Today’s Blog – Wednesday 12th October 2016

Editorial

The big news in the Aussie oil patch today (and in South Australia in particular) is BP’s announcement that it will not proceed with a long planned deepwater drilling program in the wildcat frontier territory of the Great Australian Bight (GAB).

Regular readers will note that we have been somewhat sceptical for some time as to BP’s true desire to move this project forward – in particular it did not seem to be pushing that hard on the environmental approvals front.

BP’s original announcement was not clear on whether it was “walking” away from its tenements (in which Statoil is a 15% partner).  Other news reports indicate that it still has the licences – so presumably it would be feasible to sell its interest (or even pay someone else to take it on given the remaining – undisclosed – commitments thereon).

Just recently ASX listed Karoon Gas (KAR) took up some acreage in the GAB with the same strategic intent as the other companies in the region (Chevron, Santos, Murphy, etc) – wait for BP to do the initial work and then see an up-rating in acreage value if it was successful.

That strategy is now in tatters (unless BP finds a buyer – which we think will be unlikely) and these other parties have fixed commitments that will now look a lot more onerous given the opportunity of riding on BP’s tailcoats has been lost.

A pure wildcat program like BP had planned would have been a very high risk one – no more than say a 15% chance of success.  And then in the success case the all-in development costs for a deepwater, far-offshore, Australian-cost, etc program could well have been more than the current oil price of US$50.  And the bleating from the greenies would never have stopped.  The tempo of green complaints against this kind of project always seem to increase over time – so the question might be begged – will this area ever now be drilled?

BP’s CEO recently noted that the company had been successfully reducing its per/bbl costs to around this level – so adding a new high cost development would have worsened this metric and could even have reduced his bonus……

BP has a high cost rig under contract.  This will likely now be moved to the Gulf of Mexico.

BP will also be looking closely at the recent massive discoveries made in Alaska – where it has substantial sunk costs, an old pipeline to fill, a significant leadership position, etc.  Capital would likely be better deployed there than South Australia.

Unfortunately South Australia’s Energy Minister, Tom Koutsantonis, who recently has been pointing out how other States such as Victoria have increased their sovereign risks by their anti-oil and gas words and deeds, has reacted angrily to BP’s announcement.  He has made futile calls for BP to instead invest elsewhere in the State (note to Tom – there are no other BP scale E&P targets in SA – so keep quiet and continue to be “Captain Sensible” compared to your peers).

Commodity prices

Crude oil re-traced some of its recent post-OPEC “deal” gains overnight, with Brent down ~1.2% to US$52.49 and WTI down ~0.7% to US$50.82.  The key driver were comments from Rosneft’s Igor Sechin that appeared to contradict Putin’s recent statements about Russia joining this “deal”, namely: “Why should we do it?”

Rosneft’s largest shareholder – one BP – might well agree.

Henry Hub closed down 1.5% at US$3.22.

Company news – Origin Energy (ORG)

ORG advised the market today of progress on its Beetaloo Basin exploration program in the Northern Territory. Flow testing work on its fracked shale gas wells in this area have produced flow rates of up to 1.2 mmcf/day – which to us seems highly encouraging given the wild-cat nature of the exploration.

The fly in the ointment for this is of course the recent “moratorium” on fracking on the NT which came in just after ORG got some fracks away.

Disruption

From the global king of car manufacturing (in quality anyway) – Germany – a planned ban on petrol fuelled cars from 2030.  This was in the form of a non-binding resolution from the country’s Federal Council and of course is a long time away.

But it provides momentum to the case that EVs could achieve a much higher market penetration than is generally assumed in the oil and gas sector.

Quote of the day

One from Putin that Igor Sechin might want to refer to:

“We need business to understand its social responsibility, that the main task and objective for a business is not to generate extra income and to become rich and transfer the money abroad, but to look and evaluate what a businessman has done for the country, for the people, on whose account he or she has become so rich.”

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