Today’s Blog – Friday 8th April 2016

Please pass this blog onto others who might like to read it

Please note that blogs next week will be intermittent due to travel commitments

Introduction

Previously in this blog we have sought crowd-funding (get your cheques in now tardy ones!) for our new venture “Sydney Harbour Re-gasificiation Ltd”, to take advantage of the current arbitrage opportunity of Asian LNG spot prices being lower than Eastern Australian domestic gas prices.

We now have a recent and clear precedent that validates the strategy – from Israel.  Israel Electric Company has just announced it has purchased three cargoes of LNG from BP at a spot price of US$4.90 per mmbtu.  This is less than the Israeli domestic gas price from its offshore Tamar field of US$5.70.

Israel has a relatively recently constructed re-gas facility that was put in place following shortfalls from Egypt a few years ago, so the power company could move quite quickly on the opportunity.

Psst – don’t tell the Shut-the-Gate crowd about this – New South Wales CBM will never get developed then.

Commodity prices

Crude slipped ~1% overnight, with Brent closing at US$39.43 and WTI at US$37.26.  The main driver behind the fall was a recognition that this week’s fall in US inventories was partially due to the shutting in of a key export pipeline from Canada due to a leak, rather than the first sign of global rebalancing of supply and demand.

Henry Hub rose ~6% to close at US$2.02.  Influential US oil patch commentator Art Berman posted a blog overnight which set out his view that US gas prices will double within a year.  He echoes recent comments from Houston bankers Tudor Pickering Holt (TPH) who have asserted that a very mild US winter has in fact obscured the reality that US gas production is falling and an on a weather-normalised basis the market is in fact short.

LNG and international gas

The problems at the Gorgon LNG plant seem to be somewhat worse than initially thought, with delays to cargoes now moved out to 60 days.

Bloomberg recently reported that Chinese shale production – although growing – was growing at a pace less than directed by the PRC’s five year plan.  Reserves of shale gas have however risen rapidly to 5 Tcf – although it is not clear how what definition of “reserves” is being used – possibly one that ensures that politicians meet targets rather than an independent technical one.

The Australian Financial Review (AFR) today included an article on ASX listed Sino Gas and Energy (SEH) – a company with tight gas production in China – which had a graph of SEH’s views on the supply cost curve for Chinese gas.  Indigenous shale gas, although not cheap, was not surprisingly more competitive than LNG and pipeline imported Turkmeni and Russian gas.

Company news – Woodside Petroleum (WPL)

The AFR reported a few days ago that the recently retired and highly respected CEO of Rio Tinto, Sam Walsh, was moving back to Perth – and was rumoured to be picked as the next Chairman of WPL.

WPL’s Board has been chaired for nearly 10 years by Michael Chaney, and the cynics might observe a period of under-performance under his reign (Browse/Sunrise gone nowhere; Pluto NPV10 negative, paid too much for Wheatstone, no new growth options, etc).

Walsh would be a real catch for WPL in our view. Over in Adelaide, suffering shareholders in Santos (STO) will be hoping that their company can deliver a Board re-fresh soon of equal quality.

Company news – Oil Search (OSH)

Today OSH issued its Annual Report and associated documents such as the AGM notice. The AFR also included today a lengthy article on the company’s nearly 30 year CEO, Peter Botten.

Such length of tenure is not supported by the corporate governance textbooks – but out-performance and indispensability forgives all.

We would not be surprised if the ultimate corporate governance sin of a CEO moving to become Chairman was seen at OSH in the next year or so.

Quote of the day

A recent quote from Shell’s ex-CEO Jeroen van der Veer  – one that echoes Lord Browne when he ran BP in its glory days of the late 1990s – maybe a sign of things to come back again in the ranks of the Super-Majors:

“The first school is that as the new global business environment changes, this will offer opportunities for big energy companies to develop new forms of energy. Then you won’t produce fossil fuels anymore at some point in the future.  The second school says the mission of oil and gas companies is to produce oil and gas, and if this mission ends, then the companies end too.  I belong to the first school.”

 

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