Today’s Blog – Thursday 5th November 2015

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

Introduction

OPEC is scheduled to have its next meeting in one month’s time (this blog’s view – don’t expect much to come from that).  A couple of days ago The Wall Street Journal reported that at its own organisational level, OPEC had recently instituted a round of cost cuttings that would sound drearily familiar to those in the oil patch.

These included a hiring freeze, less travel, reduced training, etc.  Although it was not stated, no doubt any fruit-bowls have also been whisked away from the Viennese office kitchens (however one presumes that the drink’s cabinets are already suitably discreet).

An optimist might see this action as a counter-factual sign that the market is in fact bottoming.

Commodity prices

Crude oil prices fell ~3% overnight, with Brent closing at US$48.73 and WTI at US$46.54.  The key driver on the day was the issue of worse-than-expected “numbers” from the US’s EIA.  Crude inventories built by 2.8 mmbbls (off-set by gasoline draws of 3.3 mmbbls and distillate draws of 1.3 mmbbls).  The EIA’s US production numbers (which are generally not considered to that methodologically reliable) actually increased by 48,000 bopd.

The US dollar also strengthened on the day amidst the reading of Federal Reserve tea-leaves which seemed to increase the probability of an interest rate rise by year end.  This may have been strengthened by wide-spread financial media reporting of the latest monthly missive from “bond-king” Bill Gross, who is making a sustained case that the long term consequences of near zero interest rates are very negative.

Henry Hub was flat over-night, closing at US$2.27.

LNG and international gas

A couple of bull-ish notes from the LNG sector for a change:

  • At its recent investor briefing day, senior Shell management emphasised the company’s strong belief in the long term potential of its LNG business.  Its CFO summarised its view as: “The fundamentals of this market look as robust now as in the past to us.”
  • At a project level, this was demonstrated by a much more bullish than expected (by this blog anyway) view on the probability of the Browse FLNG project (operated by Australia’s Woodside Petroleum, but due to use Shell technology) receiving FID next year.
  • Reuters has reported on a leaked draft EU policy document which seeks to increase LNG imports into Europe as part of a diversification strategy (translation – buy from anybody but Russia).

Governments

Socialist candiate for US President (not a phrase one often writes), Bernie Sanders, is proposing new legislation in the US – “Keep it in the Ground Act” – which aims to reduce greenhouse emissions in the US by restricting fossil fuel developments on Federal lands.

Let’s ignore for a minute the sheer unlikelihood of any such act getting congressional approval (let alone of Sander’s becoming President – its a straight race between Clinton and Rubio in our view).  What the aim of this Act misses is that the vast majority of US hydrocarbon production comes from private and State lands – and the administrative behaviours of the Federal bureaucracies have meant that the Feds are already substantially “keeping it in the ground”.

That has driven even more activity and productivity improvements in private land areas such as the Permian in Texas.  That would only continue if Washington more formally reduced Federal land activity.  Net result for the environment = nil.

Speaking of Texas, its famed Railroad Commission (an OPEC style organisation that actually worked prior to the 1970s) has just found that produced water injection wells did not cause some recent seismic activity in the Lone Star State.

Company news – Santos (STO)

The daily STO soap-opera conducted in the pages of Australia’s media continued today.  The Australian Financial Review now appears to have a number of different direct telephone lines to various factions with-in STO and its adviser team, with a couple of different slants on yesterday’s story about a possible placement to a “strategic investor” (translation – someone who allows existing Directors to keep their jobs?).

On the one hand, the AFR’s Matthew Stevens’ column concluded that such a placement would not be good for shareholders (Directors: “ah, yeah, those guys“).  A separate story specifically named another prospective place: little known (to me anyway) Hong Kong listed ENN Energy Holdings.

A casual reader of the AFR over recent months could only conclude that the stories therein on STO have been deliberately back-grounded by STO off the record. However, the confusion level is rising – perhaps because the company currently has both two formal CEOs (the Exec Chairman and MD) – and yet no single focused leader.

Company news – FAR 

FAR yesterday called an EGM.  The sole purpose was to “re-fresh” its equity placement rights.  Although the company has recently cashed-up and should be able to cover all costs associated with its upcoming Senegalese drilling campaign, it seems prudent to have an instant equity raising option available to it.  Offshore drilling campaigns sometimes go over-budget! (a prize to readers who can quickly email me with one that came materially under budget).

Company news – Shell – implications for Australia

We reported yesterday on Shell’s internal upstream restructuring.  One of its new business units is “Unconventional Resources”.  However, this unit only covers the Americas.  Shell’s substantial CBM assets in Australia (soon to become much bigger once the BG takeover is closed) will therefore not be in that unit.

Australian observers generally consider that Shell’s traditional modus operandi has not complemented its Australian CBM operations, which have become considerably higher cost under its ownership.  One can see a scenario where post-BG, these operations are transferred to a broader Unconventional group where different ways of working are pursued in order to lower costs.

Quote of the day

Our non-British readers may not know that today is “Guy Fawkes” day in the UK – on which for ~400 years the nation has celebrated the foiling of a plot to blow-up Parliament by Catholic insurgents.  The long term memory of “events” is clearly not limited to the Middle East (and this “event” no doubt had a significant impact on the candle tallow markets of the day).

“Remember, remember, the 5th of November
The Gunpowder Treason and plot;
I know of no reason why Gunpowder Treason
Should ever be forgot”

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