Today’s Blog – Monday 31st October 2016


Late last week Chevron Corp (CVX) advised the market of yet another major cost over-run in its Australian LNG business – this time at Wheatstone rather than Gorgon.  The sum involved was a hefty US$5B.

CVX’s partner in Wheatstone, Woodside Petroleum (WPL) has today advised the market that the effect of this latest cost blow-out is only an 8% increase for it – given it had started from a more recent cost assessment figure than CVX was using.

CVX’s cost management history at Gorgon and Wheatstone has been poor to say the least.  High Australian labour costs and greenery regulations are a significant factor – but poor management decisions seem to at least weigh equally in the causal mix.

Last week Houston based investment bankers, Tudor Pickering Holt (TPH) noted that CVX’s land position in West Texas’ Permian Basin could be worth a cool US$42B (CVX has 1 million acres in the Basin, including many where it holds the royalty as well as working interests).  This sum  is around 20% of CVX’s enterprise value.

CVX shareholders will be far keener in it investing capital in the Permian over the likes of Australia and LNG developments in the future – costs there are far more controllable/predictable – and sovereign risk in Texas is about as good as it gets.

To only somewhat lesser extents, this is true of all of the Super-Majors.  The US in general and the Permian in particular will be the preferred investment destination until the next oil price swing is well in the ascendancy.

Commodity prices

Friday’s crude oil trading was again negative, with Brent down ~1.5% to US$49.71 and WTI down ~2.4% to US$48.70.  Over the course of the week, prices fell 4%.  This was notwithstanding the good inventory “numbers” which came out – and which supported a strong declining trend.  The key bear factor outweighing these numbers was the wearing off of “OPEC heroin”, as doubts continued to rise over any agreement over production cuts at the key OPEC meeting due at the end of November.

Friday’s BHI weekly rig count had a fall in oil rigs of 2 and a gain in gas rigs of 6.

Henry Hub rose slightly on Friday, closing up 1% (and 4% for the week) to US$3.10, as warm weather started to wear off and the underlying relatively short production numbers shone through.

LNG and international gas

Cyprus has joined the ranks of those investigating LNG supplies through short term floating storage and regasifiation unit (FSRU) solutions.  It has just called a tender for consultants to advise on this matter – to provide a bridge of fuel supplies for its power sector prior to the medium term hoped for development of discovered gas resources offshore the island.

New LNG demand is good – but a lot of FSRUs would be required to dent the current excess of supply capacity over demand – let alone provide much room for new projects.  Indeed, the view that “5 out of 100” new projects could go ahead in the short term is now being tempered even further by the likes of the following quote:

“No company is likely to make an investment decision on a major new greenfield LNG project until 2019 at the earliest”, said David Ledesma, an LNG consultant and fellow at the Oxford Institute for Energy Studies.

Governments, fracking, etc

The Australian Government has called for input from the OECD’s International Energy Agency (IEA) with respect to security of energy supply – in light of recent power cuts in South Australia.

Given the potentially very concerning geo-political consequences of a Trump Presidency for Australia, it would be very timely for the IEA to remind Australia that it does not meet the strategic petroleum reserve (SPR) requirements of OECD membership.

Company news – WPL and FAR

Conflicting news from WPL and FAR today over the former’s purchase of equity in FAR’s offshore Senegal oil assets from Conoco:

  • WPL has announced the deal has now completed.
  • FAR has announced that any transaction is still subject to pre-emptive rights.

Those statements are not exactly reconcilable and we can only presume a rancorous legal dispute is brewing.

Quote of the day

A recent quote from the IEA’s head, Fatah Birol, on the unexpected strength of growth in investment in renewables over the last year or so:

 “We are witnessing a transformation of global power markets led by renewables.”


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