Today’s Blog – Wednesday 21st October 2015

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Introduction

This week saw a change of Government in one of the world’s top 5 oil producers (and one that is larger than any OPEC producer other than Saudi Arabia and Iraq) – Canada.  Given two of the largest producers in this top tier – the US and China – are substantial crude importers, as an oil exporter Canada is a largely unrecognised player.

Furthermore, Canada is – historically at least – a major natural gas exporter by pipeline (the shale revolution in the US has suppressed this role at present).  It aspires to become a major LNG producer and if even half of all its mooted projects came on line it would also be in the top 5 global LNG exporters.

So will the change of Government from the right to the centre-left have any impact on international petroleum markets?  In the view of this blog – the answer is no.

On the one hand, incremental production from Canadian oil sands will be retarded by low crude prices rather than by any increase in environmental regulations.  On the other hand, the future of Canada’s LNG industry is dependent on its ability to compete – as a green-fields location – with a very tight LNG global supply side. Government action cannot capture markets – and the potential negative effects of stakeholder groups (e.g. First Nations) on projects are outside Federal control.

So compared to for instance, the KSA, Canada’s change of power is definitely not a Game of Thrones – more like a Storm of Snores.

Commodity markets

Crude markets were fairly directionless overnight, with Brent closing at US$48.70 and WTI at US$46.13.

Bloomberg yesterday reported on increased country-on-country competition by individual OPEC members to capture market share in key Asian oil markets.  The price cutting involved is supposedly designed to “build relationships” – which in the view of this blog is a somewhat fruitless endeavour in a commodity market.

The market’s expectations that the Iranian nuclear deal is smoothly proceeding ahead, allowing large new exports from Iran within months, may hit a road-block.  That could be the recent arrest of a Washington Post journalist in Iran for what seem like highly dubious espionage charges.  This arrest could well reflect an attempt by hard-liners to disrupt the peace process.

Long memories will serve to remind them that the US Presidential election in 1980 was arguably materially affected by the then ongoing efforts to deal with US hostages in Tehran.

Henry Hub closed up 5c at US$2.50.

LNG

Regular readers may recall the doubts this blog has over Woodside Petroleum’s (WPL’s) Browse LNG project being sanctioned next year as the company plans.

However, one ray of sunshine for the project was reported in the Australian media today – comments from Kogas (the world’s largest LNG buyer) at Santos’s GLNG first cargo ceremony on Friday last week that it may be interested in Browse (as a buyer and an equity participant).

One would normally take such a comment with a pinch of salt – and it may reflect Kogas’s broader competitive dealings with rival projects – but generally a Kogas manager would not be completely un-scripted.

Company news – Origin Energy (ORG)

ORG held its AGM this morning.  Key takeaways:

  • Longstanding Executive Director and No. 2 to the MD, Karen Moses, is retiring.  Whether this signals anything about the succession to long serving MD, Grant King, is unclear.
  • The company’s Chairman and MD have emphasised the company has two businesses – integrated gas (which is basically APLNG – especially given the announced sale processes for most of ORG’s other upstream assets) and energy markets.  The company seems positioned – strategically and asset wise, to consider options about splitting these two.  If STO wasn’t suffering its own problems at present it should be carefully considering the consolidation opportunities thrown-up, even after much of the potential synergies in Queensland from the liquefaction construction phase have been sacrificed on the altar of CEO egos.
  • Both businesses will assist the company in dealing with a carbon constrained world.  In various moves in this area the company’s largest coal fired generator will be shut in ~20 years’ time and an increased emphasis on solar is being pursued.
  • The company today announced that APLNG had been formally served by private Texas company Tri-Star over a dispute about a key item in a ~13 year old sale agreement – whether part of what was sold has “reverted” back to Tri-Star.  This service appears to be a legal formality – Tri-Star have been disputing this issue in the Queensland courts for some time.

Company news – Horizon Oil (HZN)

HZN is dealing with its own succession issues – long serving Chairman Fraser Ainsworth has announced his retirement.  His departure appears to be part of a broader re-freshing of the Board.

Company news – AWE

AWE announced yesterday that its second well drilled in an offshore China campaign has come up dry.

Company news – Oil Search (OSH)

OSH issued a strong quarterly report yesterday which served to emphasise why WPL recently approached it with a takeover offer.  Its key PNG LNG asset is performing exceptionally well and the company has short term LNG growth options in PNG from both brown-fields and green-fields perspectives.

As we noted last week, LNG experts consider that only ~5 of the currently mooted ~100 global LNG projects will go ahead in the next few years.  OSH’s portfolio over WPL’s contains more credible contenders for membership of that 5.

Quote of the day

From a less PC time in politics – and business – Churchill and Stalin’s tense conference in Moscow in 1942:

Stalin: “Why don’t you come to my house and have a little drink?”

Churchill: “In principle I am always in favour of such a policy”.

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