans have called their view “lower for longer”.

The end in sight of the US driving season is also being observed by the market (c’mon Chuck Griswold – keep driving!) thus weighing on demand whilst official EIA estimates of US production are still strong.

The Henry Hub natural gas price firmed a couple of cents to US$2.81.  The trading range at Henry Hub has been fairly tight in recent months and there has been no sight (as yet, I say) of US$3 being tested.

LNG

The latest hurdle to the progression of the numerous British Columbian LNG projects is the calling of the Canadian election (to be held in late October).  During this long campaign period it is highly unlikely that Federal regulatory bodies will make any of the decisions required (particularly on environmental matters) for the projects to proceed to FID.

A more obscure, but possibly of greater consequence, news item from the LNG world emerged recently from Japan.  This was the World’s first trade of an LNG futures contract (for only 5,000 tonnes) on the Japanese OTC exchange.  Japan has been strongly promoting the liberalisation of LNG markets since Fukushima and regular readers will know that this blog believes that this liberalisation process is an inexorable one – and a key driver in private sector moves such as Shell’s acquisition of BG Group.

Governments

From the coal end of the fossil fuel industry in Australia rather than an oil and gas item – but still relevant to the latter – is the latest delay in a massive Galilee Basin coal project being promoted by Indian company Adani.  This multi-billion investment ($2B spent to date prior to FID) has been held up by a paperwork error and some media commentators believe the project might now not go ahead at all.

My view is that debt finance would not be available anyway for this project, given coal prices and the outlook for coal generally – but in planetary terms it would arguably be more environmentally benign to mine the coal that India will burn anyway in Australia rather than in the sub-continent itself.  But that type of assessment is apparently not made in the otherwise exhaustive green-tape process.

Company news – New Zealand Oil and Gas Ltd (NZOG)

NZOG has today called an EGM to approve commencing a share buyback program.  The company had $83M in cash as at 30 June 2015.  If its Board cannot find other attractive investments in the current market, then I will volunteer to stop blogging and seek some for them!

Company news – Otto Energy Ltd (OEL)

OEL yesterday showed what the difference is between an MOU and a binding contract.

A few weeks ago OEL announced that it had signed a letter of intent with Borealis Pty Ltd to invest US$4M into that company for a 40% share thereof.  Yesterday it announced a binding deal to acquire 100% of Borealis for A$1.2M – and in OEL scrip not cash.

In my view this is still a good deal for Borealis shareholders given its only asset was an farm-in deal into a marginal acreage package on Alaska’s North Slope – but the Champagne corks being popped by Borealis’ owners might now need to be from Yellowglen not Krug.

Quote of the day

Given the Republican debate is tonight not yesterday (mea culpa), I have yet to get a quote from The Donald calling out Senator Cruz as a low-down Canuck, so I’ve gone back to that other great American, Homer Simpson, and his adventures in the stock market (which eerily mirror my own):

Kent Brockman: Animotion is up an eighth… after plunging seventy five points this morning!

Homer: Oh, I hope plunging means up, and seventy five means two hundred!

Kent Brockman: The firm declared super-dooper bankruptcy, which is terrible news for the company’s one stockholder, Homer Simpson.

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