Today’s Blog – Tuesday 15th December 2015

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Delivery of the blog over the next few days will be intermittent due to your blogster travelling

Introduction

Late last week Bloomberg reported that the reserves positions of large US independents would face dramatic write-offs at calendar year end.  The example of Chesapeake Energy (the US’s 2nd largest gas producer) was used to illustrate the point – it will have to reduce its booked reserves by around 45% – or in excess of one billion barrels of oil equivalent.

The reserves rules that apply in the US (and hence which generally apply to international companies with a US listing) are determined by the SEC.  The rules are formula based – but hence clear.  Prices are taken from the first of each month in the prior year to determine the economic viability of reserves – hence the position for 2015 is already known.

Unfortunately SEC rules do not apply across the globe, and OPEC countries in particular have very fuzzy reserves numbers.  For instance, each and every year Saudi Arabia produces around 3 to 4 billion barrels of oil and each and every year its reserves remain the same – i.e. its production is magically matched by reserves adds.

One can safely conclude that if SEC rules were applied across the world, it would not only be Chesapeake Energy which would see a dramatic reserves write down.

If the metric to be used for countries (rather than companies) was raising enough cash to balance budgets, then arguably at least half of OPECs reserves would be written off at current prices.  That would gain attention in crude oil markets as a signal of where the medium term outlook will have to go to.

Commodity prices

During the course of yesterday, crude prices fell again – but then a wave of later day buying in the US saw WTI at least rebound by 2%.  Brent closed flat at US$37.79 and WTI was up to US$36.24.

The very large short positions in the market were said to be covered as the daily lows threatened the GFC low of 2008/09 (which in real terms has already been breached).

Houston based advisory firm Tudor Pickering Holt helpfully noted in its daily note that at US$35/barrel oil price, half of US stripper wells did not even meet their cash costs of production.  That is about 1 mmbopd of production.  Presumably shut-ins will not occur if abandonment costs have to be factored in – at least for a while – ultimately owners may just walk and let others deal with clean-up.

Henry Hub fell again – closing down 5% to US$1.89.  In barrel of oil equivalent terms that is less than US$12 – i.e. in real terms getting down to the worst of the 1990s slump.  Weather as always was the driver – to illustrate, the temperature in New York recently breached a 92 year old December record to hit 19 degrees centigrade.

LNG and International Gas

Shock news over one of the supposed new titans of the LNG world – Cheniere Energy has sacked its CEO and founder, Charif Souki.

The company’s largest shareholder (at 14%), corporate activist Carl Icahn, drove the change.  His view was that the company needed an operations guy  to deliver on its existing projects, not a visionary like Souki (whose executive pay last year of nearly US$200M would have provided some buffer against the loss of this position).

Company news – Shell and BG

The Chinese Ministry of Commerce gave its approval yesterday to Shell’s takeover of BG.  This was the last regulatory hurdle for this deal, which should now close in Q1 next year.

We expect the Mergeco in Australia to focus on:

  • Maximising the value of its existing BG operated LNG facility in Queensland.
  • Warehousing Shell’s East Coast acreage in Queensland for ~10 years.
  • Delivering the Prelude FLNG project off Western Australia.
  • Taking its own good time about divesting its remaining Woodside Petroleum stake.
  • Otherwise not doing too much.

Quote of the day

Mark Twain noted that:

“History doesn’t repeat itself, but it does rhyme.”

But OPEC seems to have forgotten the lessons of the past, as evidenced by this quote from the Wall Street Journal in 1986 which summarises its then strategy (note – which did not work):

“Saudi Arabia believes that the price war eventually will eliminate much oil from non-OPEC producers, such as Britain and the United States, because their oil is too expensive to produce.”

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