Today’s Blog – Friday 17th June 2016

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Yesterday we noted that Shell’s CEO, Ben van Beurden, was set to have a high level meeting in Russia, including with Tsar Putin, which amongst other things would discuss its investment in a proposed St Petersburgh based Baltic LNG project.

On the day itself, BvB got away with signing only a non-binding MOU on this political project, designed to feed a FSRU in Kaliningrad (there are better FRSU destinations in theory in Eastern Australia!) and “other” customers.  From his point of view, this soft commitment was designed to bolster relationships generally – and get momentum behind a rather more commercially sensible LNG project – the expansion of Shell/Gazprom’s Sakhalin 2 LNG plant, located quite some few timezones to the East of the Baltic (and hence somewhat nearer most LNG markets).

Gazprom’s commercial dilemma – it has vast quantities of cheap-to-extract gas in the heart of the Eurasian landmass but faces bottlenecks for the export thereof on all sides – reflects Russia’s own central geo-political quandary that has prevailed for centuries.  That is, although large, on all sides it is blocked in by Arctic ice, sea-lane choke points, mountains and distance.

The Baltic project is one effort to ease access to Russia’s West.  The Power of Siberia pipeline is trying to do the same in the East.  Both face major problems.  In addition to geography, Russian political behaviour means that Russian gas is not treated as a normal commodity – but rather a potentially poisoned chalice that should be avoided unless necessary.

Its a big hypothetical, but if Russian politics actually normalised (and there were brief chances for this to happen in 1905-14 and in the 1990s), then the Gazprom negative premium would disappear – to the massive competitive detriment of pretty much all other global gas suppliers.

Commodity prices

That anti-Goldilock’s bad-tasting US$50/bbl porridge continues to be spat out by the market, with crude falling yet again overnight.  Both indices fell by around 3%, to close at US$47.19 (Brent) and US$46.21 (WTI) respectively.

Brexit fears continue to dominate markets generally – and crude is no exception.

The BHI rig count due out tonight will likely be more closely scrutinised than normal for signs that the anti-Goldilocks US$50 mark is pulling in new activity prematurely.

Addtionally, the vampire squids are playing a dampening role again, with a recently published Goldman Sachs view that market re-balancing will take longer than others expect.  In our view, Nigerian terrorist plans, Venezuelan societal collapse possibilities, ISIS schemes in Libya, etc, are too unpredictable to take a firm position on this.

In the long term, the almost absolute inevitability of a strong – possibly shock – upwards pricing outcome in oil markets was again recently brought out by reports from various analysts.  For instance, Wood Mackenzie recently stated that US$1 trillion of capex would now be cut in the remainder of this decade.  Deloitte went even further – concluding that lack of capital to fund proposed capex would exacerbate the shortfall to US$2 trillion.  That would otherwise fund a lot of exploration and development that is needed to replace normal field decline.

Henry Hub took a bit of a breather yesterday, closing down ~1% to US$2.58.

LNG and international gas

LNG guru Dr Fereidun Fesharaki’s latest prognostications bring even more gloom to Australian and international LNG suppliers (although likely joy to buyers).

In his view, the oft quoted concept that “five out of the current one hundred” LNG projects will go ahead in the next few years is a wildly optimistic one.  Rather the figure – in net terms – will be zero.  On the one hand he thinks three specific projects (in PNG, Mozambique and the US Lower 48) will get up – not because of physical demand requirements – but rather because of firm buyer commitments to diversification, etc.

On the other hand – he thinks 2-3 currently producing liquefaction plants will need to shut in – with a focus on the high cost plants in Queensland and some plants in the US.

Claims by various liquefaction plant owners that they can expand production capacity beyond nameplate are in his view meaningless – customers need to exist to buy any such expanded capacity and he thinks there effectively aren’t any.  This would include the likes of APLNG, GLNG, Gorgon, etc.

The Queensland producers may therefore face the reverse situation that they botched a few years ago – missing out on US$Bs through cooperating over building liquefaction plants.  Now the next challenge could be whether they can cooperate on shutting in said plants in as least damaging a way possible.  We would not bet on it.

Company news – Origin Energy (ORG)

Company news is again thin on the ground today.  One rather boring item was the latest update from ORG on its balance sheet repairing asset sale program – it has just sold a 30 MW wind-farm for A$72M  (a hefty 12 times EBITDA) – which appears to be well above replacement cost.

Clearly it is much easier to sell developed renewables assets than the upstream assets ORG currently has (or had – e.g. the Cooper Basin assets) on the sale block.

Quote of the day

The Russian authorities have continued their widespread program of discouraging any visitors to come to the Football World Cup in 2018, with Vladimir Markin, a spokesman for the Russian equivalent of the FBI noting how soft his French counterparts are:

“A proper man comes as an amazement to them. They are used to seeing ‘men’ at gay parades.”  



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