Today’s Blog – Monday 4th July 2016

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Another election and another “oh dear!” (the polite version) moment.   The Donald will be hoping for the trifecta in November, but that’s an issue for another day.

Last week we expected a small governing majority in Australia’s Lower House for the incumbents – with an even bigger zoo developing in the upper House.  The latter has been delivered in spades – with follow-through into the lower house, where we likely face either a tiny majority for either large party or an unstable coalition.

What does this mean for the local oil and gas industry:

  • To the extent that this is another manifestation of growing global populism and resultant poor policy choices, the world economy is likely to grow more slowly than it otherwise would.  The resultant lower demand for oil and gas will delay the inevitable market re-balancing for each commodity (with oil due to re-balance in the “medium” term and gas in a more distant timeframe).
  • There will be little to no chance that the Federal Government will be able to exert an adult supervisory role over the States and Territories with respect to the latter’s apparently insatiable desires to impose moratoriums and bans on petroleum exploration and extraction.
  • Australia’s glaring need (in our view) for a Strategic Petroleum Reserve (particularly in the event that The Donald de-stabilises global geopolitics) will continue to remain in the too hard basket.
  • The gas producers on the East Coast should beware of populism not only on the “prevent new production” front – but also potentially from the “divert current production to domestic customers” front.
  • The country’s credit rating could well be down-graded – somewhat perversely leading to higher demand for Government bonds as has just occurred in the UK.  The huge hunger for yield will sustain or boost the capital markets’ current “risk-off ” settings and continue to make it hard to attract funding for oil and gas activities.

Commodity markets

Oil markets had a good day on Friday, closing up 1% (and ~4% for the week). The day’s results were largely driven by a falling US dollar.  Brent closed at US$50.35 and WTI at US$48.99.  Over the June quarter, crude prices increased by nearly 30% – not that market sentiment seems to have absorbed this fully.

The weekly BHI rig report was not good news for the bulls – an increase of 11 oil rigs (and a fall of one gas rig) – but the market effectively ignored this “anti-goldilocks” data – for this week anyway.

Henry Hub nearly broke the US$3 mark, closing up 2% at US$2.99 (which reflected a 12% rise for the week).

LNG and international gas

Last week the BP led Tangguh LNG plant in Indonesia formally sanctioned the go-ahead for a third liquefaction train.

That’s more LNG market not available to the “100 projects” competing for it.

This brown-fields investment benefits from substantial synergies, such that its capital costs are extremely low – and very tax efficient, given it is part of a cash-flow positive existing PSC which provides a tax shelter.

Company news – Oil Search (OSH), etc

A spanner (albeit a potentially golden one) has been thrown into OSH’s plans for a friendly acquisition of fellow PNG focused company InterOil.  This is the emergence of a possible rival, who has approached the latter with a non-binding, etc, etc, proposal.

The media has reported that the incomer is the Private Empire itself, OSH JV partner Exxon (XOM).

From OSH’s point of view, we don’t think there is that much downside in XOM taking out InterOil rather than itself – such an outcome should serve to drive the consolidation of gas resources in PNG and their development through a XOM led brown-fields expansion of PNG LNG.

A loser from this might however be Total – who were part of the OSH deal to carve-up InterOil.  The French giant might therefore seek to compete with XOM over InterOil.

A bidding war from OSH’s perspective would just serve to show to the market that its PNG assets are more and more valuable.

Company news – XOM

On matters XOM, we note its recent off-shore Guyana massive discovery of a potential 1.4 Billion barrels of oil (i.e. more than 2 weeks’ global demand…..).

This is the largest discovery for at least the last year.  For shareholders of ASX listed FAR (ourselves included), this may lead to increased interest across the less explored areas of West Africa.

Quote of the day

A common post-election attitude at present:

“The people have spoken – the b*stards!” – US political consultant Dick Tuck



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