Today’s Blog – Monday 25th January 2016

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Introduction

A few week’s ago we quoted some excerpts from the bible of the history of the oil and gas industry – Daniel Yergin’s The Prize – noting analogues between present woes and events in 1986.

We are hardly alone in doing so – for instance, BP’s CEO, Bob Dudley, recently said at Davos:

“The first and second quarter will be very difficult… It is a big shock for producing countries. It reminds me of (the oil crisis in) 1986.”

The same year was also raised by Schlumberger’s CEO, Paal Kipsgaard, last week:

“The decrease in land activity was the sharpest seen since 1986”.

Notwithstanding the above, we consider that there is one very large difference between 1986 and the present day: the extent of true “spare capacity” (i.e. developed reserves) in the system.

In the mid-1980s, Saudi Arabia was producing less than 4 mmbopd – down from 10 mmbopd at the start of the decade.  There was therefore very clear and measurable spare capacity in the KSA (and its OPEC neighbours) at the time.  It took pretty much 15 years for demand to eat out this spare capacity.

And at present?  In our view the only spare capacity in the system is:

  • Oil stored in tanks and boats.
  • Over 1 mmbopd in Libya – that would require a political settlement of what is effectively a protracted civil war – with ISIS involved – to be practically available.
  • Up to 1 mmbopd in Iran – although arguably around half of this is effectively undeveloped given the aging nature of the country’s production infrastructure.

The system as a whole is therefore far “tighter” than in 1986 and in our view the recovery to higher prices – potentially with a very large over-shoot – will be more rapid than 30 years ago.

We don’t subscribe to the view that tight oil in the US is the new “spare capacity” – as financiers will be reluctant to come back to this area given current losses, even when prices recover.  That is, markets are not efficient, other than in the long run.

Commodity prices

Crude prices continued their strong re-bound on Friday, closing up around 8% on the day and around 10% for the week. Brent was US$32.17 and WTI US$32.22.

No particular “events” or “numbers” were behind the rise – it appeared to be a combination of the bounce from recent lows, demand affects from East Coast US snowstorms, short covering, etc.

Plus The Economist announcing the World was “drowning in oil”…..

The Henry Hub natural gas price was flat on Friday, closing at US$2.14.  This was notwithstanding two feet of snow falling in New York and across the US North-East – to us it is strange that this supposedly affected global oil prices but not US gas prices.

LNG and international gas

Calls were recently made at an international conference for Mozambique to change its petroleum tax system in order to boost the chances of LNG projects in the country being approved by investors (given current low prices).

We think it is ambitious to ask a nascent democracy to appear to give away more to “big oil”, less than 2 years after it put in place a new petroleum law.

Governments and fracking

We note that last week yet another protest was held against Santos’ (STO) coal-bed methane ventures in New South Wales – this time by a group called Knitting Nannas.

We suspect that STO’s incoming CEO – due to officially start next week – is likely to be in the ranks of those who would like these operations to cease, given the arguable ongoing distraction they provide to the company.  However, given the current STO Directors approved the expenditure of $Bs in the region, he may be somewhat circumscribed in what he can do here.

Company news – STO

After our blog on Friday, STO announced that S&P had down-graded its credit rating to BBB- (one level above “junk” status).

As we noted on Friday, the STO Board appears to be giving itself the option to potentially suffer another down-grade to junk.  The ASX announcement again specified that the company’s “existing drawn or undrawn debt facilities” did not need it to maintain investment grade.

However, we consider that there are other reasons why investment grade would need to be maintained – such as the under-pinning this would give to infrastructure sales.  If we are right (and low oil prices persist) – hello! another capital raising.

Company news – Beach Energy (BPT)

BPT today announced a revision to its guidance for the 2016 FY.  It also foreshadowed a write-down as at 31 December 2015 of between A$450M and A$650M.

Pleasingly, these were pre-tax numbers, as BPT did not take the common weasely route of quoting post-tax numbers in order to put the best shine on a write-off.

Quote of the day

From Aramco Chairman Al-Falih:

“The market has overshot on the low side and it is inevitable that it will start turning up…I bet at the end of the year it will be higher than now”.

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