Today’s Blog – Tuesday 7th March 2017

Editorial

Last week US mid-stream giant Kinder Morgan announced the sell-down of a 49% stake in its ELBA LNG project located in Georgia, for proceeds of US$385M.  The purchaser was private equity fund EIG.

Regular readers will have noted EIG’s recent emergence in the Australian oil patch – as a strategic shareholder (and prospective further debt financier) of mid-cap Senex Energy (SXY).

Australian liquefaction assets, in Western Australia, the Northern Territory and Queensland, are currently owned only by E&P companies and to a much lesser extent gas buyers.  No infrastructure investors, PE, pension funds, etc, have yet invested in this space.

In our view some or all of these would do so – for an appropriately structured deal where risks and rewards were shot home to those best placed to deal with them.

The lack of deals is thus more likely to represent sloth, inertia and cultural issues on the part of the current liquefaction owners – combined with messy joint ventures and complex governance processes.

However, in the medium term the value-liberation which could come as assets were moved from high to low cost of capital parties would be significant.  We are sure the likes of EIG would like to invest in this space in Australia as well as the US.

Commodity prices

Crude prices closed pretty flat yesterday, with Brent up a tad at US$55.99 and WTI down a smidge at US$53.19 (note the precise trading terms).

Henry Hub was up ~1.4% to US$2.87.

LNG and international gas

Reuters reported late last week about a crash program being introduced in Northern China to substitute gas for more polluting fuels at the household and smaller business level – with a view to making a difference to the country’s horrendous air pollution by as early as next winter.  Given the size of the population and the economy, a lot of extra gas demand could be created.

The competition to capture that new market will come from many sources. One of those is another possible pipeline from Russia – in addition to the mighty Power of Siberia pipeline which could start delivering gas by the end of this decade (although more timing blow-outs seem likely).  Last week Gazprom’s deputy head said to the media that the company was still pursuing a second pipeline project (the Altai gas pipeline connecting Western Siberia with Western China).

Disruption

Last week BP struck a deal to acquire a bio-methane business in the US for US$155M. This involves extracting landfill gas and then selling it as a transportation fuel.  This is different than the standard usage for landfill gas as a source of fuel for on-site power generation.

The Majors’ differing plans to address energy sector disruption are arguably still small scale – but as a minimum options are being created.

Company news – Santos (STO)

STO today reported that it had received calls for some resolutions at its forthcoming AGM (due in early May) from a small handful of activist shareholders.  Basically they were asking for more disclosure on the company’s plans to deal with greenhouse emissions, etc – with an eye on the position in 2035.

We suspect Management is more concerned with bonuses which tie into cutting costs next week.  Recently STO has not had the fiscal luxury to create the sort of options noted above for BP – which begs the question – by the time it does, will it have missed some boats?

Quote of the day

The peak CERA industry conference is currently being hosted in Houston.  The head of the IEA, Fatah Birol, took the opportunity to remind everyone that the lack of investment in the oil patch over the last few years will have almost certain commodity market consequences:

“We have seen two years in a row of huge declines in upstream investment. If this is the case in 2017, if we don’t see substantial rebound, we may well see that the market tightens around 2020 and the spare production capacity shrinks.”

 

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s