Today’s Blog – Friday 9th October 2015

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Introduction

“Events” in the Middle East continue at a hectic pace:

  • The US has reported that a couple of the Russian cruise missiles that were launched from ships on the Caspian Sea – directed towards Syria – have crashed in Iran.  The Russians have denied this – but Russian reporting is about as credible as Saddam Hussein’s old Information Minister (“we are winning the war”!).
  • The Iraq Government has signalled that it might welcome Russian involvement in air strikes in its territory.
  • In Israel, US listed company Genie Energy has reported its drilling program in the Golan Heights has found significant quantities of oil and gas – in multiple strata – with one hydrocarbon bearing zone being 350M thick.  Genie stress that as yet no reserves have been established – further drilling and testing is underway.  Genie is a small company with little history in conventional oil and gas (it has primarily focused on oil shale) – but there seems to be a chance that this could be a material discovery in an interesting location.
  • Possibly the most significant news is an unconfirmed report that the Saudi King has been hospitalised with advanced dementia.  The KSA having an ailing King is not that unusual – but given rumours of a Game of Thrones environment in the Kingdom at present, there could be scenarios of potential conflict within the House of Saud.

Commodity prices

Crude prices had another strong day yesterday, with both indices increasing by more than 3%.  Brent closed at US$53.35 and WTI at US$49.67.  At one point during the trading day WTI breached the key “technicals” barriers of US$50, but could not sustain this to the end of the day.

The key factors behind the rise were: a grasping of the hotting up of Syria and wider Middle East; a fall in the US dollar; and the release of the Federal Reserve’s September minutes – which gave comfort to those who thought an interest rate rise would be pushed out.

Henry Hub closed up a point at US$2.49.

LNG

Houston based energy investment bank, Tudor Pickering Holt (TPH), summarised in its daily note yesterday its latest analysis on probable export volumes of US LNG.  Contrary to a general impression that these may not be that material given current low LNG prices, the TPH research concluded that within 5 years 7-8 BCF/day should be exported (i.e. more than 10% of current US demand levels).

The research noted that much of the capacity under construction had take-or-pay contracts with highly credit-worthy parties – and given that such expenditure is effectively “sunk”, then there still existed a decent trading profit to be made between Henry Hub and LNG spot prices.

Of course this is not good news for ex-US LNG projects looking to secure traditional long term off-take contracts as a necessary pre-condition to FID projects.  The desperation to be seen on that front was exemplified by a news report earlier this week that Woodside Petroleum (WPL) executives were trying to persuade Korean LNG buyers to sign up by appealing to their patriotism (“if you sign up, Korea will get to build FLNG vessels”).  One can imagine the embarrassment of the executives sent out to Seoul to deliver that unconvincing message.

Company news – AWE

AWE announced yesterday that its MD would be replaced next year, after more than 5 years in the job.  Although somewhat unexpected, there did not appear to be any particular reason for the change, other than a normal life cycle coming to an end.

This adds AWE to the currently crowded list of Australian energy companies (including Santos (STO), Beach Energy (BPT) and possibly Origin Energy (ORG)) who are currently looking for a new CEO.

Company news – Energy Australia

Hong Kong listed Energy Australia yesterday announced the successful sale of its Iona gas storage and processing plant in Victoria.  The buyer was Queensland Government owned fund manager, QIC.  The price of A$1.8B was higher than expected and is a hefty 20 time earnings.

Until the Fed starts to raise interest rates, anything with a yield and the appearance of low risk will continue to attract a lot of investment interest.

Company news – STO

STO continues its investor briefing campaign through the media. Today’s Australian Financial Review (AFR) reported that STO has told some parties that the sale process for its Asian assets has been “slowed”.  The AFR illustrated the story with a picture of the “Lusi” mud volcano in Java that this blog commented on last week, but said nothing about any contribution of this matter to its news story.

However, the reason for the delay may be pretty prosaic – oil industry insiders will know that organising data-rooms for countries like Indonesia and Vietnam is generally a complex process, involving various local regulators who may not be quite as efficient as say in Texas.

Quote(s) of the day

Following on yesterday’s quote from an anonymous letter circulating in the KSA, allegedly from an unhappy group of Princes, another extract therefrom:

“Allow the oldest and most capable to take over the affairs of the state, let the new king and crown prince take allegiance from all, and cancel the strange, new rank of second deputy premier.”  – Anonymous

The next quote is a work of fiction – but can illustrate the competitive nature of the battle for supreme autocratic power in a monarchy:

“When you play the game of thrones, you win or you die. There is no middle ground.” – Cersei Lannister

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