Today’s Blog – Monday 21st March 2016

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Last week saw the break-up of a refining joint venture in the US between Super-Major Shell and Super-NOC Saudi Aramco.  The break-up has been delivered by each party taking 100% ownership in separate refineries previously owned by the JV (and possibly with a balancing cash payment due to Shell).

This deal contains some wider themes of interest to the oil and gas industry:

  • The very large Texan refinery that Aramco now owns is suitably configured to deal with heavy Saudi crude.  Its 100% ownership now allows Aramco to run this with strategic as well as fiscal  objectives – e.g. to import Saudi oil rather than process US tight oil.  Aramco presumably considers that the war against the latter is being won – and even if it is not, then this asset gives it a good route to market.
  • Stories that emerged a few months about a potential sell-down of Aramco led many (including us) to conclude that any such sales would focus on downstream assets rather than the ultra-secret upstream operations.  This deal makes such a sell-down easier.
  • Similarly for Shell, the deal gives it greater options to sell infrastructure/low-risk type assets to allow it to meet its US$30B divestment target – and feed the yield-hungry maw of the mid-stream sector.
  • Of course, neither Aramco nor Shell are alone in the oil patch in desiring to repair balance sheets, and this deal shows that one facilitator of doing so is cleaning up JVs in various ways in order to make sales of lower-risk assets mutually easier.

Commodity prices

Crude prices fell on Friday (but were still up 2% for the week), with Brent down at US$41.20 and WTI falling more to close at US$39.44.

BHI’s weekly rig count did not help market sentiment – it included the addition of one oil rig (with a fall of 4 gas rigs).  This was the first rise for around 3 months and led some to conclude that US$40 oil might see tight oil ramp up again.  One week is statistically irrelevant – but any trend will be closely watched.

Henry Hub also closed down on Friday at US$1.91 (but was still up 5% for the week).

LNG and international gas

Another recent “micro” LNG demand development gives some succour to the otherwise gloomy sector.  This was the announcement of plans to build re-gas facilities in Finland.

Like its Baltic peers to the South, Finland has historically had one gas supplier – that nice Mr Putin – so diversification is a security and hedging mechanism as much as an economic one.

LNG bulls hope that it is the gradual accretion of many small LNG projects like this that will pleasantly surprise the market on the demand side.

And if blog readers crowd-source Sydney Harbour Re-gas Ltd, then we can add another example……

Governments, fracking, etc

Last week various progress reports were made on BP’s addressing of the regulatory issues it needs to overcome to undertake drilling in the Great South Australian Bight.

We retain our view that a discovery of sufficient oil in this area to potentially cause a blow-out would be something worth celebrating rather than lamenting.

Company news – Origin Energy (ORG)

What we have called the “drumbeat” of inevitability over a break-up of ORG between its up and downstream divisions continues.  Today The Australian reported that Macquarie Bank had been appointed as the advisers to the company on this option.

Company news – Woodside Petroleum (WPL)

Saturday’s The Australian reported that WPL’s head of M&A has retired.  The story pointed to a number of failures under his watch, including the tilt at Oil Search last year; write-offs on recent acquisitions; the aborted entry into offshore Israel, etc.

To us these seem material enough issues to be ones to be slated home to the company’s CEO (or even shock horror, the Board, or even bigger shock horror, its sainted Chairman) rather than the head of M&A.

Company news – Inpex

The Australian Financial Review today reported that as Inpex’s Northern Territory based LNG project nears the end of its construction phase, the unions area are adopting their usual late project “Oliver Twist” strategy and asking for “more”.  Who would have thought it?

This is likely to be the last of Australia’s on-shore green-fields LNG projects for many years so it is not surprising that employees and unions will seek to make hay whilst the setting sun is still shining.

Quote of the day

Australia has more protection than some other US allies from the consequences of the possible emergence of President Trump, as indicated by these recent kind words from the great man himself:

“Last week Adam Scott won at Trump National Doral. He won the big tournament, the world championship of golf. And Adam, who’s a great guy — I guess a lot of you folks know that.”



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