Today’s Blog – Thursday 3rd September 2015

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Introduction

The US EIA has released another influential report this week – this time on the implications of removing the country’s crude oil export ban.  Readers who understand basic economics will not be surprised to hear that the report concluded that removing the ban would make sense.

From the point of view of members of Congress, the most important issue – would any removal risk lifting US gasoline prices, – was concluded in the negative.  However, would they be prepared to take that risk?  Imagine the scenario where oil prices rose completely coincidentally with the removal of the ban (distinctly possible, as most industry observers believe the price will go upwards from here – at some point).  My view is that reason will not necessarily prevail here – at least not until a less fractious political time (although it is far from clear as to when that might be given the 2 year House of Representatives electoral cycle).

Commodity prices

Crude oil prices bounced up ~4% from yesterday’s falls, with Brent closing at US$50.51 and WTI at US$46.05.  This was notwithstanding mixed (at best) “numbers” from the EIA’s weekly inventory report, which showed a crude build of 4.7 mmbbls off-set only partially by a reduction in product numbers.

The price rise seemed to be largely driven by a general rise in stock-markets, started off in Shanghai, and followed globally, with the tail-wind of positive US economic statistics.

Henry Hub closed down a few cents at US$2.64.

LNG

European competition authorities have just given their blessing to the Shell take-over of BG Group, which will create the clear top-dog in global LNG.  Only Chinese and Australian regulators remain to be dealt with.  As noted previously, I do not expect any material problems there.

Over in North America we saw two recent US LNG related stories that show its easier to do business in some places compared to others.  These were on the one hand the securing by Cheniere Energy of DOE permission to expand its Texan liquefaction facility, and on the other hand, ongoing, and expensive, delays in procuring environmental approvals for Petronas’ Pacific Northwest LNG project in British Columbia.

Governments and fracking

The New South Wales Government has this week said it will seek to pass amendments to its Petroleum, etc, laws, to clarify certain matters.  The catalyst for this is the ongoing dispute with ASX listed Metgasco Ltd (MEL) over the Governments illegal suspension of its drilling activities.

Perhaps the new laws will specify that drilling shall not take place within 6 months before any election?

Company news – Santos Ltd (STO)

The Australian Financial Review (AFR) contains a detailed article today on where STO is at following its recent “succession planning” (translation – the sacking of its CEO) and associated strategic review.  Apparently the company’s Executive Chairman and CFO have been meeting with large shareholders recently – and depending on which statement one believes, either receiving a dressing down or were “amicable and well received” (STO’s quote).  I suspect that a ~2/3 share price fall since last year means the former is more likely than the latter.

One comment in the AFR article seemed to go to the heart of STO’s problem – that there had been a massive failure in risk management.  In some ways your blogster is reminded of that rather graver failure of risk management – BP’s Macondo blowout and explosion in the Gulf of Mexico in 2010.

A critical conclusion reached by the various post-mortems into that disaster was that BP had focused far too much on higher probability/lower impact risks, rather than on lower probability/high impact risks.  This was illustrated by senior BP management pointing out only a few days before the explosion that some mats on the Deepwater Horizon could be trip hazards.  In STO’s case it appears that the low probability outcome of significantly lower prices arising just when it reached “peak” debt was lost in the day-to-day grind.

Company news – MEO Ltd (MEO)

MEO announced today that it has procured an on-shore PSC in the exotic (but no doubt high-taxing) location of Cuba.  Good on them for being a typically Australian quick mover.  No doubt they will look to parlay this speed into some sort of carry from a US company once the latter has got more comfortable with dealing in the previously pariah nation.

Company news – various ASX listed

Its the annual Good Oil Conference over in Perth this week, and many ASX juniors have released updated corporate presentations yesterday and today. Your blogster doubts that there will be a huge amount of broker/investor interest in the despised oil sector at present – but would be pleased to be proved wrong. I will seek feedback from participants once their inevitable hangovers have cleared.

Oil Search Ltd’s (OSH) long time MD, Peter Botten, has for years supported this conference, but unfortunately is not presenting this year.  Perhaps now OSH is the second largest oil company on the ASX the company of juniors promoting high risk ventures (and, psst, asking for cash) is no longer appropriate for it.

Quote of the day

OPEC has been a focus in the last few days of oil market turmoil.  However, when one reads about the latest actions sought by the likes of Venuzeula, it is appropriate to bear in mind the following recent quote from Dave Purcell of US investment house Tudor Pickering Holt:

“The number one rule of OPEC is that it doesn’t matter what anybody says except Saudi Arabia.”

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