Today’s Blog – Tuesday 31st January 2017

Editorial

We have on a number of occasions recently commented on the global re-direction of capital by the E&P industry (the Majors and the IOCs) from higher sovereign risk areas such as South East Asia back into the good old USA.  This represents a ~45 year tidal turn, from when the US’s oil production peaked in the 1970s and after the oil price crisis of later that decade sent capital looking for new opportunities in the likes of the North Sea and around the world.

The main home for this return of capital has been Texas’ mighty Permian Basin.  A recent snippet from Tudor Pickering Holt’s daily note succinctly summarised why:

“..we believe the fact that Permian is lower risk (both geologically and politically) than offshore/international projects, deserves a lower cost of capital, gives capex flexibility, has easy monetization potential, provides reserve replacement and production growth and possesses upside from acceleration, downspacing and delineation…”.

It is thus somewhat ironic that sovereign risk is now rising in the US, with some economic policies being mooted in Washington which appear to come from the Kim Jong-un playbook.  However, as noted on other occasions, what the Feds want to do and what will happen in each very different State are not necessarily the same (phew says Exxon after spending >US$5B in the Permian in recent weeks).

Major Government intervention into markets through taxes on imports (and the US still imports a lot of crude) would create significant disruptions in oil/gas, currency and equity markets – with many un-forseen consequences.  For instance, an associated rise in the US dollar might make investment destinations outside the US (with cost bases in debased currencies) more attractive again.

Commodity prices

Crude prices fell slightly overnight, with Brent down ~0.5% to US$55.22 and WTI down ~1% to US$52.65.  No particular drivers appeared on the day and the media concluded that Friday’s rig count, providing evidence of ongoing activity growth in the US, was reacted against during Monday’s trading.

Henry Hub fell ~3% to US$3.23.  In the longer term, the large US gas exports to Mexico (mostly by pipeline – but also by LNG) could suffer from the increasing likelihood of a trade war between the countries.  Excess supplies looking for a new home could hit Henry Hub hard – with flow on affects on the competitiveness of US gas – competing as it might be in a complex new world of shifting trade tariffs, etc.

LNG and international gas

Reuters recently reported on comments from Wood Mackenzie on the profitability levels achieved by the vast investments made into Australia’s LNG industry over the last half decade.  Wood Mack concluded that average rates of return achieved were below 8% – rather than the planned for 13% (and Santos and Origin Energy shareholders like your unfortunate blogster can only dream of high rates like 8%).

We are sure that the politicians currently looking to tax the industry even more will soberly observe this economic data and amend their expectations accordingly….

Company news – Woodside Petroleum (WPL)

Readers of today’s Australian Financial Review (AFR) may have noted on article on WPL in which the company’s CEO was extolling the role that artificial intelligence and robots were, and could increasingly, play in the company’s management and operations.

Against the strong advice of our editorial Board, we thought this article provided a few opportunities for mischief – in terms of naming some ways that robots could take over new tasks at WPL, including:

  • Robots could now throw the darts at the map of the world in order to find new exploration ventures for the company.
  • A zillion robot-hours of thinking could be commissioned to determine that Browse and Sunrise will not go ahead until the sun freezes first.
  • An especially crafty AI fuelled robot could advise the Chairman how to increase his tenure by another decade or so.
  • When the CEO asks his executive team about the many lessons learned from the Pluto development, a robot prompter behind each Vice-President could whisper in his or her ear “don’t hire a megalomaniac as CEO”.
  • Etc.

Quote of the day

Anyone who has ever been at a work meeting and listened to the CEO being utterly un-self aware, would have had their toes curl this morning when reading in the AFR of WPL’s CEO’s account of a meeting at which he asked his multi-million dollar salary executives (as noted above) about the lessons learned from the company’s Pluto investment – and how a robot could do better:

“You could see the shuffling in the seats.  This is only two years after the project was complete.  We could not consistently give five [examples] in our executive team.  If we can’t give five, how in the heck do we think the rest of the organisation is going to do it? And so we said – there’s the business case.”

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