Today’s Blog – Tuesday 5th April 2016

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Introduction

An interesting juxtaposition of news stories from the oil patch within the People’s Republic of China (PRC) last week from two of the European Super-Majors (and perennial long time rivals), BP and Shell.

BP announced that it was entering into shale gas exploration in the PRC in partnership with CNPC (Petrochina) – the latter would be operator.

Shell announced it would invest no more funds in shale gas exploration in the PRC in partnership with CNPC – efforts had to date had indicated that the geology and drilling conditions were challenging.

BP’s venture is contextualised in a broader developing relationship with CPNC – covering areas as diverse as LNG trading, petroleum retailing and exploration.  In our view, it should also be viewed from the prism of political announcements last year in the UK by the British Government of increasing business relationships between the UK and the PRC.

BP has now backed this up with some deal substance – it knows that the UK Government is its ultimate defence mechanism against a hostile takeover.

Shell on the other hand is rumoured to be dominated by one strategic imperative – to realise US$30B in divestment proceeds/savings following its acquisition of BG (loud-speakers are rumoured to broadcast the need for this every hour on the hour in the Hague).  Furthermore, its own international relationship with CNPC might also be less important to it than it once was – and from an Australian perspective, the disastrous Arrow Energy joint venture between the parties in Queensland may have soured the friendship somewhat.

In our view the Super-Majors cannot ignore the world’s biggest economy, biggest oil importer, declining conventional producer, gas market supporter, LNG importer, etc.  BP’s strategy therefore seems more sensible in long run (in which though, we are not only dead, but which is a term longer than most CEO’s bonus measurement mechanisms).

Commodity prices

Crude continued last week’s falls on Monday, with Brent down ~3% to US$37.59 and WTI hit harder, falling ~4% to US$35.46.

The fall continued the re-evaluation by the starry-eyed optimists in the market that the forthcoming Doha meeting (if it actually even takes place now) would deliver something of price supporting substance.  Therefore the fundamental “numbers” of growing inventories have re-asserted themselves and we could see the return of US$30 in the next few weeks.

Some potential bad news on the “events” side of the market is the increasing possibility of some political stabilisation in Libya.  A UN sponsored unity Government seems to be making some positive steps in the country – which currently has ~1 mmbopd of crude capacity shut-in.  Good news for the country of course.

Henry Hub was a brighter spot – hitting US$2 over-night.

LNG and international gas

The liberalisation of international gas markets continues apace – with the latest interesting data point being the first sale of US LNG (from Cheniere’s Sabine Pass liquefaction facility) to India.

The price (paid by GAIL) was quoted as being ~US$5/mmbtu – which seems enough to give everyone a return even at these shipping distances, given ~US$2 Henry Hub pricing and the low cost of US liquefaction compared to e.g. Australia.

Company news – Origin Energy (ORG)

ORG announced this morning that Moody’s had re-affirmed its investment grade credit rating, notwithstanding its falling forward oil price deck.  ORG’s recent ability to quickly monetise non-core infrastructure assets (together with its moves last year to put in place hedges, etc), seemed to be a persuasive factor in the credit ratings agency’s assessment of the company.

Company news – Senex Energy (SXY)

SXY announced yesterday that it is in dispute with drilling contractor Ausdrill over the termination of a drilling contractor last year.  Each party is suing the other.

As we reported last week, the CEO of Schlumberger recently delivered an eloquent speech in the US which highlighted the extreme tensions between the E&P and service sectors in the oil patch at present. E&P companies have arguably delivered a lot of their mooted “productivity” improvements by squeezing service sector companies in ways which are not sustainable in the long run.

In its own small way, this dispute likely illustrates this tension.  In the longer term, the service sector’s small capacity in Australia has likely been compromised – and the small number of people in the patch will have some bad personal experiences to recollect.

Quote of the day

We are crossing our fingers that the current Panama Papers investigation does not come across the BVI account in which our vast blogging riches are stored.  Others are not so lucky, with news that President Putin and his associates have stashed away billions  reminding us of the following unsurprising newspaper headline:

“Dog bites Man!”

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