Today’s Blog – Tuesday 3rd May 2016

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Unhappy shareholders in some of Australia’s larger oil and gas companies might be excused for thinking that they had invested in contenders for the “world’s worst LNG project”.

However, in our view that prize is due to the Siberian based Yamal LNG project, given its cost structure and location.  Notwithstanding this view, late last week Yamal announced that it had procured the last tranche of project finance it needed – US$12B (denominated in Euros and Yuan) from Chinese banks.

As we have noted a number of times recently, the Chinese can be pretty tough on business negotiations with the Russians when the latter have few other alternatives – which would likely have been the case here.  Accordingly, we would expect some undisclosed aspects of this deal which would have the dragon smiling and – in due course anyway – the bear fuming.

Yamal was also in the news recently about a proposed material LNG sales deal of 1.5 mtpa – to Kuwait.  One would have thought that locations such as Qatar were ever so slightly nearer – so again Yamal might have to take a haircut to get a deal done here.

As we have noted before, President Putin is rumoured to have a personal stake in Yamal, so in addition to Russian pride, there was another big impetus to get this project done.

Commodity prices

Crude prices fell overnight, with Brent down ~3% to close at US$45.90 and WTI down 2% to finish at US$44.89.  Bearish sentiments were induced by Reuters reporting OPEC production increases in April and Genscape reporting a big inventory build at Cushing, Oklahoma.

Production growth in Iran has been somewhat higher than most expected post sanctions (if one can believe the numbers of course) and Iraq also continues to ship more barrels notwithstanding the political chaos in the country.

Additionally, Saudi Arabia is ramping up its production to ensure it can meet its summer air conditioning call on crude for electricity generation whilst maintaining export volumes.

On matters Saudi Arabian, last week’s The Economist included an interview with Aramco’s Chairman, Khalid al-Falih.  He noted that the company’s reserves were constitutionally the property of the kingdom – and a concession and fiscal regime would have to be put in place prior to any IPO of the company.

To us, this demonstrates that there is a large gap between the expectations of the KSA’s “leader”, Deputy Prince al-Salman, and the reality of actually setting up Aramco for privatisation – with all the political as well as process issues involved.  Sounds like a somewhat duller Game of Thrones than the TV fare – for just now at least.

Henry Hub declined 6% to close at US$2.04 as US inventory data disappointed.

LNG and international gas

Canadian listed Husky Energy – controlled by Asia’s “richest man”, Li Ka-Shing (if we don’t count Mr Putin according to some), is not immune to disputes about gas prices in his back-yard – the People’s Republic of China.

Husky is partnered with Chinese NOC CNOOC in a gas-field that supplies the PRC, located in the South China Sea.  Late last week Husky announced it would defend efforts by the Chinese to lower its contracted gas price.

Mr Li is better placed than just about anyone to broker a deal here – but this shows yet again that the sanctity of contracts will come under threat when underlying market prices diverge significantly from contract prices.

Company news – Santos (STO)

Its STO’s AGM tomorrow and Adelaidean fruit shops are reporting brisk sales of rotten tomatoes prior to the event.   We will aim to report to readers on any excitement on this tomorrow afternoon.

Some other STO news:

  • The sale of its interest in the offshore Stag field has been reported by the media as having fallen through – notwithstanding an earlier large hair-cut taken on price following the original deal announcement.  This type of bad news was not surprisingly “not material enough” to warrant an ASX announcement.
  • The company’s strategic Chinese shareholder has upped its stake in the company marginally through on-market purchases.

Company news – AWE

A story in today’s AFR on AWE’s incoming CEO includes his review of opportunities open to the company.   A few year’s ago, no self-respecting leader of an Australian E&P company talked about anything other than oil price linkages for domestic gas, etc.

Now AWE is talking up the fact that its domestic gas is not linked to boring old crude oil – and demonstrated again that Australian producer expectations for domestic gas prices are significantly higher than Pacific LNG spot prices (at present anyway).

Quote of the day

The weekend saw the annual “Woodstock for capitalists” in Omaha, Nebraska – Berkshire Hathaway’s AGM.  The Oracle of Omaha’s current views on oil prices were delivered at the event:

“We haven’t the faintest idea what the long-term price of oil.  We don’t think we can predict commodity prices.”  Warren Buffett


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