Today’s Blog – Thursday 10th March 2016

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Introduction

As we have noted recently, a good number of large LNG projects – such as Gorgon, Sabine Pass, the various Gladstone plants – are currently starting and/or ramping up deliveries.  At the same time, LNG spot prices in Asia – at sub-US$5 levels – are barely enough to pay for liquefaction costs, leaving a negligible return at the well-head level.

The producers with oil price linked contracts – which cover most (but not all) of the capacity in the Australian LNG plants are not as bad off as this.  With Brent at ~US$40/bbl and a slope of say 14%, their sale price will be somewhat healthier at US$5.6/mmbtu.

However, an unholy feed-back mechanism could put this under pressure:

  • Buyers look at spot prices and complain.
  • They then try to pull commercial, legal and political levers to try and drive contract and spot prices together.
  • The LNG producers are incentivised to maximise through-out (given sunk capital in plants) – selling into spot markets.
  • Said spot markets are thus likely to be driven lower – increasing buyer pressure on contract prices.
  • Leading producers to try and increase production even more.
  • And so it goes.

Commodity prices

The bulls got behind the crude market wheel again yesterday, pretty much reversing the falls of the previous day.  Brent closed up ~3% to US$40.85 and WTI went up ~5% to US$38.23.

The good “numbers” of the day were taken from the weekly EIA report, which still had a crude build (of 3.9 mmbbls – much less than last week) – but was more than compensated for by a large-ish gasoline (4.5 mmbbls) and distillate (1.1 mmbbls) draw.

The OPEC and Russian meeting due to be held later this month still does not seem to have a set date (the 20th?) or location (Russia?) – but the bulls are still optimistic that “something” will come from it (our prediction – no production cut, no Iranian freeze – result – continued over-supply).

Henry Hub closed up ~2% to US$1.76.  A good explanation for the current sub-US$2 prices: an article in The Washington Post that noted that the US had just experienced the mildest winter since records began 121 years ago.

LNG and international gas

A news article from Interfax provided some succour for those in LNG markets looking for new sources of demand – plans by a Dutch gas utility to build a gasification plant in Germany (the country’s first).

The “usual suspect” was the key driver behind this plan for a country which is otherwise well supplied by pipelines – reducing its dependency on Russia.

Interfax reported this from the International LNG Conference held in Cannes this week.  It appears that our prognostications of gloom for LNG supplies noted above have yet to filter through to decision making on selecting conference locations.

Domestic gas

Over on this side of the globe, Sydney is currently hosting The Australian Domestic Gas Conference (our invitations from both Cannes and Sydney have clearly been lost in the post).  Some major themes from these are being reported in the media, including:

  • Calls from gas buyers for cheaper gas – at the same time capital markets are basically closed to the upstream gas companies even at current gas prices, let alone cheaper ones.
  • As we have noted on a number of occasions recently, capital markets are definitely not closed to infrastructure companies.  Australian pipeline companies are claiming that the large amount of capital invested in the sector over the last decade or so is a function of its current good regulatory environment.  We would suggest that the 35 year old decline in interest rates (still going down – now below zero in various locations) is a rather bigger cause.
  • Regulators are under pressure to “do something”.  It will be politically much easier to make efforts to liberalise e.g. pipeline access than to promote (rather than block) the development of discovered gas resources in the likes of New South Wales.

Company news – FAR Ltd

FAR came out of yesterday’s trading halt with news from its Senegal delineation program.

The news was unambiguously positive, with just about every technical item reported delivering on the upside.

Market reaction to this a few years would have been ecstatic – however at present only a ~10% share price jump has occurred.

FAR’s Senegal asset is certainly one of the better crude oil discoveries globally in recent years and as noted before we do not expect FAR to be a long term owner of an asset of this size and quality.

Quote of the day

This blog occasionally raises a quizzical eye-brow at ASX company reporting (we were pleased to note that FAR’s announcement noted above lacked hype and over-promotion).

We think more companies should take the following advice from Warren Buffett’s recent letter to shareholders:

“Our intent is to provide you with the information we would wish to have if our positions were reversed, with you being the reporting manager and we the absentee shareholders. (Don’t get excited; this is not a switch we are considering.)”

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