Today’s Blog – Monday 12th October 2015

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Introduction

The US House of Representatives voted on Friday to rescind the archaic 1970s ban on the export of US crude (which anyway doesn’t cover exports to Canada and Mexico, exports from Alaska and exports of condensate).  However, passage of a similar bill in the Senate is considered to be far more difficult and the White House has signalled it does not support the proposal.  Accordingly a new law remains a long way away – post next year’s Presidential election at the earliest.

To insiders, this issue is one of tribal loyalties and outsized claims.  To outsiders, it is a relatively small-scale move towards a more efficient commodity market (albeit welcome as such).

The US is a large net importer of crude and allowing it to export its own crude production does not change that one whit.  What lifting the ban should do is narrow the spread between Brent and WTI, giving US producers a slightly stronger price for light sweet crude.

Claims, on the one hand that it will give the US greater geo-political leverage over net exporters such as Russia, or on the other hand that it will somehow increase carbon emissions, are fanciful.

This blog suspects that the issue will join the fiercely contested, but arguably immaterial, Keystone XL pipeline development, as another interminable source of dispute in Washington – that in future will be looked back upon with as much puzzlement as Medieval arguments about how many angels can dance on a pin.

Commodity prices

On Friday crude prices closed nearly 10% up for the week (although fairly flat on the day).  Brent was down slightly at US$52.65 and WTI up a smidgen at US$49.63.

The BHI rig report released on Friday was again positive, with a reduction of 14 rigs (9 of which were oil focused).  Following last week, again much of the reduction was in the Permian – perhaps suggesting that the Eagle Ford and Bakken are down to the best rigs in the best locations.

Whether there will be a lagged response of bringing rigs back on in response to the recent lift in oil prices remains to be seen.  This blog considers that is less likely than the injection of bullish sentiment that occurred earlier in the year following an earlier price up-turn.  Once-bitten, twice-shy – and balance sheets are under more pressure now from debt and equity markets.

Henry Hub went up a tick on Friday to US$2.50 and overall had an OK week, with a 2% rise – albeit from a very low base.

LNG

Over the weekend The Australian Financial Review (AFR) picked up on a Bloomberg story about the current woes facing the LNG supply market.  As this blog has noted constantly, that market is currently very long.

The extent of this length was captured in this news story very effectively through the statistic that only one in twenty of the world’s currently mooted LNG projects is actually required to meet market demand by 2025 (according to respected energy consultancy IHS).

To be one of those five, a project is going to have to very competitive.  Given the usual competitive advantage that brownfield developments have, greenfield projects, particularly in higher sovereign risk locations, look like they will be pushed out for potentially decades.

Woodside Petroleum’s (WPL’s) CEO, Peter Coleman, was said last week to support the views of some analysts that his company’s greenfield Browse FLNG project had a “50%” chance of reaching FID next year.  In the view of this blog, that number is more like “5%”.

Given the brownfield advantages that Oil Search’s (OSH’s) PNG LNG project has, WPL may be incentivise to in due course come back to its take-over proposal for OSH.

Company news – WPL and OSH

The AFR published a story in recent days about a loan from UBS to the Government of PNG which was used to buy a ~10% stake in OSH.  The nature of the story was such that AFR had clearly been leaked key confidential details about this loan.

In the current circumstances of a rebuffed take-over proposal, one has to ask the question “cui bono?” over the making of this leak.  That is not clear, and in addition to the interests of the principals (WPL, OSH and the Government), various agents on both sides are also likely to have their own interests.

The leak could be a cock-up – but the timing seems to weigh against that.  The takeover battle to date has been one where leaks to the markets and the media have already played critical roles.

Company news – Santos (STO)

The AFR continues its recent job of being the forum for potentially price sensitive disclosures by companies, albeit generally off the record.  Today it was reported that STO has been testing market appetite for a A$1.5B equity raise and that the sale of its Asian assets had been pulled.

The West Australian newspaper has also got into the act, publishing a story about negotiations by STO with private equity group Quadrant Energy about the latter buying STO’s WA assets.

STO’s optimal position would be to sync news about a sale with an equity raise.  However, pesky buyers may not be cooperating with STO’s preferred timelines, and the equity raise may have to happen first.

It is mid-October and there are not only a mere handful of shopping days left to Christmas, but also in Australia at this time of year we can see the upcoming business “valley of death” period from early December to the start of February.  The equity raise would likely want to be in the bank before that.

Quote of the day

The Economist recently sourced the following pithy quote from the manager of a caravan park in the Eagle Ford shale, which summarises the current economics of fracking tight oil plays as effectively as anything issued from corporate board-rooms:

“The juice is no longer worth the squeeze.”

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