Today’s Blog – Thursday 10th September 2015

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The oil market currently seems to be trading at the upper end of a band between the high thirties and fifty dollars.  All other things being equal, there seems to be less resistance on the down rather than upside at present.

The single biggest factor that could change this calculus (which is entirely subjective) would be for OPEC to make a meaningful production cut of say 2 mmbopd.  And by OPEC we mean Saudi Arabia.

A Reuters report from earlier this week noted that the leadership of the KSA’s Oil Ministry and Aramco remained in flux – and naturally feature heavily in what this blog calls the Saudi Game of Thrones.

That Game is focused on the change to the succession rules, with favoured son of the King, bin Salman (who is second in line to the throne, young – and if all works out for him could have a very long reign ahead), having his fingerprints all over the Yemen war (the KSA’s Vietnam?).  There is a risk that a vacuum of oil leadership is developing in the country and the technocratic basis for Aramco management in particular could be politicised.  The consequences of this would be large and unpredictable.

Commodity prices

Crude prices fell overnight, by a chunky ~4%.  Brent closed at US$47.40 and WTI at US$44.11.  The unofficial API inventory numbers issued in the US were bearish, with an expected crude build of 2.1 mmbbls (accompanied by a product build of 1.5 mmbbls).  This does not seem sufficient in and of itself to cause a price fall of this magnitude, but if my view above is correct, any bad news will tend to push hard on the down-side.

Henry Hub dropped a few cents to US$2.66.  A report earlier in the week that the currently unloved Haynesville shale play could be cheaply revived through the productivity lessons learned in the Marcellus, if proven correct, would not be good news for gas price bulls.


The troubled Yamal LNG project in Arctic Russia was the subject of a recent Reuters report which provided an update on the financing for the project.  As we noted last week, the appetite of Chinese financiers to come to the Yamal party is far less than the Russians would like and other options appear nebulous.

That leaves JV partner Total potentially having to provide even more support for Yamal than it has already given.  This factor could have some relevance to current machinations in Australia and PNG over Woodside Petroleum’s (WPL) proposal to acquire Oil Search (OSH).

Media reports have speculated that Total could be a potential rival bidder for OSH.  However, even a Super-Major needs to manage its available cash, and with its commitments to Yamal possibly being unpredictable, Total may be reluctant to over-stretch itself in PNG.

Company news – WPL and OSH

The business media continues to devote much column inches to the above.  As noted above, potential rivals to WPL have been mooted.  However to me these seem somewhat flimsy:

  • Exxon (XOM) features heavily in the speculation, as Operator of the PNG LNG project.  Naturally XOM has made no public comment on the transaction and has not leaked anything either.  In my view XOM would not undertake a public market takeover in Australia for a relatively trivial ~A$10B.  If it decided to play corporately in the current oil price environment, it would want to do much bigger deals (otherwise it would risk Shell laughing at the triviality of its deal compared to the BG takeover).
  • Total – see above.  PNG is arguably the hottest LNG location on the planet right now and Total could try and bulk up its position there.  But – it is a Super-major with many competing calls on its capital, such as Yamal.
  • Inpex – I consider it very unlikely that a Japanese company would enter into a competitive bidding war for a company like OSH, especially as it listed on a foreign exchange.
  • Petronas – as this blog has noted, the Malaysian NOC is currently under political pressure to provide funds to its Government owner and invest locally, not spend precious cash on overseas ventures.
  • BHP has not been mentioned, although it could easily play on the ASX and the OSH assets fit its Tier 1 mantra.  No doubt its prior experience in PNG (through the ill-fated OK Tedi mine) would be a significant deterrent.

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

Speculation as to when BPT will acquire DLS has been muted by the much larger WPL/OSH deal.  The ongoing absence on family leave of BPT’s Managing Director means no deal is likely to occur until he returns (presuming he does).

Company news – Origin Energy (ORG)

No sooner does this blog speculate that ORG’s long time MD, Grant King, is on his way out, than he delivers a series of bravura media performances to suggest that he is still on top of his game.

King has particularly pushed back on the suggestion that the Queensland LNG projects will not make any money.  He is assisted by the fact that there is a wide range of definitions as to what “making” money actually means in this context – NPV on a project life or go-forward basis; free cash flow positive; net profit after depreciation and all deductibles; return on assets employed in years in the future; etc.

Quote of the day

A recent quote from the boss of Rosneft, Igor Sechin, on OPEC:

“The Golden Age of this organization has passed.  If quotas had been observed, global oil markets would have been rebalanced by now,”

(What is the Russian for “if my aunty had balls she would be my uncle”!)

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