Today’s Blog – Wednesday 4th November 2015

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Introduction

A couple of recent pieces of analysis suggest that the down-side price for LNG may be more challenging than many in the industry had previously contemplated:

  • Global energy consultant Wood MacKenzie has speculated that the spot price for LNG could fall as low as US$4/mmbtu later this decade – driven by competition (primarily in Europe but also increasingly in Asia) by coal producers for electricity markets (i.e. implicit in this view is that LNG prices will be increasingly de-linked from oil). At that price, Wood MacKenzie considers that some producers (including those in Australia) would not be able to cover their cash costs, and would shut-in some production.
  • Houston HQ’ed energy investment bank, Tudor Pickering Holt (TPH) considers that US LNG producers will still produce even at current low LNG spot prices (therefore helping the supply side stay long).  The key driver for this is that ~90% of the Gulf of Mexico liquefaction capacity currently under construction is under long term “take-or-pay” contracts – i.e. capacity will be paid for even if it is not used.  Given that, liquefaction costs can effectively be ignored when considering whether US LNG will still reach markets – only Henry Hub and shipping costs need to be taken account of.  The sum of those two – to deliver gas to Pacific markets – is ~US$5/mmbtu – and lower to Europe.

Commodity prices

Crude prices received a ~4% boost overnight, with Brent closing at US$50.55 and WTI at US$47.84.  Without any particularly big driver for the move, commentators have pointed to the sum of a number of causes, including: strikes at Petrobras in Brazil; falls in Libyan export capacity; expected inventory builds in US products; and, “technicals” (i.e.basically  funny shapes in price graphs that some people interpret as the ancients did with chicken entrails).

Henry Hub closed up a couple of cents at US$2.27.

LNG and international gas

The victory of the AKP party in Turkey’s week-end elections has been interpreted by some as providing a big push for the Turk-stream pipeline from Russia via Turkey to Greece and then (somehow) beyond.

As always with pipelines, one needs to ask “who will pay” and “what will they need before they pay”.  Neither Russia nor Turkey nor Greece seem likely to be able to pay.  Accordingly, this blog considers that the election result makes no real difference to the probability of this pipeline going ahead.  One potentially piece of good news for rival LNG suppliers to Europe.

Company news – Santos (STO)

STO has informally disclosed (via The Australian Financial Review, naturally) that it has put its asset sale process on hold, whilst it pursues a capital raising alternative.  This news seems surprising to say the least, given the detailed leaking that has recently been taking place, which disclosed buyer names, prices and deal forms.  One could therefore conclude that the previous disclosures were over-egged – presumably as part of a negotiation strategy and/or to give share price support.

The AFR states that the company is considering making a 15% placement to Chinese NOC, Sinopec.  No doubt there would be significant political and regulatory issues involved in doing so – particularly given current issues such as material corruption allegations over Sinopec’s dealings in Angola, etc.

Although hard to interpret in the absence of data, could one conclude that STO’s Board is flailing about as it tries to avoid dealing with the recent takeover proposal form Scepter Partners?

Company news – Origin Energy (ORG)

Blogger speculation rather than news – but we note that a recently announced re-organisation by Shell into various business units, including one called “Integrated Gas” has invited comment from the likes of TPH that this may be a pre-cursor to some spin-offs.

We have previously noted that ORG shareholders may benefit from that company spinning-off its recently re-branded “Integrated Gas” business unit.

Such common usage of language can be internationalised, particularly as it flows through a small global sub-set of consultants, bankers, etc.

Company news – FAR

We recently noted the commencement of a drilling campaign involving FAR in offshore Senegal.  Super-Major Conoco is a significant partner in this venture.

Conoco apparently told a US investor briefing earlier this week that it would exit deep-water ventures in a couple of year’s time.

What this change of strategy might mean for the FAR venture (if in fact it fits within Conoco’s definition of deepwater) is unclear – but potentially worrisome for FAR investors.

Quote of the day

We didn’t have a story in our usual “Governments” section today.  To make up for that, we would like to conjure up what US environmental policy would be if The Donald became President, given views such as:

“It’s freezing and snowing in New York – we need global warming!”

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