Today’s Blog – Friday 16th October 2015

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Introduction

This blog has commented on a number of occasions on the potential for what we have called “Game of Thrones” instability in the key oil exporting nation of Saudi Arabia.

Earlier this week, well known author and Harvard Professor, Niall Ferguson echoed our views:

“Its [Saudi Arabia’s] fiscal position’s a total mess. There are question marks over the king’s health. And so there are big worries. It’s just that they haven’t impacted commodity prices, so most traders haven’t noticed.”

The Washington Post also expressed similar sentiments a few days ago:

“How will this Saudi political cyclone evolve? Given the uproar in the normally placid kingdom over the past nine months, the answer from veteran Saudi watchers is: Nobody knows”.

At present the oil markets are focusing on numbers.  There appears to be little premium in oil prices to reflect what is arguably the most unstable time in the Middle East since the collapse of the Ottoman Empire 100 years ago.  That could change.

Commodity prices

Crude finished down slightly yesterday, with Brent closing at US$48.71 and WTI at US$46.38.

Our reporting yesterday erroneously reported last week’s EIA inventory numbers (this week’s report was out a day late).  What’s the latin for “Mea culpa!“?

The actual report for this week was negative, with a big crude build of 7.6 mmbbls, partially off-set by gasoline and distillate draws of 2.6 mmbbls and 1.5 mmbbls respectively.

Henry Hub closed down at US$2.45.  On a better note for medium/long term US prices, Mexico’s Energy Ministry said a few days ago that it planned to import an additional 7.5 BCF/day from the US under a five year plan to construct new pipelines, etc.  That figure is more than 10% of current US production – and it is in addition to a similar order of magnitude figure that liquefaction plants under construction will add.

LNG

IHS recently reported a slightly different statistic that demonstrates the current weakness in LNG markets – the amount of idled LNG vessels.  Of the total LNG fleet of 419 ships currently in service, around 40 (i.e. 10%) are currently sitting off Malaysia and South America awaiting work.  These are not cheap ships to sit around and do nothing – there are US$2.5M per month idling costs.

Of over-bearing relevance to the direction of LNG markets is what is happening in China.  A couple of days ago the Government gave formal approval to its NOC Sinopec to construct a new gas pipeline within the country – from Xinjiang in the North-West to Guangdong in the South East.  This massive 8,400 km pipeline is estimated to cost at least $20B.

The feedstock for the pipeline is proposed to largely come from a suite of coal gasification projects that Sinopec (and others) have been building in China’s less densely populated areas (such plants are unlikely to environmentally friendly).  However, natural gas from CBM and shale gas may also contribute supplies.

As and when this pipeline actually goes ahead is unclear – for instance, how the coal gasification projects are in reality proceeding is opaque (they are likely doing worse than planned).  If it does go ahead it clearly competes head-to-head with LNG marketeers looking to target the PRC’s wealthy South-East coastal area.

Governments and fracking

The Australian media today reported on a claim from independent federal senator, Glen Lazarus (ex-Palmer party) that CBM “mining” should be banned, following the death by suicide of a farmer in Queensland who had apparently had disputes with gas companies seeking access to his land.

After cynically using this news to further his anti-CBM agenda, Senator Lazarus gracefully said: “Out of respect for the family at this difficult time, we are not making any further comment.”   

(Overseas readers – Lazarus is a legend of Australian rugby league – known as “the brick with eyes” – nothing personal Glen!).

Company news – Santos (STO)

STO announced today that the first cargo of LNG had sailed from its GLNG project in Queensland. The buyer is Kogas – one of the GLNG JV partners.

The project’s second train should start its own exports in the second quarter of next year.

Company news – Woodside Petroleum (WPL)

The media exchanges over WPL’s takeover proposal to Oil Search (OSH) continue, with today’s press the forum for WPL’s CEO saying that the company will remain disciplined and the previous proposal was a full one.

WPL yesterday issued its quarterly report.  The news therein was largely positive, including its Pluto LNG plant achieving production levels 3% above capacity, a sale agreement being inked over its non-core Laminaria asset and LNG sales prices which seem to be held-up by the bottom part of LNG contract “s-curve” pricing.

Company news – Drillsearch Energy (DLS)

DLS has just procured $100M in new debt financing – which can be used to redeem convertible notes which will mature next year.  This issue has been a bit of an over-hang over the company’s stock price – and possibly an item that Beach Energy has had its eye on as it takes forever to launch a take-over for DLS.

Quote of the day

More extracts from an anonymous letter purported to be from an unhappy Saudi Prince:

“…the marginalization of the sons of Abdul-Aziz…[danger to]….the strength and closeness of the family and its staying in power….[King Salman’s]…weakness…….completely reliant on his son’s rule.”

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