Today’s Blog – Wednesday 18th November 2015

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Houston HQ’ed energy industry adviser Tudor Pickering Holt (TPH) has recently and pithily summarised recent quarterly reporting by the industry’s Super-Majors:

“it must be magic as companies cut capex and projects without impacting growth”.

TPH’s numbers however suggest that at US$60 oil (which appears to be the medium term consensus number from the Super-Majors) it is not possible for them to maintain dividends and capex without sacrificing reserve adds and hence production.

Effectively, the sheer scale of further cuts required to do this is infeasible.  The service sector has already been cut to the bone and a goodly proportion of the productivity improvements that have been achieved over the last year are not repeatable.

Either dividends will be materially cut or the companies will start liquidating themselves – and drive a supply side shock to crude markets in the longer term.

Commodity prices

Crude prices fell overnight, with Brent closing down 2.5% at US$43.66 and WTI even more (2.8%) at US$40.73.

It appears that Paris was a one-day news story for crude markets as attention turned back to the dismal reality of over-supply and large inventories.  Surveyed expectations are for another large US inventory boost to be reported by the EIA tomorrow.  And a rising US$ did not help either.

So Paris appeared to cause an inverted “V” in markets – a one day rise followed by a fall the next day.

The Henry Hub gas price rose a few cents to US2.37.  Another Houston based adviser, Simmons & Co, summarised current US gas markets in a recent note to clients as: “Weather will be the focal point for the natural gas macro story over at least the next three months.”

LNG and international gas markets

Chevron’s (CVX’s) Australian tax returns have been much in the news recently – as tax authorities have argued that profits have been transferred out of the country through overly generous interest rates on intra-group loans.  A lot of money is at stake, as CVX has invested many A$10Bs into the Gorgon and Wheatstone LNG plants over recent years (in fact, many more A$Bs than it planned to, given cost over-runs).

The rates of return that CVX will earn on its Australian investments are not likely to be great – as illustrated by lowly expected PRRT tax takes.  However, it will be tempting for even developed nation politicians to bash “multi-national tax dodgers”, especially when they need every dollar they can grab in difficult fiscal times for Governments.


Australia’s offshore regulator has asked BP to revise its planning for its 2016/17 drilling campaign in the wild-cat territory of the Great Australian Bight.

If current low oil prices persist, BP might delay this program – perhaps for a long time (or forever) – if overly onerous cost structures are imposed on it (as arguably happened with Shell’s now abandoned Arctic exploration efforts offshore Northern Alaska).

The Bight is arguably Australian’s only remaining possibility for new large scale crude finds – and this is now a country which imports ~70% of its oil needs.

Australian pipelines

More news has emerged over the NEGI pipeline project to connect the Northern Territory with the East Coast.  Much of it is hyperbolic and political – but a few facts can be sifted out:

  • The NT’s wholly owned Power & Water Corporation (PWC) has or will enter into a conditional Gas Haulage Agreement with pipeline company Jemema for a period of 10 years to deliver gas to Mt Isa through a new pipeline.
  • PWC has or will enter into a Gas Sales Agreement (GSA) with Mt Isa gas user, Incitec Pivot, to sell gas at Mt Isa.  The volumes appear to be in the region of up to 15 PJ per annum.
  • PWC will source this gas from an existing GSA it has with Eni to purchase gas from the offshore Blacktip gas field.
  • The NT Government will therefore be taking commercial risks in entering into a GHA (e.g. if Incitec went broke, it would still owe Jemena many $10Ms).
  • The contracts are “conditional”.
  • 15 PJ per annum does not justify a A$800M pipeline.  Further contracts are required to get volumes up – and the conditionality presumably relates to securing these.

Company news – BHP

It is easy to forget that Australia’s largest oil and gas company is in fact a miner – BHP.

The “Big Australian” has recently been hit by a massive humanitarian and environmental disaster in Brazil at Samarco, due to the collapse of a tailings dam at an iron ore mine in which it has a 50% share.

BHP will fervently hope that the cost of this disaster will be in the region of a few A$Bs, rather than a BP-Macando scale pay-out of US$10Bs.

In recent years BHP has been said to be scouring the globe for new investments for its oil and gas business – particularly in areas like deepwater oil.  We suspect that this process will now effectively be put on hold until the true scale of the Brazilian issues are determined – which may be for some time.

Quote of the day

Last night on Australia’s ABC TV station a documentary was shown on Australia’s failed attempt to deal with FIFA over securing the soccer World Cup.  Apparently Qatar’s LNG suppliers used their muscle to help win the event for their country – whereas ours did not!

FIFA has provided us with a rich source of quotes in the past – and here is another one from Sepp Blatter about a future world cup venue:

“Mongolia – the Land of the Free and Brave will host the Asian Cup by 2035 and the World Cup by 2050”.  Sepp Blatter to Mongolian President Elbegdorj

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