Today’s Blog – Tuesday 13th October 2015

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

Introduction

Data from two separate sources confirms what many industry observers currently consider to be the case: the oil patch is currently in liquidation mode.

The first data point is in respect to exploration expenditure.  Without exploration, reserves cannot be replaced, let alone expanded, but expenditure on this critical input has been slashed in the last couple of years.  Recent data from energy specialists, Tudor Pickering Holt (TPH) expects the exploration spend in 2016 (for the companies it covers) to be around half what is was in 2013.

And 2013 expenditure fell dramatically short of delivering discoveries that would cover consumption.

Furthermore, TPH’s coverage universe is basically the larger companies in the global private sector – who are the drivers of exploration much more than the NOCs.

The second data point covers that other source of new reserves for the larger oil companies – acquiring their smaller brethren.  However this sector has also seen a dramatic decline in expenditure.  Dollars spent on acquisitions in the last quarter only totalled US$18B – 60% less than the quarterly norm in the preceding six years.

As Shell’s CEO Ben Van Beurden noted last week, this lack of current investment creates the material risk of an oil shortfall and associated price spike in years to come.

Commodity prices

Crude oil prices fell ~5% over-night, with Brent closing at US$50.22 and WTI at US$47.38.

This fall feels like a not unexpected natural re-tracement and profit-taking following last week’s large rise.  Goldman Sachs is currently a vocal bear and its influence on markets can be material.

The particular “numbers” that catalysed the bears on the day was the release of OPEC’s monthly report, which showed that its production had increased by 100,000 bopd to 31.57mm bopd (somewhat larger than the official quota of 30mm bopd).  Saudi exports have been increasing as its own demand (summer related – for air conditioning) has relaxed in recent months.

In addition to pumping as hard as they can for revenue raising reasons, the Sunni world is also grabbing as much market share as it can prior to more Iranian oil coming back to market.

Over at Henry Hub, last night we saw a small rise to US$2.54.

LNG

The owners of the shiny new liquefaction plants coming on line in Australia have been (rightly) pointing out that, notwithstanding their current travails, these are very long life assets that will generate cash-flows for decades to come.

The longevity of liquefaction plants was recently emphasised by Alaska’s Kenai plant seeking Federal authorisation to export more gas.  Kenai delivered its first cargo in 1969 and it looks like it will still be selling gas on its 50th anniversary.

South of Kenai, in British Columbia, mixed messages continue to emerge in connection with the Province’s supposedly most advanced LNG project, the Petronas led Pacific Northwest project.  On the one hand, last week a Petronas spokesman re-assured stakeholders in Canada that the company was still committed to the project.  On the other hand, back home in Malaysia, local analysts have said the project is likely to be deferred to next decade.

On this issue, as in many others, one should always “follow the money”.  Petronas, and its owner the Malaysian Government, arguably does not have the discretionary funds to invest in an expensive overseas project at this time.

Governments 

Oklahoma continues to suffer from seismic events that have a potential causal link with oil patch activities.  On Saturday a 4.5 strength earth-quake was felt in the key oil hub of Cushing.   In response, the State Regulator (no enemy of the oil patch) ordered the suspension of local produced water re-injection activities.

Meanwhile over in Australia, the South Australian State Government is keen to be seen to “do something” about the closure of the State’s only coal mine at Leigh Creek.  To that end it is assisting the promotion of the coal gasification potential of the remaining coal deposits by a small ASX listed company called Leith Creek Energy.

Given the history of coal gasification in Queensland, what could possibly go wrong?

Company news – Santos (STO)

STO yesterday announced an imminent 200 redundancies (on top of around 600 already made earlier this year).  Perhaps your Blogster should postpone his visit to STO’s offices asking whether they want to sign a lucrative contract to receive this blog?  Still, the company has the funds to pay for the wages of both of its current CEOs.

As has become customary, The Australian Financial Review (AFR) today provided a brief update on the company’s asset divestment process. Today the focus seemed to turn away from the Western Australian assets back to PNG.

Company news – Central Petroleum (CTP)

The AFR also today had a bullish piece on the proposal to link gas resources in the Northern Territory with Eastern Australian though the “NEGI” gas pipeline project.

It appears that the AFR was charmed (or bulldozed?) by CTP’s well known CEO, Richard Cottee (more commonly known in the media as “the ebullient Richard Cottee“) into giving somewhat more weight to the chances of the project going ahead than do the cynics like this blog (once I hear stories about investment grade sellers with reserves signing deals with investment grade buyers, I will instantly change my tune).

Company news – CNPC

Massive Chinese NOC CNPC (parent of PetroChina) is hardly an Australian company, but overnight news from it has implications in every country in which it invests.  This was the handing out of a 16 year jail sentence to its previous leader Jiang Jiemin for corruption. This followed the conviction earlier this year of another previous company chief, Zhou Yongkang.

Managers across the Chinese NOCs will be increasingly cautious about taking any business risks, even entirely legitimate ones, in case they could be tarred with a corrupt brush.

Quote of the day

Speaking of the ebullient Richard Cottee, a confidential source of this blog told the tale of Richard’s analysis of his time at ill-fated Nexus Energy (more sensitive readers should turn away):

“Before I joined I knew I was going to be fed a sh*t sandwich.  What I didn’t know was there would be no bread!”

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