Today’s Blog – Tuesday 8th December 2015


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Has OPEC’s decision not to cut 12 months ago now forced the first change of Government of one of its members?  Venezuela’s opposition party has just won a sweeping Parliamentary victory (the Presidential election was not contested at this time) – possibly with an important 2/3 majority level.

Arguably the main reason behind the change of power was the dire economic situation within the country (although political repression was likely also a factor).  Gross socialist mis-management of the economy had for years been papered over with large oil revenues – but these dramatically fell 12 months ago with the halving of the oil price.

Other OPEC nations also look vulnerable to political change due to low oil prices.  This is certainly not the case in the supposed target of OPEC’s strategy – US shale oil producers.  Arguably it is also not the case in the second supposed target of Russia either – due to its ruble denominated cost structure and shock absorbing oil tax system.

Commodity prices

The “technicals” have it.  Once US$40 was breached, further down-side moves have been the easy path, pushed by a massive collective short position.  Brent closed nearly at US$40 itself (at US$40.73 – down 5%) and WTI was in free-fall to close at US$37.69 (down nearly 6%).  This was the lowest price since the GFC downwards spike.

The US economy’s robust position compared to the rest of the world, leading to next week’s expected Federal Reserve raising of US interest rates, has strengthened the US dollar – naturally pushing oil prices down further.

The Henry Hub natural gas price was also hit yesterday – closing down ~5% to US$2.07.  The “technical” support level of US$2.00 could be tested here as well shortly – absent a nice cold snap for Christmas.

LNG and international gas

Respected LNG consultant, FGE (led by Dr Fereidun Fesharki) has named its view on 3 projects that could make FID in the short term (out of the 5 from 100 projects that we have continually spoken about).  These are an expansion of PNG LNG, Anadarko in Mozambique and Petronas in British Columbia.

The first is a no-brainer.  Ask Woodside Petroleum.

The second received a material boost in recent days as Anadarko entered into a development cooperation agreement with Italian Super-Major ENI over its neighbouring gas discoveries.  Additionally, the Mozambique Government’s recent actions seem to recognise that it needs to support a risky project, not seek to tax it to death.

The third seems more difficult.  Petronas does not have infinite balance sheet capacity and as a NOC will be encouraged to invest in the troubled local Malaysian economy.  If this goes ahead, it will show the power of lower sovereign risk in countries like Canada and Australia, notwithstanding issues such as environmentalist and native group opposition.

Company news – Oil Search (OSH) and Woodside Petroleum (WPL)

The Australian Financial Review today has two separate stories on the WPL stalking of OSH.

Firstly, WPL is said to have received an unacceptably high price demand from the PNG Government for its 10% stake in OSH.  It may now formally announce it is walking away from any proposal.

Secondly, OSH is rumoured to be investigating the take-over of NASDAQ listed InterOil in order to increase its equity in the latter’s fore-lands LNG project.  Additionally, the OSH Board is said to be looking (after nearly 30 years) at a succession plan for its CEO, Peter Botten – and InterOil’s CEO could stack up.

In our view takeovers should not be driven in any way by a need for management talent.  Long time Australian investors will remember that a little company called BHP over-paid for a South African dog called Billiton in order to boost its management ranks – to the large cost of shareholders – and the acquisition of an “over-exuberant” CEO in the form of Brian Gilbertson.

Company news – Santos (STO)

STO timing of its ights issue to close before the OPEC meeting last Friday was well advised – its share price is now below the rights price.

Quote of the day

 A note of cheer from Dr Fesharaki for Australian energy investors – who are naturally long LNG given the portfolios of the ASX listed E&P players:

“The oil market is not so bad.  LNG is far worse.”

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