Today’s Blog – Tuesday 22nd December 2015

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Introduction

Australian sport is dominated at present by the Big Bash 20-20 cricket competition.  Over the weekend we saw that the Brisbane Heat 20-20 team retains underground coal gasification (UCG) specialist Linc Energy as a sponsor – under a five year deal struck in the halcyon days 0f 2011, when Linc was riding high on the basis of a top-of-the-market coal exploration licence sale.

Linc has not been riding as high recently:

  • Since moving its listing from the ASX to Singapore 2 years ago, its share price has fallen 90%.
  • It is accused of serious environmental breaches arising from its UCG operations in Queensland.
  • Its founder and Executive Chairman Peter Bond has recently stood down from the Board.
  • It has flagged the sale of its South Australian petroleum licences – and received a “speeding ticket” from the Singapore Exchange when it said these could sell for US$100M (our view – the word “million” seems misplaced).

In our view UCG is a failed science experiment – that unfortunately has serious environmental risks.  However, it seems to still possess a siren like attractive quality for politicians.  This was evidenced in South Australia recently with some stated political support for a venture called Leigh Creek Energy (LCK) which is focused on UCG at this recently shut down coal mining operation.

Bizarrely (in our view) LCK recently announced it had entered into a HOA with Australia’s largest energy infrastructure owner, APA Group, to look into development options such as pipelines and incredibly, even underground gas storage.

We note that there are no underground gas storage assets associated with UCG “caverns” anywhere in the world (and one cannot contemplate how high pressure gas could be physically stored in such assets).  We also note that to pipeline the syngas generated from UCG into the national network would require a multi-$B and technically challenging methanation process.

Still – some favourable headlines about the potential local jobs at Leigh Creek could be generated for a couple of days.  Pollution – that’s the next guy’s problem.

Commodity prices

Both Brent and WTI breached the GFC price lows yesterday, going down to 2004 levels.  Brent closed at US$36.16 and WTI at US$34.74.

Entrail-reading “technicals” focused types see this breach as being significant – with the next pricing support level possibly down in the US$20s.

The prices were set in an already much less liquid market, as traders are focusing on buying Xmas presents (the oil price shorters at Tiffany’s and the oil industry ex-employees at Aldi).

US based analysts Tudor Pickering Holt (TPH) managed to produce one piece of bullish analysis amongst the gloom.  It noted that the 500,000 bopd of Iranian production expected to come back to market in the next few months would actually be more like 300,000 bopd – as 200,000 bopd was already being sneaked onto markets as “Iraqi” oil.

Henry Hub actually saw an up day yesterday, closing at US$1.91.  A flurry of snow perhaps?

LNG and international gas

Some slow progress is currently being made in Russia’s LNG projects:

  • China’s Silk Road Fund is taking a 10% stake in the troubled Yamal LNG project for US$790M.  It is also advancing a loan of the same quantum to the project.  Part owner Mr Putin will no doubt be pleased.
  • Much further East, on Sakhalin Island, FEED work has started on a possible third LNG train.  However, the problem remains of reserves backing for such a train. There is gas on/near the Island – but controlled by Rosneft/Exxon rather than the Sakhalin LNG JV members of Gazprom, Shell and Mitsui/Mitsubishi.

It is not only Australia where rational cooperation amongst LNG project rivals is sacrificed on the altars of ego and testosterone.

Company news – Woodside Petroleum (WPL)

Nearly two years have passed since WPL abandoned its purchase of a stake in Israel’s massive Leviathan gas-field.

Late last week the Israeli Government finally made key rulings allowing the development of this field.

Would WPL see that they dodged a bullet – i.e. paying a price set in higher commodity price times?  Or regret that they did not have the stamina to stay with a world class asset through some not untypical politicking?

Company news – Shell and BG Group

Now that all regulatory hurdles have been jumped, the takeover of BG by Shell merely awaits the approval of those groups called “shareholders”.

Judging by the still material ~11% discount that BG is trading on compared to its implied takeover price, there still exists considerable scepticism in the market that the deal will happen.

In our view, although Shell may not be the cheapest operator in the world (US$7B wells in the Arctic anyone?) it is likely to be able to manage its shareholders better than this discount implies.

Quote of the day

In addition to being very smart, rich and the frontrunner for the GOP nomination for President, The Donald is also the owner of a golf course near to the oil town of Aberdeen in Scotland.

Those readers who have ventured to the Granite City might be somewhat surprised by the recent colourful description from The Donald’s lawyer of what would happen if a proposed offshore wind-farm spoiled the views from his golf course:

“completely destroy the bucolic Aberdeen Bay and cast a terrible shadow upon the future of tourism for the area.”

 

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