Today’s Blog – Monday 2nd November 2015

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Introduction

The production of tight (shale) oil in the US has been falling in recent months – but arguably by less than expected at the start of the year, when there were widespread views that debt finance would effectively be “pulled” from the industry, leading to a collapse of production.  However, that has not (yet) happened in any meaningful sense.

October did not see any particular change to this – perhaps because the banks face the classic problem that the vast extent of the credit they have provided to the sector means that they are effectively stuck with what they have got.

World oil supply is therefore largely flat – with OPEC, Russia and pretty much everyone else pumping flat out, whilst production in the US has fallen by only ~0.5 mmbopd – quite a bit less than the current excess of supply over demand of more like 1.5 mmbopd.  Result – lots of oil going into storage and low oil prices.

Recent analysis by blogger Euan Mearns has characterised this situation as: “the situation is one of stalemate as opposed to checkmate”.

A slew of poor quarterly results from the Super-Majors last week contained warnings that market re-balancing was now expected to be pushed out to ~2017.  And that thereafter there were high risks of supply shortfalls due to the lack of current investment.

Commodity prices

Crude oil prices received a boost from the BHI rig count numbers on Friday, with Brent closing up ~4% at US$49.56 and WTI up ~6% at US$46.59.  The gain for the month of October was ~3%.

The BHI numbers were material – a decline in oil rigs of 16 (gas rigs went up by 4).  The total onshore US oil rig count is now quite a bit less than it was in the darkest hours of the post GFC oil price crash.

The Henry Hub natural gas price got a ~3% boost on Friday, closing at US$2.32, as winter chills arrived.  However, this was still down 10% over the month.

LNG and international gas

Australian LNG projects are stuttering and tripping across the finishing lines of first cargoes.  Chevron’s Gorgon and Wheatstone projects in Western Australia seem likely to suffer from further delays, the company’s CEO said at the end of last seek.

Over on the East Coast, Origin Energy’s (ORG’s) APLNG project also expects a few week’s delay in its first cargo.

The operating early-stage LNG projects such as GLNG will be delighted with these delays – as it gives at least an opening to sell gas in tight LNG spot markets (albeit not likely for great prices).

Governments and fracking

The efforts of the New South Wales Government to shut down the State’s indigenous petroleum industry continue, with ASX listed Metgasco (MEL) advising today that it had done a deal with the State to sell its existing licences and settle all disputes for the sum of A$25M.  A shareholder vote is required to ratify the deal.

This blog expects that ultimately all petroleum activities in the State will end.  By far the largest investment – Santos’ (STO’s) A$1.5B into Narrabri CBM, will probably be written off by the new leadership of that company next year.

The votes and voices of attendees at Byron Bay farmers’ markets are more immediate and louder than those of employees in businesses with rising energy costs.

Although this blog is a cynic over the prospects of the NEGI pipeline project to link the Northern Territory to Eastern Australia, this news gives it a boost.

Company news – STO

The Australian Financial Review (AFR) today reports that STO should imminently announce the sale of its 2/3 interest in the Stag oil-field off Western Australia (for a sum expected to be less than A$200M).

The phone-line between the AFR and STO’s asset sale team seems like a very direct one, so one should expect confirmation of this in the next few days.

Company news – FAR

FAR announced today that drilling had commenced in its offshore Senegal 4-well campaign.  As we have noted before, this is arguably the highest impact drilling being undertaken by any ASX listed company at present.  FAR has advised that a minimum commercially viable field size of 200 mmbbls is required in this location.  The company’s partners are Conoco and US listed Cairn Energy.

Company news – Woodside Petroleum (WPL)

The West Australian newspaper has reported that the State owned energy retailer, Synergy, has recently lost a court case with the WPL operated North West Shelf JV.  The heart of the case was whether Synergy owed monies to the venture for take-or-pay gas contract volumes – the Court says it does.

This gas will be “banked” by Synergy – and hence be available for draw-down.  The implications for the WA gas market are that this gas will hang over the market – Synergy will be strongly incentivised to sell the gas it has already paid for.  This will affect the ability of the likes of AWE and ORG to sell their soon-to-be-developed Perth Basin gas.

Quote of the day

IHS’s Daniel Yergin (author of the seminal The Prize) as is often considered to be the acme of optimism in oil markets – more so than the Super-Majors as noted above.  His recent view:

“As it is, however, the collapse [of demand growth] certainly marks a historic change in world oil markets — from strong demand and tight supplies to ample supplies and weaker demand growth. Put simply, the world is in a much better position in terms of oil than was the case just a few years ago”.

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