Today’s Blog – Monday 14th December 2015

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Introduction

UN talks in Paris ended in a “deal” to aspire to manage man made greenhouse gas emissions to a level that would lead to a two degree (or less) warming.

Most informed observers consider that there is little chance of that goal being met given the current trajectory of energy demand and the realistic supply alternatives available to meet it.

So is it just “business as usual” for the oil and gas industry post Paris?  It is tempting to say “yes” – that the outcome of the talk-fest is meaningless and that absent say a major breakthrough in nuclear fusion, that oil and gas will not be replaced in the energy mix.

However, we think that the overall “vibe” from Paris will have some implications, even in the short term, for the oil and gas industry.  These include:

  • Debt financiers making headline announcements about reducing the availability of loans for oil and gas companies.   Such loans are a small part of their overall books and as such they can garnish PR and political credit without losing much profits.  For the oil and gas companies finance should still be available from other sources – but at a price that will increase their cost of capital.
  • Vertically integrated companies such as Origin Energy will come under stakeholder pressure to sell out of the upstream.  This has already happened with AGL Energy.
  • Coal will be the number one whipping boy.  However, for contrarian investors, there may be no better time to buy coal mines – their product should still be needed for decades.

Commodity markets

Crude markets continued their dismal week on Friday, with the overall price fall for the week being a hefty 12%.  Brent closed at down 4% US$37.93 and WTI down 3% at US$35.36.

The forty dollar support level is clearly long gone – and speculation is increasing that the next real support level would be more like US$20 than US$30.  Indeed, there is almost a mood in the market of “lets go down to US$20 and get it over with, then we can build from there.”

In better times the weekly BHI report on Friday would have been assessed as good news – a material reduction of 21 oil rigs and 7 gas rigs.  However, at present, this “numbers” item had no impact on the market.

The OECD’s IEA warned on Friday that it expected excess supply to continue throughout 2016 and there are few contrary voices to that view.

The Henry Hub natural gas price also fell through a key support level on Friday – closing at US$1.98.

LNG and international gas

Edinburgh headquartered oil and gas advisory firm Wood Mackenzie issued a half yearly report on LNG markets recently.  Not unexpectedly the news therein was gloomy.  In a nutshell, demand is now forecast to be less than prior expectations and there is an excess of supply chasing markets around the world.

For the academic economic observer (rather than say an investor in the likes of Santos or Origin), it is fascinating to observe the liberalisation of previously static LNG markets in real time.

Pacific and Atlantic LNG markets are rapidly converging, if indeed they have not already done so in the spot market.  Qatar, still the world’s largest producer, is the pivot point between the previously two separate hemispheric markets. It will have large volumes coming out of contract in 2016, which will point both East and West in a battle to secure markets.

Governments

The Australian Financial Review (AFR) today contained an article summarising the recent findings of a report on South Australia’s electricity market – now one of the most wind & solar intensive in the world.

That market relies on the importation of dirty brown coal fired electricity from Victoria to balance itself.  The implications of the Paris agreement is that such power stations will be shut down in the next 10 years.  They would need to be replaced by either gas or nuclear in order to provide reliability of supply.  We assume the latter is politically unlikely.

The former needs new gas to be discovered and produced.  However even exploration, let alone development, of indigenous gas in Victoria and New South Wales, has been effectively banned.

Something will have to give here.  We forecast it will be to extend the life of the brown coal fired power stations – with some associated green washing such as studies into carbon capture and storage.

Company news

The Xmas parties must really be starting to get into full swing, as there is next to no news from Australian oil and gas companies.

We note with interest the recent “disappearance” of the billionaire head of China’s Fosun Group.  This company owns what was the ASX listed Roc Oil.  The media assumes that he is helping the PRC authorities over corruption charges.  Whether this will mean anything for the company’s longer term investments in Australia remains to be seen.

Finally, Exxon Mobil has effectively announced its next CEO, through the promotion of the head of its downstream business.  To the surprise of no-one, this is an internal candidate.

Downstream is where the profits have been in the last year across the Super-Majors, and Exxon is following the paths of Shell and Total in promoting the CEO from this traditionally poor cousin side of the business.

We expect no change in culture or strategy at the “Empire”.

Quote of the day

From today’s The Economist daily note:

“Even if its goals are more political than possible, the Paris deal markets unprecedented recognition of the risks of climate change.”

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