Today’s Blog – Monday 8th February 2016

Please note that the blog will be intermittent and/or shorter this week due to travel commitments

Please pass this blog onto others who may like to read it


Last week saw a new policy proposal from the White House – a US$10/bbl tax on oil produced in (or imported into) the US – with funds raised to be directed to new highway infrastructure and research into clean vehicles.

To the surprise of no-one, the Republican controlled Congress immediately rebuffed the proposal, which accordingly has no chance of ever becoming law.

The proposal was never going to fly politically, and in addition it included a number of obvious design flaws (would it be legal for the Feds to effectively apply a royalty on State/private lands; hypothecation is a joke – the Government does not keep money in separate jam-jars; it would incentivise producers to export everything they produce; why not just bump-up gasoline taxes instead; etc).

So why did the Obama administration make this policy announcement when they would have known it would go nowhere?  One can only conclude that they saw political merit -in a Presidential election year – in trying to tie the Republicans to those nasty folks at “big oil”.

In our own little part of the oil patch we are biased and do not see “big oil” as being a political liability – but presumably some rational hard-headed political thinkers conclude that those in the US oil patch (in say firmly Republican Texas) have rather less important votes than those in swing States such as Ohio.

Commodity prices

Crude prices fell again on Friday, with Brent down ~1% at US$34.06 and WTI being hit harder, down ~3% at US$30.89.  The pattern in the week was one of volatility – but on a downwards trend (Brent was down 5% on the week and WTI down 8%).

The key driver on the day was the simple blunt instrument of a rising US dollar.

The BHI rig count “numbers” continue to be ignored by the market.  Friday saw a very hefty cut (and from a low base) of 31 oil rigs and 17 gas rigs.

The Henry Hub natural gas prices saw some recovery from sub US$2 prices on Friday – closing up 4% to US$2.06 (but was still down 10% on the week).

LNG and international gas

Figures produced by the US’s EIA indicate that Chinese LNG demand in 2015 fell year on year (by 1.15%) – a first.  Growing indigenous production and pipeline imports from the West and South were the primary factors – as well as a slowing economy of course.

Pipeline gas from the North – supposedly due to commence in 2018, but likely to be a few years late – will only add to the competitive mix.

Company news – Origin Energy (ORG)

Media reports emerged late last week about a confidential legal challenge by the APLNG joint venture in Queensland (operated up-stream by ORG) over the calculation of State Royalties.  An ORG spokes-person said the dispute is not material in terms of ASX reporting requirements.

For ORG (and others in Queensland such as Santos), the calculation of State royalties will likely also have implications for the calculation of: private royalties, “reversionary interests” under old purchase agreements, “payout” under operating agreements, etc.  This is because such matters are often linked legally, through contractual definitions, to State calculations.

We can therefore envision circumstances where this matter is pretty “material” for ORG.

Company news – Oil Search (OSH)

The Australian Financial Review (AFR) today speculated that the material stake held by the PNG Government in OSH might come onto the market this year.  This would be as a result of potential difficulties in re-financing the short term debt (supplied by UBS) that was used to fund the original purchase of the stake.

No doubt this would be of interest to parties such as Woodside Petroleum (WPL), who was of course spurned as an OSH suitor last year.

To make things spicier in the country (which is effectively currently ground zero for the world LNG industry), OSH reported last week that results from the Antelope-5 well appeared to be strong.  This could have implications for the operator of this well – US listed InterOil Corporation – who could also be a takeover target for WPL (or others such as Total).

Quote(s) of the day

From famed US value investor Jeremy Grantham in his most recent quarterly newsletter:

“I consider that Saudi Arabia, if it has been driven by commercial as opposed to political reasons, has made perhaps the biggest economic error in the history of oil”.

This was echoed by an un-named senior source from within the KSA:

“The policy hasn’t worked and it will never work.”

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