Today’s Blog – Friday 17th February 2017

Editorial

We have reported on a number of recent occasions about the increasingly vocal calls for more taxes from the (low-returning-check-the-share-prices) Australian E&P industry.

Today the Australian Financial Review’s (AFR’s) political columnist Laura Tingle commented on the structure of the petroleum resource rent tax (PRRT) – and seems to have nobbled by the “more taxes” camp, with the following comment:

“Designed in an era of double-digit interest rates in the 1980s, the current structure of the tax means resource companies are essentially receiving a 13% rate of return from taxpayers in the form of a discount on tax eventually paid on their expenditure.”

PRRT is complex – and hence leads itself to misinformation and confusion.  The 13% figure quoted above seems to come from nowhere – there are a range of uplift factors which provide economic compensation for risk and time – of which only which is “high” – a 15% premium on the long term bond rate for certain types of exploration expenditure.

Such expenditure is very risky (again check the shares prices of exploration companies for evidence – or at least the ones that I have owned) – and only accounts for a small part of total project expenditure.

Having uplift factors linked to a base bond rate means that the comments above about 1980s interest rates are totally irrelevant – the tax has been designed well to deal with changing rates.

Finally, the insidious concept of tax “expenditures” – i.e. it seems that increasingly this means any scraps the Government leaves the taxpayer – is embedded in the above view (to the extent it is completely coherent).

C’mon E&P industry – if the AFR is not on your side – you will lose.  You have a simple case – conventional crude oil historically made high returns – gas never really has and does not now.  Oh, and PRRT does not apply in what are now the genuine alternative investment destinations for the likes of Chevron – its massive land bank in the Permian.

Commodity prices

Crude prices were fairly flat overnight, with Brent closing at US$55.74 and WTI rising slightly to US$53.42.  OPEC has just hinted that it will extend its current 6 month freeze – which seems to be required if very high inventories start to be materially run down in the middle of the year (when the Saudis in particular will be consuming a lot of their own oil in electricity generators feeding air conditioners).

Henry Hub continued its slide – falling ~3% to US$2.84.

LNG and international gas

A consortium of French energy company Engie, Japan’s Mitsubishi and Japanese shipping company NYK Line are currently taking delivery of a Korean constructed vessel which is a global first – a LNG bunkering vessel that will operate out of Europe to supply a growing fleet of ships that use LNG as a fuel.

Presumably variants on this ship could also supply much smaller gas markets than do the large scale FSRUs that we commented on yesterday – e.g. small portside power stations, etc.

Company news – BHP and Origin Energy (ORG)

ORG’s long serving CEO Grant King, who retired last year, has quickly added what is arguably the bluest chip NED appointment available in Australia – a seat on the BHP Board.

Serendipitously, this came only two days after ORG had taken a write-off of A$3B (before tax).

Company news – InterOil

On the second time around, shareholders in InterOil have just voted for its takeover by Exxon Mobil (XOM) – by a commanding 90% majority.  The company’s founder Phil Mulacek still seems to be whingeing about this.  We consider that InterOil shareholders could in fact be very lucky – if the PNG Highlands based well Meruk-1 is as good as seems possible, then the lowlands licences held by InterOil could be worth less than thought only 6 months ago.

Quote of the day

As we enter the weekend, a couple more quotes from Rodney Dangerfield:

“I drink too much. The last time I gave a urine sample it had an olive in it.”

“I say ‘no’ to drugs. Whenever someone asks me for some of my drugs I say, ‘no’.”

 

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