Today’s Blog – Tuesday 12th July 2016

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An article in Bloomberg in the US last week highlighted the expected effects in the next few years of the retirement of the remaining survivors of the great purge of oil workers that occurred in the 1980s.  For many years the industry has referred to this as the Great Crew Change – as the younger boomers retire and are replaced by, err, someone? anyone there?  Hello?

The Great Crew Change has now smashed into the current 2010s phenomena of “laser like focus on costs”, “reducing costs per barrel”, “cutting our way to growth”, [insert your favourite spew-worthy piece of bullsh*t bingo here], etc.

So now the industry risks the legacy of previous hollowing-out(s) (the 1990s as well as 1980s) being greatly exacerbated with the current short term cost cutting exercises.  These are unfortunately particularly focused on the high-skill/high-cost employees in their early 50s who would otherwise be the key bridge between the Crew Changers and the younger members of the industry.

Combine this with the massive capex reductions seen in the last few years, and we face a pricing outcome richly characterised by US-based industry commentator Art Berman as:

“The truth is that we are going to see an absolutely moon shot in terms of oil prices sometime sooner than later I think.”

We agree – but as always with no idea as to what “sooner than later” actually means in units of time – and always bearing in mind J M Keynes “the market can stay irrational longer than you can stay solvent”.

Commodity prices

Crude markets weren’t exactly listening to the these long term siren calls last night, with falls of ~1.5% in both main indices.  Brent closed at US$46.05 and WTI at US$44.76.  With no particular “events” or “numbers” to drive trading on the day, the runt of the causal litter, “technicals” was sited by some as a reason for the fall.

Henry Hub fell sharply (~4%) to US$2.70.  However, Houston based industry bankers Tudor Pickering Holt (TPH) noted planned gas-fired electricity plant new build capacity in the region of the Marcellus was now up to an impressive 30,000 MW (more than half of East Coast Australia’s total thermal capacity).  If all built, that would consume an incremental 3 BCF/day (if substituted for coal – less if crowding out other gas fired power stations).

Thats a pretty hefty new increment of demand in a market with production of ~75 BCF/day, growing LNG and pipeline exports, etc.

LNG and international gas

Bloomberg has recently reported another story that demonstrates the linking up of the Pacific and Atlantic LNG markets.  This was an announcement by Japan’s largest LNG buyer, Jera, that it is about to enter into another (it did a deal with EDF in May) sales contract with a European buyer.

Another Japanese buyer, Tokyo Gas, is also playing the LNG liberalisation and vertical integration games – announcing it has formed a JV with PetroVietnam Gas to invest in gasification facilities in Vietnam – and potentially other downstream infrastructure.

Even Russia’s Novatek is joining the LNG trading game prior to first cargoes from its challenging Yamal Arctic LNG project.  The company has just announced it has purchased a cargo from Trinidad and is selling it to Chile.

Australian LNG players – hello?

Company news – Oil Search (OSH)

The Australian Financial Review (AFR) today contained a story noting that OSH may have to raise its bid for InterOil following the recent emergence of a potential rival – rumoured to be Exxon (XOM).

In our view, XOM taking out InterOil is a better outcome for OSH than it doing so itself, so raising a bid in this scenario would not make sense for it.  That could also be the case if Total was to take out InterOil.  Accordingly, OSH is in a strong position here and should only raise its bid if a rank outsider comes in.

Company news – Beach Energy (BPT)

As is often the case with acting CEOs, BPT’s recently acting CEO, Neil Gibbins has just “left” the company.  No doubt with a decent cheque, but a lesser cheque than if the “acting” appellation had been removed from in front of the word “CEO”.

Quote of the day

Over in the UK the “Leave” candidate for leader of the Conservative Party (and hence the Prime Ministership), Andrea Leadson, has quit the race – leaving Theresa May as the unopposed candidate.

To quote an un-named heckler at her news conference:

“Another Brexiter leaves the scene of the crime!”

And a tweet:

“The last of the Leavers drops out. Take back control! No, you take back control, No, you take back control.”

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