Today’s Blog – Monday 21st November 2016

Editorial

The Australian business press is closely following what seems to be a mounting train wreck at mining giant Rio Tinto.  This concerns the leak (by we know not who) of a few emails from around five years ago which concerned the payment of a US$10M fee to an agent who helped the company in its dealings with the less than pristine African nation of Guineau.  The making of that sort of “facilitation” payment could be illegal under US, UK and Australian laws – and even constitute a criminal offence for Management and Directors.

So far the company has sacked a couple of senior managers (one of whom at least has publicly threatened strong legal action).  Two previous CEOs could well also get caught up in this whirlpool.  We also assume that the company is scouring its records for anything similar surrounding its dealings in other countries such as Mongolia and Mozambique.  The text of the leaked emails appeared to reveal a pretty relaxed corporate culture about the payment of this type of success fee.

Australia’s largest mining companies are giants of the global industry.  Its oil and gas companies in comparison are minnows and are largely invested in Australia itself (and the US in BHP Petroleum’s case).

So we conclude that the sort of cultural laxness demonstrated at Rio – although it may well have been replicated in the oil and gas sector in theory – would have much less chances of leading to major problems – as the companies involved don’t really play the game much in areas where such issues normally arise.  One exception may have been Woodside’s foray into West Africa of around ten years ago – which by recollection it extracted itself from after not only poor reservoir performance, but also a President sticking his hand out for a US$100M “penalty” payment.

Commodity prices

Crude prices were flat to positive on Friday, with Brent closing at US$46.89 and WTI at US$45.58.  They rose 5% in the week – notwithstanding major head-winds from poor inventory numbers and a rising US dollar.

Friday’s weekly rig c0unt number from BHI represented another head-wind – a large rise in oil rigs of 19 (with gas rigs increasing by 1).

Henry Hub leapt by nearly 6% on Friday (and was up 9% for the week) to close at US$2.85.

LNG and international gas

A couple of stories from the far ends of the US LNG exporting sector:

  • Firstly, Conoco has put up for sale one of the oldest liquefaction plants in the world – the 47 year old Kenai plant located near Anchorage in Alaska.  This plant operates only intermittently these days – reflecting not so much a rickety old plant – but rather a shortage of low cost local gas and poor LNG markets.  Kenai demonstrates that well maintained liquefaction plants effectively last “forever” in up-front economic terms.
  • Down in the Gulf of Mexico, Cheniere Energy’s much larger and newer Sabine Pass liquefaction plant continues to break production records (and we note anecdotally its strong performance compared to the dismal one of the Chevron operated Gorgon LNG project, which has suffered continual delays and now teething outage problems).
  • South Korea’s KOGAS has a contact for LNG processed by Cheniere – and for some reason the Trump election encouraged the country’s Vice Energy Minister to call last week for further investment from his country into that obscure but rising energy source called “US shale gas”.

Disruption

Last week industry consultants Wood Mackenzie (not normally a hot-bed of greenie activists) released a study that concluded that ~50% of large company oil and gas production could face rising costs from the imposition of carbon taxes and their equivalents.  More significantly (in our view) they also noted that:

“Green financing could also mean higher cost of capital for more carbon-intensive oil assets such as oil sands, as investors shift to alternative fuels and lower-carbon technologies.”

As we noted last week, the actions of capital markets can be more influential than those of politicians.

Company news – Central Petroleum (CTP)

As reported last week, CTP recently rebuffed a takeover approach from its lender, gas customer and shareholder, Macquarie Bank.  Today’s Australian Financial Review (AFR) contained an article on CTP, which noted its Management might find “a working life in the gas industry might be made a whole lot easier living under the capital umbrella of private equity.”

That sounds like a strong case being publicly made to CTP’s CEO, the “ebullient” Richard Cottee, to come over to the side of the Barbarians at the Gate – and, hint, hint, you can make more money here without having to deal with publicly listed market issues such as those pesky “shareholders”.

Quote of the week

There does not seem to be a unified position in Saudi Arabia, let alone OPEC as a whole, about what course of action should be taken at its upcoming key meeting, based on the following recent quote:

“I have no idea why they want a reversal because a high price will definitely bring more crude to the market and Opec will further lose [market] share.” – Ali al-Naimi, the former Saudi Oil Minister

 

 

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