Today’s Blog – Monday 4th April 2016

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Introduction

Late last week Bloomberg published an interview with the Deputy Crown Prince of Saudi Arabia (and its generally accepted de facto leader) Muhammad bin Salman (who is proving to be an uncharacteristically chatty Saudi Prince – this interview follows a lengthy piece in The Economist in recent months).

One of the most interesting points that came out in the discussion was some greater clarity on  previously flagged plans to privatise Saudi Aramco.  Most observers (ourselves included) had concluded that these plans would likely focus on the downstream refining operations of the oil patch’s biggest daddy by far.  However, bin Salman indicated that 5% of the parent company – i.e. the owner of the Kingdom’s actual oil reserves – would be floated on the local Riyadh exchange.  Furthermore, the management of the entire company would be passed onto a new Sovereign Wealth Fund and ultimately diversification away from oil dependence would be fostered.

A publicly listed company should disclose a lot of information supported by third party audits, etc.  Listing in Riyadh rather than in e.g. New York might compromise this, however.  But if the KSA wants to raise real funds it will have to disclose far more than it has done so for many decades – potentially leading to far greater clarity over the biggest long term question for oil markets – what are OPEC’s “technical” rather than “political” reserves?

Commodity prices

Oil prices slumped 4% on Friday, with Brent closing at US$38.67 and WTI at US$36.79.  The prime cause was generally considered to be a negative reaction to other comments from bin Salman – to the effect that the KSA would not freeze its production levels unless Iran did.  The latter has already made it crystal clear that it will not do so.  We think market reactions were over-cooked on this point in isolation – the KSA has arguably very little ability to raise production from current levels.  However, the bullish hopes that the forthcoming Doha meeting might actually something are evaporating.

The BHI weekly rig count provided some good news – a reduction of 10 oil rigs and 4 gas rigs – but this was swamped by the bad vibe from the Middle East.

Henry Hub was flat on Friday, closing again at US$1.96 (albeit it was up 8% for the week).

LNG and international gas

Bad news emerged from the massive Gorgon LNG project offshore Western Australia last week.  This was a mechanical failure in a propane refrigerant plant that is expected to cost more than A$100M to fix – and will delay cargoes for up to a month.  (Although we note that such a figure is a tiny amount for a >A$50B project).

Domestic gas pipelines

The NEGI pipeline linking the Northern Territory and Queensland (and hence the more broad connected East Coast market) has made a two steps forward/one step backwards move in recent days.  The Australian Financial Review (AFR) today reported that project owner Jemena (owned by Chinese and Singaporean SOEs) ordered the steel pipe to build this ~800 km pipeline on Friday.  The bad news was that it had ordered 12 inch pipe not the previously foreshadowed 14 inch pipe.

Jemena is taking extra-ordinary and uncharacteristic risks over this project.  Even with a 12 inch diameter pipe the project has only contracted through-put for less than half the pipeline’s capacity.  Jemena is therefore financing the project off its own balance sheet rather than procuring project finance.

The NT is due to have an election later this year which the Labor Party is widely expected to win.  The policy of that party is to impose the usual dishonest greenish playbook of a “moratorium” on fracking in the Territory whilst it conducts “studies”.  E&P industry insiders consider that there are no gas resources in he Territory that would not require fracking to produce them.

Likely result for Jemena – stranded pipeline capacity and big losses.  So much for currently widely popular “low” risk infrastructure investments.

Company news – Santos (STO)

The AFR on Saturday included an article on STO’s strategic review of last year, with much detail on clearly confidential matters such as the changing bids received for the company’s crown jewel asset – its stake in PNG LNG.

The most interesting thing about the story is the range of potential answers to the question “cui bono?” from its leaking.  Possible candidates:

  • Recently departed senior management who want to shore up their reputation(s) as they search for a new job.
  • Recently joined senior management who want to tell the market that the previous mob were hopeless but there is now a new sheriff in town.
  • Unhappy Director(s) who will face shareholder rage at the forthcoming May AGM.
  • Etc!

Quote of the day

From the influential “Twilight of the Desert” (printed more than 10 years ago now) by Matthew Simmons:

“..when Jumah [Aramco’s CEO] was asked about the need to bring in outside auditors to verify their comforting claims, a glint of steel appears in his eyes: Why should we?  We have never failed to deliver a single barrel of oil promised to anyone, anywhere!”

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