Today’s Blog – Tuesday 24th November 2015

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Introduction

As we noted yesterday, the chances of any material change coming from the OPEC meeting due to be held in Vienna on 4th December seem relatively slight – even though one can make a credible case that if Saudi Arabia led a (say) 2 mmbopd cut, then it would boost its (and everyone else’s) revenues much more than the income forgone.

This has led this blog to speculate – if the KSA leadership will not change its current course due to pride and internal reasons – why couldn’t the Russians?

Russia’s oil is not produced by a single entity like Saudi Aramco – but the Russian State has many levers at its disposal to control the country’s industry on a macro basis (which would certainly not be the case in the US).

If Putin reduced production by the same sort of number as noted above – arguably not only would Russia benefit economically – but it would then be in a geo-political position to say “we are the new swing producer“.  And the power of that position is arguably derived as much from its mythical status as from its reality.

We consider this unlikely but intriguing.

Commodity prices

Crude prices were flat overnight, with Brent closing at US44.89 and WTI at US$41.81.

During the course of the day, the American trading in particular reacted strongly to comments from Saudi oil chief Al-Naimi about the KSA’s ongoing role as a market “stabiliser”.  Now that’s the sort of “soft power” we are talking about.

Henry Hub clawed its way a little bit off yesterday’s floor, closing up 7c at US$2.21.

LNG and international gas markets

Reuters recently reported on a move we have been expecting from some  time in LNG markets – the re-opening of long term contracts.

India’s Petronet has contracted to buy a substantial 7.5mmtpa from Qatar.  It has been taking less than its minimum contract quantity under the contract – leading to exposure for substantial liquidated damages.

The parties are now said to be close to a new deal which reduces the contract price to a level which will allow Petronet to take higher volumes.

In markets under severe stress contracts are not solid – they need to be re-aligned to market realities, notwithstanding their legal robustness.

Governments and fracking

Even Australia’s most sensible jurisdiction with respect to oil and gas regulation – South Australia – is not immune from the close-the-gate crowd.  Over the weekend Premier Weatherill faced protests in the State’s South East over the evils of fracking.  (Note – gas has been cleanly and safely produced in this region for many decades).

Refreshingly, the Premier refused to be browbeaten into rash promises about enquiries or embargoes (neighbouring States – take note) – and instead pointed the protestors to the existing due process under the relevant petroleum and environmental laws.

LNG producers – Australia

The Sydney Morning Herald (SMH) recently pursed its leftish lips over projections that indicated that the petroleum resource rent tax (PRRT) expected to be raised from Australia’s new LNG projects will be minimal.

Note to the SMH – that is because they do not generate economic rents.  That is, PRRT is working as designed.

Shell and BG Group

Reuters has reported that “China Inc” is seeking a commercial quid pro quo from Shell before its regulators will approve the takeover of BG.

This is said to be in lowering LNG prices.

As expected, China is addressing the takeover in a transactional rather than legal fashion.  We would expect Shell to have planned for this and to have negotiations in hand.

Quote of the day

A recent statement from the KSA’s al-Naimi:

“Arab oil producers will need about $700 billion in financing for petroleum sector projects over the next 10 years to assure the sustainability of the Middle East and North Africa region’s key industrial sector.” 

Our view – good luck in getting this money unless prices rise again!

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