Today’s Blog – Thursday 7th April 2016

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Introduction

This morning troubled ASX listed vertically integrated iron ore/steel company Arrium went into voluntary administration.

This could have multiple implications for the State Government of South Australia where most of its operations are based, in addition to increasing unemployment in a concentrated area.

As we have seen recently in Queensland, the collapse of a minerals processing business (Queensland Nickel in Townsville) has led to material negative consequences for the oil and gas industry in that State.

Arrium’s operations in South Australia include iron ore mines and an old steel processing plant that may very well never reopen given their uncompetitive position on their respective industry cost curves.  Such assets are pregnant with major abandonment and environmental liabilities.  These liabilities effectively come last in the queue of creditors under a voluntary administration.  That practically means the State Government could carry the can for costs which could be in the $100Ms.

As we have seen recently in Queensland, State Governments don’t like such bills unexpectedly being posted through their letter boxes and they can lash out and seek new laws to try and spread the pain.

The South Australian Government might therefore try and follow the lead of their banana bending brethren and put in place new laws in South Australia to deal with who carries the can for environmental liability issues – with likely negative consequences on the ability of the oil and gas industry to e.g. trade in assets.

The Arrium tale is an eerie ghost of what could have happened to fellow South Australian enterprise Santos (STO) if oil prices had got stuck in a ~US$30 rut for an extended period – an over-geared and high cost producer could have gone into administration.

Commodity prices

Crude markets responded bullishly to positive US “numbers” overnight, with Brent up ~4% to US$39.71 and WTI up to US$37.73.

The weekly EIA inventory report had an unexpected crude draw (analysts had expected a build of 3.2 mmbbls) of a material 4.9 mmbbls. A product build of 1.4 mmbbls of gasoline and 1.8 mmbbls of diesel offset this somewhat – but not enough to dampen spirits.

The unconnected Henry Hub gas price however fell ~2% to US$1.91.

LNG and international gas

A recent ASX announcement from ASX listed micro-cap Bounty Oil and Gas (BUY) provides an interesting insight into international gas prices.  BUY has a ~10% interest in a conventional gas field (Kiliwani North) in Tanzania and has announced that its joint venture has just entered into a Gas Sales Agreement with a power plant operator.

The sale price for the gas is US$3 – to be indexed by US CPI on an annual basis.

To us this price feels like a “goldilocks” one when we look around at various international gas prices:

  • It is >50% higher than Henry Hub.
  • Given Asian LNG spot prices of ~$4-5 it is considerably higher than an LNG net-back price.
  • Is it lower than typical Australian domestic gas prices which are at present around ~US$4-6.
  • It should give a reasonable economic return for a conventional gas field (albeit one subject to Tanzania’s fairly onerous fiscal regime).

Could US$3 therefore become a “new normal” for gas sellers and buyers around the world?

Company news – AGL

The Australian Financial Review (AFR) today reported that AGL has joined a consortium of NGOs, etc, to promote various policy incentives for the take-up of electric vehicles.  Shorn of most of its upstream business, AGL is now far freer to promote such things which could otherwise conflict with an upstream agenda.

As noted often before, we expect Origin Energy (ORG) to join AGL in such a focused position over the next 12-18 months.

Policy responses suggested such as an abolition of fringe benefits tax (FBT) on the supply of electric cars could have a dramatic impact – this effectively cuts in half the cost of a Tesla for a high income earner.

As we noted yesterday, the impact of electric vehicles in the long term could have a dramatic effect on current predictions of gasoline/diesel demand.

Company news – Strike Energy (STX)

STX is pursuing a deep coal-bed methane (CBM) delineation venture in South Australia’s Cooper Basin.  Its efforts appear to be delivering technical merit (although it might struggle to make much money at the above goldilocks price of US$3/GJ if major CO2 processing and possible long term imposts are factored in).

The company has just undertaken a A$6.7M placement at a relatively low discount of 13% – demonstrating that some oil and gas companies can still muster equity capital market support even in the current environment.  In this instance, the excellent market (and Sydney high end social) connections of the company’s prominent Chairman no doubt helped.

Quote of the day

Saudi Arabia’s de facto leader, Muhammad bin-Salman, might also have his eye on the long term threat to petroleum from the likes of electric cars (as well as being privy to the true state of the Kingdom’s oil reserves).  He recently stated the following ambitious aim:

“Within 20 years, we will be an economy or state that doesn’t depend mainly on oil”.

 

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