Today’s Blog – Thursday 27th August 2015

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Introduction

This blog commented yesterday on the increasing internet “chatter” on the possibility of OPEC blinking and curtailing production in order to raise crude oil prices.  Since yesterday that “chatter” rate has gone up again, with your blogster having read a number of well-reasoned articles as to why this might happen.

One succinct piece of analysis looked at Saudi Arabia and calculated how long its sovereign wealth reserves would last for at US$40 oil prices – the answer (with numerous simplifying assumptions) was a blunt three years.

However, keen followers of The Game of Thrones may note that monarchs occasionally are more concerned with their dynasties than with the common good.

Commodity prices

Brent strengthened by a few cents overnight, to close at US$43.61.  However, WTI fell nearly 2%, closing at US$38.88 – as a set of ambiguous numbers from the EIA’s Weekly Report spooked a very skittish market.

Although US crude inventories fell by a substantial 5.5 mmbbls, product in storage went the other way, with gasoline and distillate going up 3.1 mmbbls.  US crude imports were down nearly 1 mmbopd over the week – more than the fall in crude inventories.  The EIA reported that US production remained flat.

Henry Hub natural gas prices were stable at US$2.68.

LNG

Reuters has reported Gazprom as signalling that its massive Power of Siberia gas pipeline to Eastern China may be delayed by a few years – with first gas shifting from ~2018 to ~2021.

Given the Arctic conditions prevailing over the the long and virgin pipeline route, further delays would seem likely.  It is interesting to compare the very sparse information released by Gazprom to the extensive public disclosure of the complex technical issues surrounding the AKLNG pipeline route from the North to the South of Alaska (which unlike Power of Siberia greatly benefits from following an existing oil pipeline route).

Although the Russians will not be held to anywhere near the same environmental standards as prevail in the US, assumptions about a quick build for Power of Siberia seem highly optimistic.

This likely provides a substantial market opportunity for LNG traders to supply the PRC whilst the Russians experience problems in laying pipe in permafrost, etc.

Governments

News service Interfax has over-night reported that the State of Pennsylvania has recently fined Shell, Exxon and Chesapeake over the contamination of water supplies by methane from gas wells.  I would expect these parties to perform to much higher environmental standards than smaller US independents, so it is unclear whether the breaches are immaterial, or relate to periods of prior asset ownership.

The Super-Majors need to show strong leadership on dealing with community concerns over fracking by adhering to the highest industry standards.

Company news – Santos Ltd (STO)

The Australian Financial Review (AFR) has today reported that STO may find non-traditional financing measures to deal with its current over-leveraged plight – including raising money through various forms of hybrids.

Investors in junior resource companies are intimately familiar with this sort of capital raising, in which a desperate need for cash means that Boards turn to aggressive financiers who provide e.g. convertible notes on onerous terms – and which tend to capture a lot of upside from other equity investors.

Given the systemic and material losses that US private equity houses are currently suffering from investments made in the energy sector – not only prior to last year’s price crash, but in the period since then when prices seemed to be on the rebound – such hybrids (i.e. something well short of a full take-over, but with liquidity and upside) could well be attractive to them.

Company news – Drillsearch Energy Ltd (DLS) and Beach Energy Ltd (BPT)

Conglomerate Seven Group’s CEO was recently reported as saying that the fall in oil prices provided an even greater rationale for consolidating the mid tier Cooper Basin oilers such as DLS and BPT (in which it has 20% stakes in each).

Not surprisingly, DLS’s Chairman (who appeared to recently see off the Company’s MD in a Boardroom battle an was front and centre in the company’s results reporting this week) suggested that only a substantial premium would make a takeover of DLS by BPT likely to be acceptable to its shareholders.

There would therefore appear to be a few “social” issues to overcome before BPT and DLS are wed – but those are often the biggest issues in takeovers.

APA Group Ltd (APA)

APA recently re-affirmed its interest in building the Government sponsored (but not funded) pipeline proposed to connect the Northern Territory to Eastern Australia.  But who will take risk on this given there would be few quality reserves (rather than resources) to under-pin it?  Not APA for sure.

Viewers of the ABC’s excellent current comedy series, Utopia, in which a hapless Government department endlessly promotes infra-structure projects that never actually go ahead, will see close similarities with this NT pipeline project….

Quote of the day

Returning to the wit and wisdom of Edmund Blackadder, this time imagining his part in an OPEC meeting following last year’s “cunning plan”:

“Baldrick, you wouldn’t recognise a subtle plan if it painted itself purple and danced naked on a harpsicord singing ‘subtle plans are here again’.”

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