Today’s Blog – Monday 21st December 2015

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Introduction

Notwithstanding the doubts that we have aired throughout the year (we queried whether politicians would vote for potentially higher gasoline prices on the altar of economic common sense) the US Congress enacted legislation on Friday that removed the 40 year old crude export ban.  The President has signalled the relevant bills will not be subject to his veto.

The WTI-Brent spread has been narrowing in recent times as this move has become increasingly likely.  Now it is approximately US$2/bbl, whereas back in August it touched US$7/bbl.

Many observers believe that the spread will not be completely arbitraged away, due to the make-up of global refining capacity being weighted towards taking heavy Middle Eastern crude blends rather than the superior US light oil.  Furthermore, shipping costs from the Middle East to the key import markets in Asia are cheaper than from the US Gulf of Mexico by at least US$1/bbl.

So economic rationalism has prevailed – but there will be no material pricing boon for the struggling US oil producers.

Commodity prices

Crude prices were flat to negative on Friday, with Brent closing at US$36.88 and WTI at US$34.73.  The weekly BHI rig count numbers were surprisingly negative, with oil rigs increasing by 17 (offset by a decrease in gas rigs – check out the Henry Hub price – of 17).  This number is likely an aberration – but if extended for another week or so would cause real concern.

Goldman Sachs came out again last week to reiterate their view that crude prices are headed towards US$20, driven by an absolute lack of spare global storage capacity.

Further negative news for crude markets over the last few days came from Libya.  Progress appears to be being made towards peace between the country’s various warring factions.  Although likely fragile, the ultimate impact on crude supplies could be of the same order of magnitude as from Iran – around half a million barrels a day within 6 months and up to one million barrels a day over a longer period.

The PRC recently made a rare disclosure over the status of its strategic petroleum reserve.  It said that its current capacity of ~180 mmbbls had been full since mid year – but that it planned to add another ~130 mmbbls over the course of next year, which will be handy increment to expected demand over the course of 2016.

The Henry Hub gas price fell around 11% last week, closing at US$1.77 on Friday.  Warm weather continues to dominate the market.

LNG and international gas

Late last week Gazprom issued a progress report on the status of the Power of Siberia pipeline linking Eastern Russia with China.  Various agreements were signed by Gazprom and CNPC in Beijing – particularly over the engineering and other issues associated with the pipeline’s border crossing under the Amur river.

This is especially politically sensitive, as less than 50 years ago Russia and China went close to a nuclear war following border clashes over this and other rivers.

Gazprom’s Alexei Miller said that the pipeline was on track.  First deliveries had previously been announced for 2018 – however in our view this is optimistic and statements from the likes of Gazprom are issued more for political rather than market-informing reasons.

Company news – Woodside Petroleum (WPL)

The Australian Financial Review (AFR) today contained a lengthy article on WPL – basically an end of year wrap-up (and no doubt fed off-the-record by WPL).

The key messages (arguably from the company outside the legal constraints of formal ASX announcements) were that:

  • Its walking away from its proposed Oil Search takeover was a sign of discipline not poor strategy.
  • Real progress was being made on the Browse FLNG project.  Indeed the AFR reported that non-binding (and undisclosed) MOUs over gas sales had been entered into with the Japanese partners in the joint venture.  This was the key news in the story, as most market commentators (including ourselves) put little weight on the chances of this project reaching FID next year.
  • Its West Canadian LNG project had real legs – as did its various far-flung exploration efforts.

Company news – Santos (STO)

The AFR article referred to above quoted recent analysis from UBS as to what oil price the larger ASX listed E&P companies required to break-even on a free cash-flow basis.  For WPL this was said to be US$28.40.

However, for STO it was calculated as US45.80.

Note to Kevin Gallagher’s beach-shack: this is somewhat higher than the current price.

If UBS is correct and low prices persist or indeed get worse, then STO will presumably have to go back to the asset sale or equity raising wells.

Company news – Transerv (TSV)

Perth Basin focused minnow, TSV, today announced that it had flowed gas from its Warro-6 well.

The rate was not measured.  Cynics might conclude that therefore the rate was low.  No photo was provided of the gas flare.  Cynics again might conclude the rate was low.

Quote of the day

A recent quote from Rosneft’s Igor Sachin, demonstrating the systematic “optimism” characteristic of Russian E&P company announcements:

“Gas resources are available and we are ready to satisfy all Japan’s gas demands on the account of our resources.”

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