Today’s Blog – Friday 20th November 2015

 

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Introduction

The blog’s call yesterday that Shell’s proposed takeover of BG Group was now a “done deal” looks somewhat premature, judging by the pallid market reaction.  BG has been trading for some time at a material discount to the equivalent Shell price, suggesting a high risk of deal failure.

Yesterday that discount narrowed – from 9.1% to 8.3% – i.e. with still a large risk premium being appliedf.

In Australia FIRB approval still awaits.  That seems unlikely to be denied – but it is a febrile environment at present with the recent moves and politics about Chinese investment in various sectors.

Is there a risk that FIRB would put impediments in Shell’s way in order for the Government to appear even handed?  We think not – but perhaps it is not impossible.

Meanwhile BG this week announced that its QCLNG venture in Queensland has approved new investment of US$1.7B in 400 CBM wells and associated gathering systems to meet supply requirements for its Gladstone liquefaction trains.

This shows a vote of confidence in customers taking the associated volumes in a few years’ time, notwithstanding the current poor LNG market environment.

Commodity prices

Crude prices were fairly steady overnight, with Brent closing down a fraction at US$44.29 and WTI falling slightly more to US$40.59.  There were no particular “events” or “numbers” on the day to drive prices up or down.

Henry Hub however took a bit of a beating, with the benchmark closing down `4% at US$2.26.  This followed news of gas in US storage reaching over 4 Tcf – a record.

LNG and international gas

In the last couple of days news has separately emerged that the likes of Japan’s Osaka Gas and general Chinese buyers are looking to off-load excess LNG purchases.

Osaka has contracted capacity at the Gulf of Mexico Freeport LNG plant and the company’s President has said:

“We want to resell as much of this volume as possible.”

Perhaps more chillingly for longer term LNG markets, he also stated that he:

“does not currently see any attractive LNG investment opportunities”.

Over in China the unwelcome statistic for the industry is an estimate that the country will only take 77% of its contracted LNG cargoes in 2015.  The other 23% has to find a home elsewhere – hence the current looseness in LNG spot markets.

Governments

The ACCC has welcomed this week’s announcements about the proposed NEGI pipeline – as it should introduce competition into East Coast gas markets (if it goes ahead of course).

Good timing for the ACCC in the same week that it waved through the Shell takeover of BG, much to the annoyance of industrial gas buyers who were hoping the regulator would use this transaction to try somehow to get Shell to divest assets.

Today’s Australian Financial Review (AFR) has however echoed this blog’s recent sentiments about NEGI – basically more contracts between credit-worthy buyers and sellers need to be executed before the project attains viability.

Unfortunately the NEGI news will be used by the pusillanimous politicians in New South Wales and Victoria to maintain their embargoes on any gas exploration and production in their States.

Company news – Origin Energy (ORG)

The AFR reported today that ORG has appointed various investment bankers to sell its upstream assets in the Cooper and Perth Basins and certain smallish pipeline assets in Victoria and Queensland.  The company aims to generate ~A$800M from these sales as part of its balance sheet strengthening process.

The sales also tidy up ORG’s upstream business in order to give the company’s Board the option of splitting up into a downstream energy and an upstream LNG business.

ORG is current participating in an unconventional petroleum exploration program in the Northern Territory’s Beetaloo Basin with South Africa’s SASOL and AIM listed Falcon Oil and Gas.

The latter has recently reported that the JV has successfully drilled a 3,808M well which encountered encouraging shales, etc.

Depending on the outcome of its other sale programs and possible change of strategic direction, the Beetaloo interest would well become non-core for ORG next year.

Company news – general

It is AGM season for most ASX listed companies at present.  However, little drama has emerged in the oil patch with respect to items such as “strike” votes on remuneration reports, etc.

However, judging by the views expressed at a PESA Christmas lunch which this blog attended yesterday in Adelaide, Santos (STO) could well repair its damaged balance sheet by selling tickets to its AGM (which will come up in May next year).

If the Board does not materially re-fresh itself before that date, then there  should be some fire-works at that meeting.

Quote of the day

In a week where Paris has made the news for all the wrong reasons, the following recent quote takes us back to the less dramatic issue of energy companies’ policy positions with respect to climate change – and the awkward straddling they need to do across the Atlantic.

“Clearly, in an election where energy is centre stage the companies cannot be caught saying one thing in Paris, France, but something completely different in Paris, Texas”. Nick Butler, Financial Times

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