Today’s Blog – Thursday 28th July 2016

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

Editorial

A number of media articles have recently focused on the low levels of tax likely to be paid by Australia’s new wave of LNG projects.  One such piece was contained in today’s OilVoice Daily from academic Diane Krall, who asked the question:

“Surely this lack of revenue from the petroleum resource rent tax raises a few questions for the government?”

To see low taxes as a business conspiracy rather than a real world cock-up is maybe a not untypical perspective from the sheltered world of academe, but in our view the better question is “surely the poor returns (and hence low tax) from these projects raises a few questions for shareholders?”  

Many years ago your blogster worked as a lowly tax accountant (hmm, I seem to remember that paid more than blogging…) and a constant question from clients was “why am I paying more tax than my neighbour?”  In almost all cases the answer was “don’t worry – that’s because you are making more money than him.”  Low taxes are usually a sign of low income – not a conspiracy.

Many if not all of Australia’s new LNG projects are likely NPV negative on a full cycle basis and as such there are only low profits to tax and certainly no economic rent on which the petroleum resource rent tax would be due.  Additionally, royalties clearly suffer from low commodity prices – and especially so if Governments let Producers deduct full liquefaction and pipeline costs from revenues.

Governments are getting less money than they would like.  But shareholders (including us) have lost real money.  Sympathy from academics please!

Commodity prices

The siren call of “US$40, US$40” continues to tempt crude markets, which saw another fall overnight.  Brent was down ~2.5% to US$43.44, whilst WTI didn’t suffer quite so badly – down ~1.8% to US$41.91.

Again there are no current “events” to focus on (although the likes of Venezuela continue to apparently unravel) – so “numbers” are the thing to price markets on.  And these are not good.

The weekly EIA report saw an unexpected rise in crude inventories of 1.7 mmbbls, only partially offset by a gasoline draw of 0.5 mmbbls and a distillate reduction of 0.8 mmbbls.

Bloomberg has published a recent article noting that refining profits – which have greatly supported the integrated Super-Majors over the last 2 years – are now coming under pressure.  The product glut which is shading crude markets themselves seems to be the principle factor behind the decline.

Henry Hub slipped ~1% overnight to close at US$2.67.

LNG and international gas

An interesting development in the rapidly changing LNG world was an announcement earlier this week that oil-field services giant Schlumberger (SLB) and Norwegian LNG shipping/FLNG/FSRU company Golar had formed a JV.

Golar has taken 51% of that and SLB the balance of 49%.  The intent of the JV – called OneLNG – is to take the parties’ collective expertise to develop small stranded offshore gas deposits more cheaply and quicker than has traditionally been the case.

Small LNG projects are increasingly developing advantages over the mega-projects that the Majors and NOCs have traditionally cornered.  These include accessing the skills and support of the likes of OneLNG; being able to sell smaller contracted volumes to niche markets; sitting on fields with FLNG vessels for shorter periods; linkages to the growing number of FSRUs; etc.

Governments, fracking, etc

The oil and gas sector will welcome recent comments from Australia’s new Energy and Environment Minister, Josh Frydenberg, over the powerful role that he sees gas playing in future energy markets.  The recent public focus on electricity price spikes, the future of coal and the intermittency of renewables provides an opportunity for him to try and shake up the regulatory system that has otherwise been largely moribund for many years.

With gas however, deliverability is often just assumed by politicians and regulators.  However, mechanisms are required to provide this – ranging from responsive reservoirs, flexible processing infrastructure, underground storage, FSRUs, etc.  The mix of these is changing as the resource pyramid is consumed downwards – e.g. the first item is much less available than it was.

Company news – Sundance Energy (SEA)

Another SLB news item of potential wider interest was contained in an ASX announcement by Eagle Ford focused SEA today.  This was the entering into of a deal by SEA and SLB to re-frac wells – where SLB would be paid only out of any enhanced production.

Whether such typical US oil patch “lets do it!” can be copied in Australia is a challenge to operators and service companies alike.

Company news – FAR Ltd (FAR)

Today’s Australian Financial Review (AFR) contained a short story on FAR in its Street Talk section – the part of the newspaper typically used by investment bankers to communicate messages to their competition, etc.

This noted that FAR was examining a wide range of options to potentially fund the exercise of its pre-emptive rights over Woodside Petroleum’s (WPL) acquisition of Conoco’s interests in FAR’s Senegalese venture.

It will be interesting to see if further communications between the parties take place through the public media.

Quote of the day

It seems that we are not the only free-marketeer who has some doubts about the risks that The Donald might pose – as illustrated by the following recent quote from libertarian author P J O’Rourke:

“As far as I’m concerned, Hillary is wrong about everything, but she is wrong within the known parameters of wrong.”

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s