Please pass on this blog to others you think may like to read it
Global asset markets continue to be very volatile, with China’s opaque economy and the actions of the PRC Government to try to deal with its floundering stock market and currency, etc, being the key driver of events.
In oil markets, absent “events” in the Middle East, everyone is searching around for a firm data point that will provide a price floor – which can then be built on. The most likely such floor is solid evidence from the US of production declines, but unfortunately the data and methodologies used to measure these are weak and lagging.
Every oil price bull’s great white hope would be for OPEC to make meaningful production cuts – and there does appear to be a (completely non-scientific) increase in recent on-line commentary to the effect that this might actually happen. The KSA strategy to deliver a short-sharp-shock to US tight oil producers last year has clearly failed and cost the Saudis and the whole of OPEC an enormous amount of money forgone compared to what would have been achieved by a production cut.
However, the “K” in the KSA stands for “Kingdom” – and the new King is playing a Game of Thrones in terms of changing the Saudi succession rules which means that it would be very hard to back-off from the current strategy and lose face accordingly.
Crude oil prices bounced back from the previous days’ fall overnight, with Brent closing at US$43.50 and WTI at US$39.64. A reduction in interest rates announced by Chinese authorities under-pinned the rise. However, crude markets did close before a late fall in US stock-markets which might send a negative signal to today’s price action.
Henry Hub ticked up a few cents to US$2.69.
Reuters has recently reported that Qatar has been changing its LNG sales business model – in response to not only lower prices, but also the threat to its market leading position from Australia (and soon the US as well). Qatar has traditionally followed the route of selling LNG cargoes almost exclusively under long term oil-price linked contracts to the high credit-quality buyers in Japan and Korea. More recently it has greatly increased its traded LNG volumes, as it has sold spot cargoes to emerging markets in Egypt, Jordan and Pakistan.
Qatar can direct its large LNG industry centrally – which Australia does not do as a laissez-faire country. Australian LNG businesses are fragmented, with only Woodside Petroleum Ltd (WPL) having the scale to even start to build an LNG trading business. Unfortunately two of the other three key players, Santos Ltd (STO) and Origin Energy Ltd (ORG) are too consumed at present with their current high debt loads to be positioning to take up opportunities in the LNG trading space.
The cementing of the biggest private sector LNG party, the merged Shell and BG Group, is not yet a fait accompli. The price of BG Group shares is currently at a large discount (~15%) to what it should be if the market considered the deal was done. This seems too large a gap – given the regulatory issues (Chinese and Australian competition authorities) should be manageable, the strategic deal rationale is still very strong, and that there would be too big a loss of face (at Shell in particular) if the deal fell through.
The Australian today reported an interview with the Queensland Treasurer on the potential for increased Government interference in the State’s petroleum industry. Earlier this year the State conducted one of its regular acreage gazette processes – largely for ground in the Cooper Basin, but also for a smaller parcel of land in the Surat. The Treasurer indicated that in future the Government would somehow seek to impose operating requirements on potential oil and gas developments in these areas to reduce fly in-fly out operations.
Given: the released ground is marginal at best; the Cooper Basin cannot be anything other than FIFO; the current Petroleum Law does not support such conditionality; etc, this seems a mere thought bubble rather than a reasoned policy. At present, Queensland is competing for very few global exploration dollars with the rest of the world – it is not being be-seiged by parties desperate to explore in the “Smart”(?) State.
Company news – Oil Search Ltd (OSH)
Following yesterday’s half year results presentation, OSH’s CEO noted that his company could be interested in STO’s PNG LNG assets (naturally only at the right price he said). As we have stated before, these assets are STO’s crown jewels – and the likes of WPL would also be potential purchasers.
Company news – STO and ORG
The Australian Financial Review (AFR) has reported that US Super-major Conoco-Philips, the operator of the existing Darwin LNG project, is assessing various options for back-filling these liquefaction facilities when the current feed-stock from Bayu-Undun depletes in ~7 years time.
Conoco has the luxury of being able to play-off STO and ORG over this. Both are in JV with Conoco in rival ventures to supply Darwin: Barossa-Caldita and Poseidon respectively.
Company news – Drillsearch Energy Ltd (DLS)
It was DLS’s turn to announce its annual results this morning. The company made the current usual write-down of exploration assets, emphasised the strength of its balance sheet and noted that cost-cutting was ongoing.
DLS reports its reserves split into oil and “wet gas” categories. The latter appears to be a marketing term only. DLS does not split out condensate (if any) and natural gas liquids (NGLs). As such, it is hard to get a true picture of the value of its reserves. Wet gas is not a product.
Quote of the day
Taking a break today from the wisdom of Edmund Blackadder (more later in the week), DLS’s manipulation of English has inspired me to quote the following:
“The basic tool for the manipulation of reality is the manipulation of words. If you can control the meaning of words, you can control the people who must use the words”. Philip K Dick