Today’s Blog – Wednesday 1st June 2016

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Oil Search’s (OSH’s) takeover of InterOil has a vocal opponent – the founder of the latter, Phil Mulacek.  Mr Mulacek is renowned for audaciously relocating an oil refinery from Alaska to PNG before commencing what became a very successful gas exploration program in the country.

We think Mr Mulacek’s opposition to the takeover is driven by emotion rather than reason and that the price being paid by OSH is fair (indeed we have seen analysis to suggest it is excessive and on a per/mcf basis very high for contingent resources with very limited paths to market).

Moving a refinery half way round the world seems like a pretty difficult thing to do – but Mulacek’s success in doing so suggested to us another opportunity to move what is arguably some pretty redundant oil-field hardware – a few excessive liquefaction plants on Queensland’s Curtis Island which don’t appear to have reserves to process.

So come on Phil, buy up these surplus plants for a dollar and move them to e.g. Mozambique where cheap gas is very long not short.

Alternatively, maybe Cheniere Energy’s ex-CEO, Sharif Souki, could undertake the reverse of what he did in the US – convert a liquefaction plant to a gasification plant?

Regular readers will recollect our view that given relative gas prices (and the high value placed on gas deliverability in Eastern Australia given the price paid for Iona Gas Storage last year), a floating storage and re-gasification unit (FSRU) could make economic sense (although we note that the share subscription cheques for our start-up venture to do this appear to have been lost in the mail).

Interesting musings – but in reality corporate egos will likely dictate many years of pain at Curtis Island to pursue liquefaction dreams before anything else could be considered there.

Commodity prices

Crude prices traded fairly flat overnight, with Brent up slightly to US$49.89 and WTI down a bit to US$49.10.  The US$50 barrier is proving a hard one to break through and although no one really expects much from tomorrow’s OPEC meeting, the market will mark time until it has passed.

Over the month of May, prices rose 5% overall in London and 7% in New York – largely driven by supply side “events” in Canada and various increasingly desperate OPEC countries.

Henry Hub spiked up 5% overnight – possibly not because of wide-spread reading of yesterday’s blog amongst US gas traders.

LNG and international gas

Bloomberg recently reported that large Japanese LNG buyer JERA had inked a deal with French utility company Engie to sell it 1.5 mm tonnes of LNG over the next few years.  Pricing was said to be linked to European gas indices.

This is an interesting bridge between largely crude linked Pacific LNG prices and Europe’s more advanced gas-on-gas pricing.  Presumably Jera could chose to hedge out certain commodity price mis-matches – or take an open trading position.  Japanese entities have already taken on Henry Hub exposure through growing US LNG exports and eventually (adjusted for distance) we should see global LNG prices converge through such market developments.

Governments, fracking, etc

A recent petition signed by various climate scientists is protesting against the greenhouse footprint of the mooted Pacific Northwest LNG project planned for British Columbia.

The coal industry – as well as rival LNG projects elsewhere on what is the same planet – would welcome the blocking of this project – which would of course do nothing to affect total global demand for fossil fuels – only shift the location of their production.

Company news – Woodside Petroleum (WPL)

Readers may recall that WPL walked away from a deal to participate in Israel’s massive Leviathan gas project some years  ago- inter alia, due to concerns about sovereign risk (note to the WPL Board – good oil and gas projects are not universally located in nice countries).

The Leviathan project has recently signed a gas sale agreement to a Israeli utility for a gas price that is said to be a very juicy US$6.50/mcf.  Note to WPL – that is a better price than it could get on a netback basis for any of its other gas projects

Company news – Sundance Energy (SEA)

SEA has come out of its trading halt and as expected has done deals to place $80M of new stock (most of which is subject to shareholder approval). This more than doubles the company’s shares on issue.  A discount of ~22% is not that bad in the circumstances and we think equity market support for this deal reflects that SEA is one of the ASX’s stocks that is most clearly and cleanly leveraged to oil price rises.

Quote of the day

It is not often that we take announcements from Gazprom with other than a pinch of salt, but we found ourself agreeing with the following recent quote from company analyst, Valery Nemov:

“We can assume that a scenario when the market is short and prices in the U.S. are at similar levels to those in Europe or Asia … That is likely to happen in the next 20 years, with 100 percent probability.”





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