Today’s Blog – Thursday 20th April 2017


Yesterday the Northern Territory Government announced that it was contributing $250,000 towards a study into the potential to add another train to Darwin LNG.  Various owners of offshore gas resources will put in a massive $375,000 as well.  These include Santos, Engie, Shell, Origin Energy, etc, etc – basically everyone who has stranded gas within 1,000 kilometres.

The NT Government has dressed this up as being all about creating construction jobs, economic activity, etc, etc.  In our view the real intention is to provide cover for an indefinite extension of the Territory’s current “moratorium” on onshore fracking (which effectively has closed down the entire onshore industry outside relatively small current production in the Amadeus Basin).  It seems that, like Victoria, offshore gas is lovely stuff and onshore gas is nasty.

This move likely kicks the can that is the moratorium down the road past the next election.

But what about the chances of a second train you ask?  Our view:

  • If the gas companies thought this was real then they would not need Government money and a lot more than $650k would be required.  Maybe they get some marginal benefit in protecting retention lease statuses.
  • DLNG Train 2 is somewhat lower down the LNG development merit order than about 100 other projects.  Feedstock gas is distant, lean, acid and held by disparate owners.  The likes of Qatar have massive competitive advantages in supplying an LNG market in which buyers have the upper hand.  (We still think DLNG Train 1 back-fill will take place – the economics are completely different).
  • The potential supply source companies to DLNG Train 2 would take a lot of cat-herding.  And for instance include the likes of CNOOC – not necessarily to be welcomed by DLNG’s current Japanese partners.
  • The owners of onshore licences will suffer from this process.  That includes Macquarie Bank, Santos, Blue Energy, Pangaea, Origin, Falcon, etc.  However, the biggest loser will likely be pipeline company Jemena – its already very challenged NGP pipeline project will struggle even more for customers.  Oops, thats close to $0.5B that it may have to write-off in the next few years because of this Government policy.

Commodity prices

Oil prices fell sharply last night, with Brent down ~3.3% to US$53.08 and WTI falling ~3.8% to US$50.44.  The main driver appeared to be a disappointing inventory report from the EIA.

However, the reaction seemed somewhat over-blown to us – with crude falling by 1 mmbbls (plus a SPR draw of 0.2 mmbbls), gasoline up by 1.5 mmbbls and distillate down by 2 mmbbls.

Henry Hub closed up ~1.6% to US$3.19.


Yesterday’s Canberra meeting between the Prime Minister and leaders of the Queensland LNG companies delivered only a damp squib.  The only tangible outcome appeared to be increasing public reporting of key price and volume information.    The Government’s problem is that its armoury contains nuclear weapons that entail sovereign risk – and then nothing but pop-guns.

Oh, and the Federal Government said it is looking again at building a pipeline to Northern WA. Fat chance.  And interestingly given moves by the likes of AGL, a FSRU would be a far cheaper gas delivery mechanism than that.

Company news – Santos (STO)

STO put out its quarterly report this morning, no doubt feeling like it dodged a bullet in Canberra yesterday.

The company’s poor strategic position was outlined in depth in today’s Australian Financial Review by respected columnist Matt Stevens.  However, he did not mention the company’s disgruntled ~15% shareholder once – perhaps Chinese activist investors are invisible compared to e.g. Americans.  One can readily imagine that if Elliot Management had a stake of this size and was demanding Board seats it would attract more journalistic attention.  Our view on this Chinese stake is like the old saying in Westerns – “its quiet, too damn quiet…”

One last thing on STO – its quarterly report didn’t exactly say much about a current drilling program to the North of the NT which is intended to delineate gas for Darwin LNG train 1 backfill.   The “vibe” of the reporting (in the absence of any facts) appeared to be negative.

Quote of the day

A pithy, but not very cheery, recent view from well known investor, Bill Gross:

“Equity markets are priced for too much hope, high yield bond markets for too much growth, and all asset prices elevated to artificial levels that only a model driven, historically biased investor would believe could lead to returns resembling the past six years, or the decades predating Lehman. High rates of growth, and the productivity that drives it, are likely distant memories from a bygone era.”

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