Today’s Blog – Wednesday 20th April 2016

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Introduction

A number of analysts and commentators have recently pointed to the similarities in the strategies currently being adopted by global LNG players with those followed by John D Rockefeller’s Standard Oil in the US over 100 years ago.  That is – when one is a player in a commodity market that is structurally long on the supply side, move downstream to capture the ultimate end-user.

Standard Oil did that through building a vertically integrated business from well-head to trains to refineries to retail outlets – and much of that legacy still exists today.  (As an aside, many industry players – including ourselves – have called this vertically integrated strategy outdated – but the Super-Majors have clearly benefitted from it in the recent short term during which their downstream businesses have excelled and cross-subsidised the upstream).

In the LNG sector, E&P players have moved downstream to become traders in commodity markets – and are now increasingly taking physical positions in areas such as re-gas plants and even beyond that – into pipelines and conceivably into gas-fired power stations.

Australia’s own Woodside Petroleum (WPL) has signalled moves in this area – e.g. in India.  However it is a very capital intensive strategy – and one involving the assembly of a mix of skills that are not core to traditional E&P companies.

It is somewhat ironic that in domestic terms this strategy served Australia’s Origin Energy well for may years – but is now seemingly being dismantled here at the same time that it appears to make sense in LNG markets.

Commodity prices

Crude oil rose overnight, with Brent closing up ~2% to US$43.99 and WTI up even more (~3%) at US$41.05.

The principal driver appeared to be the ongoing market appraisal of the impact of the Kuwaiti strike-induced supply cuts – as well as various other smaller, but still material, supply cuts in various locations such as Nigeria and Venezuela.

And over-arching all, the US dollar continues its current weak performance.

Henry Hub performed strongly (mostly on technical grounds), closing up ~8% to US$2.09.

LNG and international gas

Yesterday we quoted a representative from Petronas who made a speech at last week’s LNG conference in Perth – basically saying that FID would not be forthcoming on LNG projects anytime soon.  For an Asian NOC, this was the equivalent of a blunter Australian saying FID on Pacific Northwest LNG was “stuffed” (or worse).

The Malaysian sovereign wealth fund, IMBD, from which the country’s Prime Minister definitely did not steal anything, thank you very much – that money was a gift! – has just defaulted on a bond payment.

Not the sort of Governmental environment in the country that will support Petronas investing US$Bs in foreign ventures in the likes of Canada.

Governments, fracking, etc

The Queensland Government has recently banned underground coal gasification (UCG) – a few days (coincidentally) after UCG specialist Linc Energy went broke.  Linc was once listed on the ASX with a market cap in the billions of dollars.  But it seemed that we did not love it enough -according to company founder Peter Bond – and it moved its listing to Singapore a few years ago.

Spruiky South Australian UCG company Leigh Creek Energy is now an orphan on the ASX as an UCG company.

Domestic gas – Western Australia

The Chevron led Wheatstone LNG project has just signed a domestic gas sale deal with Alinta Energy – for a material 20 PJ per annum for 7 years from 2020.

Alinta is a PE owned utility that is seeking buyers at present, so de-risking its WA gas retail business through such a contract makes sense for it.  From Chevron’s point of view, not only does this meet a domestic gas obligation – it also arguably delivers a better price than available from LNG markets for some years to come.

Onshore gas assets in the Perth Basin (e.g. as owned by AWE and Origin Energy) will be wondering what this sort of deal means for them.  The domestic market in WA is not infinite whilst the potential for the LNG players to disrupt that market is large.  The current Origin Perth Basin sale process may be delayed (or priced) accordingly.

Quote of the day

Maybe the “Debacle in Doha” (or as Tudor Pickering said: “no soup for you!”) was induced by ennui rather than strategy or KSA Games-of-Throning, if the Lonely Planet’s view on that city is correct:

“The most boring city in the World”.

 

 

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