Today’s Blog – Wednesday 17th August 2016

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Yesterday Iran allowed Russia to use a military air-base to launch air-strikes on Syria. This was the first time that the country had allowed a foreign power to do any such thing since the dog days of the British Empire before World War Two.  Not even in the times of the strong US and Shah of Iran alliance that collapsed in 1979 did US forces ever use such rights.

At the same time, Iran is finalising the terms of the oil contracts it is offering to foreign companies.  That process has been a matter of bitter in-fighting in the country, with the reformists trying to craft something that will attract investment whilst the hardliners are loath to give anything anyway to representatives of the Great Satan.

The current compromise contract draft is pretty unattractive and many industry observers think that the Super-Majors will not see the upside from entering Iran again as sufficiently counter-balancing the ongoing sovereign risks (particularly with the political uncertainty in the US at present).  And they have little ability to deploy surplus capital anyway right now.

However – could the mighty Russian oil companies such as Rosneft step into the void?  A deepening of relationships between the two countries – as evident from this military news – could be expanded upon commercially.   Rosneft already produces more crude than the increasingly gassy Western Super-Majors.

Russia’s ability to keep expanding production of its generally late life assets over the last two years has been technically and commercially impressive. Iran offers a very material new capacity potential of ~2 mmbopd for them to participate in.  And its onshore.

Gazprom would also be watching this space with great interest – having a chance to invest in Iran’s massive, well located and under-developed gas-fields (the fantastic South Pars/North Dome in particular in the Persian Gulf) would give it arguably a chance to compete with the likes of Shell in global LNG terms.

Commodity prices

The bull run continues in crude markets.  Brent was up nearly 2% to close at US$48.85 and WTI performed similarly to finish at US$46.58.

The gruel which the bulls are feeding on seems somewhat thin to us – ongoing hopes of OPEC “doing something” and a weakening US dollar.  If the weekly EIA inventory numbers due tomorrow are weak, that might give pause for reflection.

Henry Hub also closed up – at US$2.63.

LNG and international gas

Russian industry analysts Interfax have reported another dog not barking in the night – Gazprom’s 2nd quarter report has made no mention of its latest views on when the Power of Siberia pipeline will commence deliveries of natural gas to China.  No news is good news – not.

Company news – BHP

BHP’s annual results released yesterday contained what investors have come to expect in recent years – another multi-billion dollar write-off of its US shale assets (this time by US$5B).

In accounting terms, the investments made in this sector a few years ago by the Big Australian are unequivocally the worst deals it has ever done (and it has done a few doozies over its very long life).  However, these assets have long lives themselves and could achieve some sort of redemption if US gas prices in future are as volatile as they have been in the past.

Company news – FAR

FAR’s US listed partner in its Senegalese oil discovery – Cairn Energy – released its half year results overnight.  These contained material increases in its view of contingent resources and oil in place (and from our non-technical perspective the implied recovery factor seems pretty conservative – so there is room for a lot of upside).

Perhaps even more importantly, it published a revised break-even price of US$35/bbl.  If correct, that makes Woodside Petroleum’s purchase price for Conoco’s share of the asset perhaps one of (if not) the best deals it has ever done.

Quote of the day

The recent comments from the Saudi Oil Minister which are thickening the soup supped by crude market bulls:

“Despite the bearish sentiment engulfing the market, we still see strong demand for our crude in most parts of the world, especially as supply outside of OPEC has been declining fast, supply outages increasing, and global demand still showing signs of strength.   To reverse the decline in investment and output, oil prices have to go up from current levels.”

(Note to readers – supply has been declining in the poor cousins of OPEC such as Nigeria, Libya, etc, more so than in nearly all non-OPEC countries…….)





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