Today’s Blog – Friday 8th January 2016

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Introduction

Today’s issue of The Economist contained a lengthy interview with the Kingdom of Saudi Arabia’s Deputy Crown Prince (and power behind the Throne, despite an official position of second in line of succession), Muhammad bin Salman.

Almost all aspects of politics and national life in the KSA have some bearing on oil markets, but one new story in particular was placed in sharp relief by the interview: the possible IPO of part of the biggest daddy of them all in the oil patch, Saudi Aramco.

Aramco is by far the world’s largest oil producer, with production of > 10 mmbbls per day at present and it is one of the lowest cost producers.  Its reserves position is said to be 261 billion barrels.

The IPO plan, about which Prince Salman declared himself to be “enthusiastic” could involve listing say 5% of Aramco’s shares on the Riyadh exchange.  The Economist story did not mention any possible joint listing on e.g. the NYSE.

If this plan goes ahead, it could throw light on one of the key mysteries of global oil markets – what is the true position with respect to the KSA’s reserves?

BP’s Annual Energy Outlook reports reserves from the OPEC countries without much critical review (the technical sources for these figures are ususally confidential).  For instance, each year the KSA’s reserves magically do not change – that is production is exactly matched by new reserves bookings.

This leads many (this blog included) to conclude that these reported reserves figures are in fact “political” rather than technical in nature.  That is, the reported numbers are about the balance of power within OPEC, rather than an estimate of what can be commercially extracted.  The truth behind the numbers has great consequences for oil markets in particular – and indeed on the world’s plans for its long term energy needs.

The question is therefore begged – could Aramco list without properly disclosing its reserves position?  It could not on Western exchanges such as in New York or London.  Presumably in Riyadh it could do what the KSA wanted – but even in such a jurisdiction some degree of audit would presumably be required to encourage investors.

For this (and other reasons – including the Game of Thrones in the Princely ranks of the KSA), we do not expect the mooted IPO of Aramco to become a reality.

Commodity prices

Meanwhile in the day-to-day bustle of commodity markets, crude continues to spiral downwards.  Brent closed down nearly 2% at US$33.72 and WTI fell 2% to US$33.23.

For some less valuable blends such as West Canada heavy oil, prices have already fallen below US$20.

The key factors behind yesterday’s decline was another (the second this week) large fall on Chinese stock-markets, driving fears of significant demand weakness from the Middle Kingdom.

The US dollar strengthened, which also did not help crude prices.

Henry Hub has been performing in pretty much reverse fashion to crude markets in 2016, with yesterday seeing another rise to US$2.38.  A return to normal winter weather has reversed the sub-US$2 period briefly experienced in December.

LNG and international gas

A recent article from Russian energy news service, Interfax, has raised one of our ongoing issues – the possibility of buyers seeking the re-opening of LNG contracts.

India’s Petronet has recently been successful in obtaining better pricing terms under its LNG contracts with Qatar.  No doubt emboldened by this, Interfax has now reported that Petronet is also seeking changes in its Gorgon contracts.

The other Gorgon buyers (and no doubt other buyers from Australian and global LNG projects) are said to be closely observing the outcome of Petronet’s push.  They will seek to ride on the coat-tails of any secured changes.

Long term experience in gas markets – including in “rule of law” nations such as the UK and the US, indicates that the sanctity of contracts can be disturbed in times of significant market disturbances.  Current LNG markets, with price falls of ~2/3 over the last year and very long supply positions, are arguably in such a period of dislocation.

Company news

As for the last few days, very little specific company news is emerging.

The Australian Financial Review (AFR) yesterday had a story about the potential for M&A action in the oil and gas sector in 2016.  It shared our prediction that there could be substantial action internationally, but had a different view to ours about the extent of such action in Australia.

Our view had been that, outside the smaller end of the market, there would not be that much corporate action in Australia in 2016.

There is of course merit to both views, with the case for action in Australia resting on factors such as: the ease of doing business here; the possible worsening of balance sheets at the likes of Santos; the monkey-see-monkey-do contagion affect of overseas M&A action, etc.

Bring it on we say!   (It makes for more interesting blogs than stories about Governments yet again imposing moratoriums on fracking, etc).

Quote of the day

A good summary for the start of 2016 from Peak Oil News:

“It is becoming obvious that there will be a major shake-out in the oil and gas industry in 2016.  With prices now in the mid-$30s, hedging with futures contracts no longer profitable, and the opportunities for cost-cutting and other efficiencies running thin, many oil production and service companies will be closing their doors in the coming year. In short, oil production is going have to get a lot lower before supply and demand comes back into balance”.

 

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