Today’s Blog – Friday 8th July 2016

Please pass this blog onto others who might like to read it

Editorial

Readers are no doubt sick to death of one of our constant themes – that the current massive cuts in capex (with exploration in particular being almost wiped out) will inevitably have consequences in terms of supply shortages and price spikes.  But keep reading anyway, please, you know its good for you.

The graph below (complements of John Phillips of Blue Energy) illustrates well the decline in exploration in the particular location of Queensland.

It also tells the story that the decline in exploration in this particular locale is not just a post-November 2014 issue – the trend was well established before then.

The likely causes for this, even in a US$100/bbl world, were likely onerous regulations designed for Majors not juniors, declining capital market support for risk-on ventures in the post-GFC world where yield is king and lack of access to prospective ground locked up by the larger players.

image001

We suspect that the 2016 bar in this graph will continue the trend.  Pessimists will say that 2017 and even longer will also be too soon for a rebound (if that is the case, does any kind reader have need of a indentured servant?).

Commodity prices

Crude prices were smashed overnight, with an evidently very jittery market reacting badly to less than expected weekly inventory reduction numbers.  Brent was down ~6% to US$46.40 and WTI fell 5% to US$45.14.

The EIA’s inventory reduction number of 2.2 mmbbls was much less than forecast by the API the day before (who predicted a fall  of 6.7 mmbbls).

Product also fell by relatively small amounts (gasoline by 0.1 mmbbls and distillate by 1.6 mmbbls).  The Griswolds over in the US are clearly not driving as much as the market would like.

Henry Hub was an oasis of calm in this mini maelstrom, closing flat at US$2.78.

LNG and international gas

Bloomberg has just reported rumours that Exxon (XOM) is on the verge of making a major acquisition in offshore Mozambique – in partnership with Qatar Petroleum – its existing joint venturer in the massive RasGas LNG business in Qatar.

If true, XOM is currently being pretty busy on the LNG acquisition front – it is still rumoured to have approached InterOil about a takeover offer for that PNG LNG focused company.

No-one doubts the massive high quality gas resources that have been found offshore Mozambique.  Many (including us) have however wondered whether the clear sovereign risks in the region would deter LNG developments for many years – particularly when the LNG market is so long and other options such as the Gulf of Mexico are much less risky.

The ongoing rapid growth of LNG demand in India (and also in Pakistan and Sri Lanka in the future, etc) support the development of Indian Ocean LNG, and maybe this sort of strong locational advantage factor might push Mozambique up the queue.

If XOM does make a move here, it will be a real marker for the other “100” LNG projects to note.

Company news – Woodside Petroleum (WPL)

The Australian Financial Review (AFR) today had a short article on WPL foreshadowing that it was on the lookout for acquisitions in the US$1B range.

We have long considered that the location of WPL’s assets provide a strong base for growing an “Indian Ocean LNG” strategy and the company has made some moves downstream to support this.

The AFR quoted investment bankers saying they were looking for WPL to do deals over oil assets.  Our view is contrary to that – US$1B does not buy you much in that space.

However, a portfolio enhancing deal in the Indian Ocean – upstream or downstream – would be considerably more interesting.

Company news – Oil Search (OSH)

OSH issued a monthly drilling report yesterday.  It noted that its Strickland-2 wild-cat exploration well in the PNG Highlands had been P&Aed after encountering water wet reservoir.

Its Strickland-1 well is drilling ahead so presumably the first well did not kill the play.

Quote of the day

As The Donald continues to express his views in his robust manner (“Saddam Hussein…was damn good at killing terrorists”) it is almost pleasurably painful to watch the sensible leader of the Republican Party in Congress, Paul Ryan, try to rein him in:

“Look, anti-Semitic images, they’ve got no place in a Presidential campaign.  Candidates should know that.”

This echoed a humorous tweet from earlier in the week, which made up a Ryan quote as follows:

“While I strongly condemn Trump’s decision to set all nuns on fire, we must support him because he is not a Democrat.”

 

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