Today’s Blog – Friday 2nd October 2015

Please pass on this blog to others you think may like to read it

Introduction

Australian resources giant Rio Tinto has this week made solid progress in what appears to be its plan to exit the coal business, with a major asset sale and a restructure designed to facilitate further sales.  This occurred against a background of two very negative current trends facing the coal industry – first: low prices rendering many coal mines worldwide uneconomic; and  second: projections that a good proportion of coal reserves might never be produced if policy settings were put in place to constrain carbon emissions to meet a two degree warming scenario.

The latter clearly also has implications for the oil and gas sector and analysts have also pointed out that a large proportion of corporate oil and gas reserves may also not be produced in this policy scenario.

Here is where your blogster thinks OPEC could be an unlikely saviour – I am one of those cynics who considers that OPEC’s “reserves” are numbers issued for political reasons rather than an estimate of economically recoverable resources and are likely to be grossly overstated.  If this view is correct, then the reserves booked by private companies would be a much larger part of the world’s oil and gas reserves and as such should still have a large market role even in a carbon constrained world.

Commodity prices

Crude prices fell overnight, with Brent closing at US$47.69 and WTI at US$44.74.  The drivers for the fall were a lack of “events” – on the US side of the Atlantic the likelihood that Hurricane Joaquin would not disrupt petroleum supply chains as had been feared earlier in the week – and in the Middle East the perception that Russian bombing in Syria was less disruptive than viewed a day or so earlier.

The Henry Hub gas price continued its fall this week, dropping a further 3.5% overnight to close at US$2.43.  In a world awash with LNG, the likelihood of material spot cargoes of LNG leaving the US by year end have been diminishing.

LNG

Weakness in LNG markets is leading towards what has always been to date a great unthinkable – that buyers will seek to break long term purchase contracts.  Recent reports indicate that Indian buyer Petronet is achieving such significant savings by buying on the spot market compared to its long term contract price from the Qataris, that it is prepared to pay penalties under the latter for not taking the required take-or-pay quantities.

This is a typical development in a liberalising commodity market, and echoes similar large contract ruptures that have been seen in domestic and pipeline gas markets in the past in areas such as the UK and the US.

Governments and fracking

News service Interfax has today reported on a development in US fracking that may do more to reduce this business activity than opposition from green activists – the increasing scarcity of water, particularly in the parched US West.  Scarcity increases cost, and when the end-product prices of oil and gas are so low, every input counts.

This development is likely to lead to increased good-old-US ingenuity in recycling water, using grey water, etc, etc – all things that environmentalists should welcome.

Company news – Woodside Petroleum (WPL)

That apparent arm of WPL’s investor relations team, the Australian Financial Review’s (AFR) Street Talk column, has today provided an update on the company’s takeover offer to OSH.

The AFR has reported that WPL is awaiting any rival bids (my view – no such rival bids will emerge) before considering upping its ante with OSH.  WPL again is cloaking itself with its mantra of “investment discipline”.

Company news – Origin Energy (ORG)

ORG should close the institutional part of its rights issue today and come out of its trading halt next week.

For the first time, the media is speculating that ORG’s long time CEO, Grant King, may not survive for much longer.  As always, the share price talks (and bulls**t walks), and next week ORG stock is likely to hit its lowest price in more than ten years.

As this blog has speculated before, the LNG assets of ORG and rival Santos (STO) would arguably do better if owned by the same organisation.  However, as in getting to Dublin, where we are just now does not seem a propitious starting point.

Company news – STO

Following yesterday’s comments, STO has made a (late) disclosure of yet another Director acquiring stock – this time $565 worth.

Company news – Buru Energy (BRU)

BRU advised the market a day or so ago of a disappointing result in its Praslin-1 exploration well in the Canning Basin yesterday – unfortunately no moveable hydrocarbons were encountered (but naturally lessons were learned).

Quote(s) of the day

Differing management styles…..

“Failure is an option here. If things are not failing, you are not innovating enough”.  Elon Musk

“Don’t take advantage of me, because I am going to be looking down your throat. You need the job — I don’t!  Do not speak to me when you see me. If I want to to speak to you, I will do so. I want to save my throat. I don’t want to ruin it by saying hello to all of you sons-of-bitches.”  “Tiger” Mike Davis

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