Today’s Blog – Thursday 24th September 2015

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The blog is back after its brief sojourn to Aberdeen – the land of golf, whisky (correct spelling this time!), and of course the black, black oil.

On the latter, your correspondent can report that, judging by the vast amounts of Porsches, Range Rovers, etc, crowding the streets (and what was that Bentley doing parked right outside Schlumberger’s office?), the collapse in oil prices is taking its time to work its way through in the North Sea’s oil capital.

That is likely to be for a number of different reasons, including: the vast accumulation of wealth in the region in the last few years (particularly it seems from the successful sale of numerous service companies in the boom times), the international customer base for the same service sector, long lead times for North Sea developments (very clear when compared to the fall in US production in recent months), etc.

Commodity prices

Taking a “long term” look back at oil prices (i.e. since my last blog on the 11th September), not much movement has occurred.  Brent closed yesterday at US$47.75 (a 0.8% fall since the 11th) and WTI at US$2.57 (a 0.3% fall).

“Numbers” have been mixed to positive in this period – with good falls in the BHI rig count, ongoing US crude inventory reductions, but gains in US product stocks.

“Events” have been quiet to negative, with the likelihood of the Iran deal being blocked by Congress being likely eliminated and no worsening of Middle East conflicts.  General concerns about the global economy are the biggest bear factor.

The Brent/WTI spread has narrowed – likely for a number of mixed reasons, but possibly also reflecting some recent (although arguably limited) progress in Congress towards the lifting of the 1970s ban on US crude imports.

Henry Hub gas prices have been more bearish than crude prices, with the benchmark closing at US$2.57 yesterday.  Predictions of a mild winter and relatively high inventory numbers appear to be the main factors, notwithstanding EIA data indicating expected ongoing falls in production from many key areas (including associated gas from the likes of tight oil production in the Eagle Ford).


This blog’s main themes continue to play out in the LNG sector:

  • Increased trading and contract flexibility as the market moves towards a more liberal commodity market (e.g. Glencore seeking to build up its LNG trading team and ongoing Japanese moves towards de-linking LNG prices from crude prices).
  • A lack of progress towards FID in the main green-fields areas such as East Africa and Western Canada (e.g. Tanzanian politicians seeking a higher tax take on as yet non-existent projects and Canadian indigenous groups increasingly asserting their rights).

Governments and fracking

Scotland’s ruling party, the Scottish National Party, has currently imposed an “embargo” on on-shore fracking in Scotland (whilst at the same time basing much of its economic plans for its hoped for independence on contributions from the offshore industry, which of course never stimulates wells).  This embargo is not enough for some in the SNP, who consider it wimpish and want the practice to be banned.

This pressure group have named itself “SMAUG” – SNP Members Against Unconventional Gas – which appears to be clever marketing in terms of not awakening the well known evil dragon.  As usual, the industry appears to be trailing in the wake of its opponents in the battle for public opinion.

Company news – Woodside Petroleum (WPL) and Oil Search (OSH)

As predicted, last week OSH rejected WPL’s proposal to acquire it.  The premium offered was deemed to be inadequate – and the calculation of that inadequacy seems to have been greatly assisted by the spike in OSH’s share price before the news of the WPL approach was announced.  Cock-up or conspiracy?

WPL now has the unpleasant task of seeing whether a narrow path exists whereby it could pay OSH more without diluting its own shareholders.

If that path does not exist, then Plans B (buying Santos’ share of PNG LNG), C (acquiring InterOil), D (doing a deal with the PNG Government) could beckon.  Or Plan E – do nothing under the umbrella of not over-paying (but then still boosting Browse LNG).

Company news – Santos (STO)

STO’s asset sale process – basically inviting bids for everything it owns – appears to be on track, judging by the intensive media campaign the company has conducted in recent weeks.

What will be left of the company, and hence what its strategy (and who will lead it) will not be known for some months at the earliest.

The process is very much akin to a partial liquidation, with the Executive Chairman taking the role of the liquidator.

On the good news front, today STO announced first production from its GLNG plant.

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

The glacial pace towards mid-tier Cooper Basin consolidation continues.

In the last week or so, BPT has lost its short term MD, Rob Cole, for family reasons.  Its Board would presumably be reluctant to spend many more months searching for an external candidate, who would want to conduct his/her own strategic review, etc.  So the incumbent acting CEO, Neil Gibbons would seem well placed to take charge.  The wild card here is whether 20% shareholder the Seven Group will assert any influence.

DLS has appointed its acting CEO to a permanent job in the same timeframe.  The apparent desire of the DLS Board to retain its independence would be aided if the company could quickly acquire a non-Cooper Basin asset whilst BPT is still deciding what to do.  Media reports have recently emerged confirming that DLS’s previous MD, Brad Lingo, who left in abrupt circumstances in recent times, was pushing for a merger with BPT before his “departure”.

Quote of the day

The AFR reported today that the current visit to the US by Chinese President Xi Jinping risks being over-shadowed by the concurrent visit by the Pope.  This brings to mind Joseph Stalin’s question posed to Winston Churchill during the war:

“How many divisions does the Pope of Rome have?”

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