Today’s Blog – Monday 4th December 2016

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Introduction

The start of a new year is a busy time for prognosticators on the oil patch. The consensus view for 2016 is a gloomy one – basically “more of the same” (which we note is usually the easiest call for tea-leave readers).

BP’s Managing Director Bob Dudley has recently called the low for the year as being in the first quarter, but that seems too precise to us.

The fundamentals of: supply still being greater than demand; high inventory levels; everyone producing flat out just to generate some cash; and, sustained US production; all support this consensus view.

However, as always, “events” in the Middle East could erupt to quickly change this picture. This was demonstrated in recent days with the execution of 47 convicts in Saudi Arabia, including a regionally well known Shia cleric. Result – Iranian riots and the ransacking of the KSA’s embassy in Tehran.

This blog’s view remains that the current Saudi “Game of Thrones” could be more unstable than for many years, particularly with last year’s changes to the normal rules of succession, etc. In that context, the recent executions could well have been a show of strength to rival princely factions.

Today’s daily note from The Economist asked the question: “is the newish King Salman (and his powerful son, Muhammad) showing boldness – or alarm?”

The Spectator’s veteran irascible columnist Taki – a long time observer of rich KSA types in his old money milieu – put his views somewhat more bluntly last week:

“The world’s most mis-guided leaders, Salman of Saudi Arabia and his ludicrous son, Napoleon Muhammad, are trying to build reputations as leaders of the Arab World. All they’ve managed to do, by bombing the hell out of hospitals in Yemen, is prove that the Saudi air force is on a par with that of Luxembourg, which does not have one.”

Commodity prices

Since our last blog just before Christmas, crude prices have traded in a thin market. On Friday Brent closed at US$37.28 and WTI at US$37.04 – down a couple of percentage points from our last numbers.

Last week’s EIA’s report was negative – with a build of 2.6 mmbbls of crude and 2.7 mmbbls of gasoline & distillate.

The weekly BHI rig report indicated US onshore oil rigs fell by two and gas rigs were stable. Despite the massive fall in oil rigs over the course 2015, US production has held up very well. The remaining rigs are the most modern, have the best crews, are drilling more feet per day – and are picking the eyes out of the best rock.

Henry Hub gas prices have seen some respite over the last 10 days – Friday’s close was at US$2.34, as winter finally hit the US.

LNG

Production of LNG has now commenced at Cheniere Energy’s Sabine Pass liquefaction plant in Louisiana and first cargoes seem to be on track for the end of this month. Will the US gas market respond – as we mistakenly predicted it would in 2015?

Governments and fracking

Government types will no doubt stay on holiday in Australia for another few weeks yet, resulting in few opportunities for us to report further “moratoriums” on proven oil and gas production techniques like fracking.

Company news – Origin Energy (ORG)

Various media reports (e.g. in Saturday’s The Australian newspaper) have been building up recently about the likely retirement of ORG’s long serving CEO, Grant King, at some point in 2016.

The nature of his successor will very much depend on what the company’s Board decides about its future strategic direction – and in particular whether it retains its vertically integrated business model.

Our prediction for 2016 is that the company will split into upstream (principally the company’s interest in Queensland’s APLNG) and downstream businesses. Ownership of the former could be retained by ORG shareholders through an in-specie distribution – or possibly more likely be the subject of a trade sale.

Saturday’s The Australian also reported another story on ORG – about a whistleblower who raised concerns about the mis-handling of certain smaller ORG upstream assets.

The real interest from this story for ORG shareholders was the illustration it provided of a bloated and sclerotic organisation trying to manage a much larger project (APLNG) than it had attempted before – in a time of competing projects in Queensland (and across Australia). For instance:

“She (the Upstream Compliance Manager) says she warned that upstream was likely to again fail its audit in an email to her immediate manager, Anne Syrvet, a former media officer for Peter Beattie, and Origin’s General Manager of Health, Safety, Environment and Risk”.

At my count that’s at least three levels of environmental “managers” (some of whom would seem to have differently focused skill sets). Try getting things done efficiently and cheaply in that sort of work “environment”.

Company news – exploration results

Some activity on the exploration front today:

  • Carnarvon Petroleum reported some results from its Roc-1 exploration well off northern Western Australia. Unfortunately these were underwhelming – liquids rich gas rather than oil and a smaller column size than previously hoped for. The market has reacted negatively with a ~10% fall in share price this morning.
  • Woodside Petroleum reported a gas discovery off Myanmar. However, not much could be read into the brief announcement. A “working petroleum system” does not sound too encouraging, but that could be the ex-Exxon employee in WPL’s CEO coming out.
  • FAR Ltd has gone into a trading halt prior to the release of some testing results from its Senegal well. (Disclosure – I’m a small shareholder – fingers crossed!).

Quote of the day

“The current price is unsustainable. Unfortunately, we have to sustain it for a while longer.”

Raoul LeBlanc, an analyst with IHS Inc. in Houston

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