Today’s Blog – Monday 27th February 2017

Editorial

Last week saw a massive reserves write-off by oil industry leader Exxon Mobil (XOM). The majority of the de-booked reserves were 3.5 billion barrels from its Canadian oil (or tar) sands assets.

XOM has not been the only company to take a bit hit on its oil sands assets recently. Basically at the oil prices prevailing in 2016 the high cost of developing and producing these expensive barrels would have rendered them uneconomic.

It is often forgotten that heavy oil deposits of this type – in Canada and Venezuela – host more oil than the conventional reservoirs in Saudi Arabia.  However, if the Super-Majors cannot get the stuff out and make a buck – then who can?  And we don’t think the answer is Venezuelan NOC PVDSA – which has been ruined by Chavismo policies in its be-knighted country.

But maybe there are some parties who could operate these assets more efficiently – the large mining companies like BHP and Rio – who have demonstrated relentless and wildly impressive cost cutting in the likes of their Pilbara iron ore operations.

It is often said that the Super-Majors are good at doing some things (e.g. deep offshore oil and LNG mega-projects) but bad at doing others (e.g. coal-bed methane and US tight gas).  Tar sands may be one of the latter.

To us there is a massive opportunity for the likes of BHP to acquire more of its beloved “Tier one” assets, at a good price, in a low sovereign risk location – and apply mining not oil-field skills to produce tar sands more cheaply than the likes of Exxon can.

However, we don’t think they will – the investment and management skills would arguably need to come form BHP’s mining team not its oil and gas team – and the two are not necessarily known for their deep love and respect for each other.

Commodity prices

Oil prices rose by more than 1% on Thursday and then fell by nearly as much on Friday – closing at US$55.99 in London and US$53.99 in New York.  As usual recently, the week closed pretty much as it had opened.

The weekly inventory numbers from the EIA report were the best for some time – crude up only 0.6 mmbbls, gasoline down 2.6 mmbbls and distillate down 4.9 mmbbls.  However, a relentless liquidation of the current record global inventory stocks will be required to get oil to move above its current low-to-mid US$50 levels.

The weekly rig count from BHI was also somewhat less than has been the case for the past few months – oil rigs up by 5 and gas rigs down by 2.

Henry Hub firmed up at the end of last week at US$2.79 – but was still down 1% for the week.

LNG and international gas

A few years ago various Japanese companies and Government bodies managed to flow gas from sub-sea frozen methane hydrate deposits and in April are going back to try an extended production test.

The theoretical extent of methane hydrate resources is immense – as are the technical and commercial challenges to developing it.  But if this works – the world gas market will change very significantly.

Company news – Cooper Energy (COE) and APA Group

COE and APA have today announced the entering into of a Heads of Agreement over the sale by the former to the latter of its Orbost gas plant in Victoria.  The HoA is intended to be turned into a binding Agreement in the next couple of months.  Its key terms are that APA will reimburse COE its own costs for the plant as is and then spend A$250M on its subsequent development to make it ready for gas from COE’s Sole asset (and potentially other developments).

The parties have presumably got some idea as to what rate of return APA will want on its investment – likely to be much lower than COE’s own cost of capital.  This leaves COE with 100% of the Sole field – which it seems possible it could develop itself without having to sell-down too early.

All up this deal is eminently sensible – and it is arguably “being sensible” that has allowed COE to out-perform most of its peers in recent times.

Quote of the day

Berkshire Hathaway issued Warren Buffett’s annual letter to shareholders over the weekend and as usual it provides a lot of fare for those seeking good quotes such as ourselves.

Like other media, we note Buffett’s greater optimism over the current State of the USA compared to You-Know-Who:

“From a standing start 240 years ago – a span of time less than triple my days on earth – Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers.”

 

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