Today’s Blog – Tuesday 5th July 2016

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Both Australia and the UK pass another day without a Government.

Meanwhile the PRC is conducting a show-of-strength military exercise in the South China Sea this week, in the lead up to an expected adverse international court ruling on its infamous (dare we say farcical when it is someone so powerful making the claim?) 9-dash line claim to much of this Sea.

As noted yesterday, Australia does not have a proper strategic petroleum reserve – Government policy is effectively that free markets will always deliver the > 0.5 mmbopd that the country needs, whatever the geopolitical circumstances.

Military exercises by a belligerent PRC in a major maritime chokepoint (let alone the possibility of The Donald retreating from the Western Pacific) seem to us to make the Australian Government’s position too laid-back, even given the famous Aussie temperament encapsulated by “she’ll be right mate”.

In our view it would be prudent to start to build a stockpile of product (crude would not really work given our deficit in refining capacity).  Maybe even some of this could be located in seats held by the ever-expanding group of politicians that could be called the “unrepresentative swill” (thanks, P J Keating) in order to sugar-coat the broader political situation.

Commodity prices

Due to the 4th of July holiday there was no trading in WTI or Henry Hub yesterday.

Brent dropped slightly to US$50.10, as various “events” started to unwind themselves – such as Canadian production continuing to come back following the recent fires and the potentially striking Norwegian offshore workers coming to a deal.

LNG and international gas

Russian news service Interfax today published an interesting article on the global LNG carrier fleet.  This is being renewed at present, with 180 new vessels due to come into service in the next year or so – making a large amount of older ships (with less efficient motor technology) redundant with respect to their original purpose.

Interfax quote an expert view that this otherwise redundant fleet could join the growing ranks of floating storage and regasification units (FSRUs).  Presumably if a glut of such vessels arsise, then their lease cost should come down.

Coincidentally, the Sri Lankan Government has just announced a policy to support new gas fired generation developments in the Island nation.  These will almost certainly need to be supplied by FSRUs, given the lack of indigenous gas reserves (we note Cairn India walked away from gas contingent resources offshore the country last year, which presumably says something about the cost of their development).

Governments and fracking

We are keeping our ears open for the almost guaranteed anti-fracking wails which will emerge from the the wackier fringe of Australia’s new Federal politicians (but is it a fringe if they have the balance of power?).

The likely strength of the nut-job (a political science technical term) Pauline Hanson party will particularly concern the A$60B Queensland CBM to LNG industry.

Company news – Bounty Oil and Gas (BUY)

Company news must be a bit thin on the ground when we are reporting on an update from A$7M market cap junior BUY (who used to promote itself as having a great ASX ticker).

BUY has what is arguably a hidden gem of an asset – 10% of a gas producer in Tanzania that has just sustained an excellent flow rate of 30 mmcfd – and which has a gas sales contract attached to it.

Company news – Terracom Ltd (TER)

TER is a micro-cap coal company that has just announced a deal in Queensland with relevance to the oil and gas industry in the State.  This was the purchase of an old moth-balled mine from Rio for the princely price of A$1.  Furthermore, Rio will also tip in A$80M into an escrow account effectively controlled by the Queensland Government to cover abandonment liabilities.

We have previously expressed concerns that Queensland’s new laws designed to massively spread liability with respect to late life assets would effectively close down transactions in this asset class.  TER has proved this theory wrong for deals structured the right way and which dial in the Government into the deal making.

Quote of the day

For anyone unfortunate enough to have Facebook acquaintances with conspiracy theories about e.g. Big Pharma cover up that eating oranges cures cancer, the tone of the PRC’s comments over the 9-dash line will sound eerily familiar.  For instance, the following recent quote from Li Jie, a military expert connected to the PLA combines just the right amount of illogic and conspiratorial tone:

“They show China’s dissatisfaction and unhappiness with this case which is a farce.  It was presented by the Philippines President but has been directed by the US.”


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