Today’s Blog – Tuesday 29th September 2015

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Introduction

The tragedy in Mecca last week (with nearly 800 deaths now declared – and Iran claiming there are more yet to be disclosed) has potential consequences for the what this blog calls the Kingdom of Saudi Arabia’s “Game of Thrones” – and hence oil markets.

Senior KSA sources have recently been reported in the media as saying the Deputy Crown Prince (and favoured son of the King), Muhammad bin Salman, should bear responsibility for the deaths.  This adds to the criticism of his central role in the war in Yemen, which risks spinning out of control, at least in humanitarian terms.

As noted in this blog, instability in the House of Saud could be one of the premier “events” that could emerge to rock oil markets.

On a different note, and recognising the appalling death toll in Mecca, the tragedy puts a spotlight on the views of those who see OPEC and the KSA as capable of complicated and subtle machinations to control international oil markets.  A systemic inability to manage the Haj over many decades would seem to suggest that controlling the rather more complicated crude markets would be a tougher task.

Commodity markets

Crude prices fell sharply overnight (>2%), with Brent closing at US$47.43 and WTI at US$44.47.  The fall was driven by another poor set of economic numbers from China and gloom from the IMF about global growth prospects.

From a medium/long term perspective, news from Shell’s Arctic drilling campaign off Alaska’s North Coast, should provide a fillip for oil markets.  Shell announced that it had P&A’ed its Burger J well at ~7,000 feet after only encountering non-commercial quantities of hydro-carbons.

This could be seen as a validation of OPEC’s strategy to drive out or delay expensive oil projects from the market.  Arctic oil, deepwater and tar sands have arguably proved themselves more vulnerable than on-shore US tight oil to current market pressures – and form a large part of the US$220B in recently deferred projects identified by Wood Mackenzie.

Burger J must be the most expensive well ever – an all up cost, including leasing, a failed prior year program and the vast cost of dealing with regulations – of ~US$7B.

Henry Hub closed up at US$2.67.

LNG

A couple of good news stories for LNG markets (for a change):

  • A possibly material market for LNG is in powering ships.  The number of such ships is now 70 – an increase of 2/3 in the last 2 years.  Current LNG prices should accelerate this trend.
  • LNG powerhouse country Qatar’s domestic gas consumption has grown by 80% in the last 5 years (hence, all other things being equal, reducing the amount of gas available for export).  The growth has been driven by water desalination and electricity generation needs.  And that is before the World Cup’s call for cooled stadiums (and cold sherbets if beer is not available).

These are minor in the overall scheme of things, but do reflect important trends: new markets for gas and increased demand by Middle Eastern nations for their own gas and oil.

Governments and fracking

Recent news from Victoria: ongoing competition from the main political parties as to who can most abuse the word “moratorium” when it comes to on-shore petroleum exploration.

The Oxford Dictionary defines this word as “the temporary prohibition of an activity”.

The Labor Government in Victoria presides over a current “moratorium” whilst it conducts a very very sloooowwww enquiry.   The Liberal opposition now wants this extended to 2020.  This seems to stretch the concept of “temporary”….

General industry consensus would be that on-shore Victoria is not particularly prospective.  In my view, if the moratorium was lifted tomorrow then no material exploration work would happen anyway.  The Government could look sensible and still no fracking would take place.  But where are the votes in being sensible?

Company news – Santos (STO)

STO’s Executive Chairman, Don Coates, is also a non-executive Director of LSE listed commodity giants Glencore.  The latter’s share price was smashed 30% overnight, amid concerns over its very solvency raised by Investec.  Its share price is now down ~75% in the year to date, is hugely below its IPO price of a few years ago and its bonds are trading at large discounts.

No doubt Glencore’s call on Coates’ time at present, given this crisis, together with his “day job” of seeking bidders for STO’s assets, leaves him little time to long at the long term issues facing STO (such as recruiting a new MD, developing a strategy, etc).

Company news – Origin Energy (ORG) and STO

The Australian Financial Review (AFR) today reports that Standard & Poors has downgraded its oil price assumptions which has led to its noting that ORG has little room to manoeuvre before losing its investment grade rating.  Although not stated as yet by S&P, STO’s credit rating would also no doubt be under pressure.

This increases the likelihood that one or both of these parties will undertake an equity raising, notwithstanding their asset sale programs (which will take time and are also affected by oil price outlooks).

Company news – Woodside Petroleum (WPL)

The AFR has also reported that calls are being made on WPL to undertake a share buyback in preference to pursuing the acquisition of Oil Search (OSH).  In the ultra-low interest environment in which the world still appears to be stuck, the maths behind this is simple – borrow at say 2.5% and acquire shares yielding ~ double that.  However, in the long term, the act is one of liquidation – and leaves no-one left standing actually searching for and producing oil and gas.

Quote of the day

Continuing on from yesterday, another quote from Tesla’s Elon Musk (in brilliant timing given Volkswagen’s woes, Tesla has today launched its electric powered SUV).

“Some people don’t like change, but you need to embrace change if the alternative is disaster”.

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