Today’s Blog – Tuesday 29th March 2016

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Introduction

Last week we reported on Woodside Petroleum’s (WPL) announcement that its operated Browse LNG joint venture would not be sanctioned as a development any time soon.  Today we report below on delays in another LNG project – Inpex’s Abadi asset in southern Indonesian waters.

Both of these projects were intended to use floating (FLNG) technology.  The Australian Financial Review (AFR) has today therefore made a connection between FLNG and the failure of these projects to go ahead.  In our view this is mistaking coincidence for causality.

As we have frequently noted, there are “100” pre-FID LNG projects currently competing for sanction – in a market that in the medium term only needs “5” projects.  It is therefore self-evident that only the best projects will go ahead.

Browse and Abadi are not in the best 5% of global LNG projects – not because they plan to use FLNG technology, but rather because primarily they have not signed up customers to underwrite multi US$10Bs of project finance.

Commodity prices

Crude markets did not trade on Good Friday and only thinly traded yesterday.  Closing prices were US$40.27 in London and US$39.39 in New York – both being pretty flat since last Wednesday.

In the US on Thursday, BHI released its weekly rig count report a day early.  It contained good news for crude bulls – a fall in oil rigs of 15 – showing last week’s one rig increase was only an outlier.

Reuters has recently reported that much of the recent rise in oil prices has been driven by shorters closing out their positions, rather than by buyers taking long positions – which it concluded meant that the rally was a fragile one.

The upcoming Doha meeting of OPEC members and Russia continues to generate news.  Its agenda is however very simple – countries who are currently producing at full capacity will continue to do so, whilst the two material countries with spare capacity, Iran and Libya, will not attend the meeting.  (Like us, our good readers will no doubt have gone to a few pointless meetings in their time – this Doha meeting brings back a few not-so-fond memories).

Henry Hub closed at US$1.85 yesterday.  Notwithstanding the widespread gas market gloom in the US as the country moves from a mild winter into spring, analysts Tudor Pickering Holt last night pointed out that the US gas market is in fact “structurally” short when adjusted to “normal” weather conditions.

LNG and international gas

As noted above, the Abadi LNG project in Indonesia is facing some difficulties.  Operated by Japan’s Inpex Corporation in partnership with Shell, the joint venture planned to use Shell’s  FLNG technology to develop the remote gas-field.

However, the Indonesian Government has just mandated a much more expensive onshore development – to “create jobs”.

Result – the development will not go ahead, no jobs will be created and Indonesian’s petroleum export/import deficit will continue go grow.  But: “we will have showed those foreigners!”.

Company news – Santos (STO)

The media over the weekend included some initial analysis of the implications for STO of a large Chinese downstream gas company (ENN) taking a 12% strategic stake.

The AFR noted that STO’s new CEO, Kevin Gallagher, would now have to add a visit to China to his busy itinerary in the next month.  We think that given the stated strategy of ENN (building an integrated international gas position), he and his Board might also have to re-think their current strategy.

When a company like ENN that is ~40% owned by an individual Chinese billionaire spends A$1B on buying something, the investment is pretty personal.  This presents a rather new type of challenge (or opportunity) for STO – who since the days of Alan Bond have not had such a game changing presence on their register.

Company news – APA Group

Today’s AFR included a lengthy interview with the CEO of APA, Mick McCormack (note to self – when a long serving CEO continually refers to the company he runs in the first person – don’t invest in it….).

Mr McCormack vented his spleen to the AFR on the Commonwealth Government’s proposed new law to toughen up its anti-competition legislation.  APA’s srong share price performance over the last decade is one that has delivered equity returns far higher than should be the case for an infrastructure business – interest rate falls have been a large contributor to this – but otherwise this provides prima facie evidence of an uncompetitive environment in which APA has made supra-normal profits.

Quote of the day

Last week we saw the passing of one of the best footballers (soccer that is) of all time: Johan Cruyff.  A sporting philosopher with insights that rank with Yogi Berra’s for the breadth of their appeal.  Today’s examples:

“Before I make a mistake, I make sure I don’t make that mistake”.

“If I wanted you to understand it, I would have explained it better”.

 

 

 

 

 

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