Today’s Blog – Thursday 14th January 2016

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Introduction

As we noted yesterday, BP is shortly to add another 4,000 souls to the swollen ranks of redundant oil and gas workers that have fallen out of the industry since the November 2014 OPEC meeting.

However, we have come across one organisation in the sector that is currently actively seeking engineers of all stripes: ISIS.

Last week the International Business Times said it had seen documents from ISIS seeking staff to assist it in bringing back to production various assets it had “acquired” in Libya.

It did not disclose the fringe benefits it was offering – perhaps low taxes; multiple wives; a free knife; company uniform (black); etc.

Libya is a failed State.  But it is one that used to produce >1.5 mm bopd of low cost oil and now only produces a few hundred thousand bopd.  It therefore arguably has more true “spare” capacity than any other OPEC country at present.

If its political issues were resolved (for instance if its warring tribes decided that unity was better than letting ISIS take over) then it could quickly add more additional supply than Iran could do in the short term.  Perhaps an unlikely outcome, but Libya’s low population and open terrain, etc, suggests problems there could be less intractable than in Syria and Yemen.

Commodity prices

It was Brent’s turn yesterday to test prices below US$30, but ultimately it closed at US$30.60 (still down 3% for the day).  WTI was fairly flat at US$30.60 (after it tested the sub US$30 mark yesterday).

Do these intra-day rebounds suggest some “technicals” support at US$30?   That would not accord with the recent investment banker prognostications of much lower prices to come – but their predictive power is about as proven as that of the oil futures curve (i.e. there is no statistical correlation).

The Brent premium over WTI which has been present for the last few years turned negative yesterday.  This may be a one day or a very short term phenomenon, but some commentators consider that it represents a “new normal” – due to Brent priced product (largly sea-borne) being more exposed to the expected oncoming resumption of Iranian exports compared to the land-locked WTI pricing node in Oklahoma.

The EIA weekly report issued yesterday was largely negative.  Crude stocks increased by 0.2 mmbbls – and worse news came from a substantial build in product stocks (gasoline by 8.4 mmbbls and distillate by 6.1 mmbbls).

Reuters recently noted that the US oil and gas industry itself was a cause of declining demand for distillate (in the form of diesel).  Less drilling activity, by more efficient rigs, had reduced total diesel demand in the US by up to a few percentage points of the total demand.

Henry Hub natural gas prices inched up overnight to US$2.28.

LNG and international gas

The Wall Street Journal reported yesterday that Asian LNG demand in 2015 declined (including a first ever decline from China).  This was notwithstanding the very substantial spot and contract price falls and increased regional supplies.

In due course, low prices should be their own remedy, through their demand-stimulative effects, but as for crude just now, it is the length of the “medium” term that is the multi-trillion dollar question.

Korean LNG buying giant, Kogas, has flagged that it is looking to sell down its equity stake in its British Columbian LNG project.  Kogas’s balance sheet is very highly geared and it is under political pressure in Seoul to make moves to remedy that.  However, given the current LNG supply situation and the arguably low place on the merit order that BC LNG projects currently occupy, we don’t expect there to be much buyer interest in this stake.

This leads us to speculate that Kogas may revisit the sale or sell-down of its stake in the Santos (STO) operated GLNG project in Queensland.  Previous efforts to do this came to nought, but now that the project is up and running, operational risks have been somewhat mitigated from a buyer perspective (although from a commodity price point of view it is not exactly a good time to be a seller).

Company news – STO and Origin Energy (ORG)

Credit Suisse has recently issued a report to clients on the merits of STO and ORG combining their upstream operations, particularly their Queensland LNG assets.  This blog shares their views.

However, we wonder how the social issues involved (Directors might lose their jobs!) could be resolved in the interests of shareholders.

Some keys to this puzzle might lie with:

  • STO’s new Chinese ~10% shareholder – who presumably wants to make money and who would have connections with APLNG’s Chinese partner (Sinopec).
  • ORG’s CEO, Grant King, who might wish to deliver such a mega-deal as his ultimate legacy before retiring.
  • The 3rd party JV partners in GLNG and APLNG, who should see merits in their upstream operators becoming stronger and cutting costs.
  • Governments – for reasons outlined by Credit Suisse, such as freeing up gas for domestic users.  However, the track records of the Queensland and Federal Governments has been poor in nudging Australian LNG developers to bring brains rather than egos to their decision making processes.

Quote of the day

The similarities between the current oil price crash and that experienced in the mid 1980s has been remarked upon by many.  This is illustrated by the following quote from Daniel Yergin’s The Prize, commenting on the sector in 1986:

“Many oil companies were unprepared for this latest crisis, their executives having been convinced that “they” – OPEC – would not do something so silly as to eradicate a large part of their on revenues”.

 

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