Today’s Blog – Monday 22nd May 2017


A couple of news stories from late last week illustrate the still very strong demand for “low risk” infrastructure assets – and that such assets are not necessarily risk-free.

Origin Energy (ORG) has just announced the sale of a suite of pipeline assets in central Queensland to Chinese/Singapore Government owned energy infrastructure company Jemena.  The price is A$392M.  In a classic example of how numbers can be manipulated, the parties differ on what multiple of EBITDA this price represents – the seller says it is 17 and the buyer says it is much less.

A certain infrastructure asset sale at an even higher EBITDA multiple took place in 2015 – the acquisition of the Iona Underground Gas Storage business by QIC from Energy Australia for A$1.7B.  On Friday news emerged that QIC has initiated court action in Victoria over this transaction – basically saying that Energy Australia wilfully misled in in the sale process for this asset and it is now seeking nearly A$1B in compensation.

That is, more than half the value of this “low risk” infrastructure asset is in dispute.  The parties involved here are pretty gold plated – as are their advisers such as Lazard on the sell side – and Management on both sides.  There seems to have been either a gross failure of due diligence or deception on a hugely material scale.  Boards across the country would presumably be wondering what horrors might emerge from proposed transactions their Management teams are recommending to them.

In our view this dispute has consequences beyond the rather small scale of media coverage it has attracted to date.   For instance, energy regulators and politicians should be thinking about whether there is less gas deliverability capacity from Iona than previously thought – and what that means for meeting e.g. peak winter demand in Victoria.

Commodity prices

Crude had a good week last week – rising 5% to close at US$53.61 in London and US$50.33 in New York (a three week high).  With an OPEC meeting imminent, the Saudis particularly have been issuing strong signals of a significant extension – and possibly even deepening of the current production cuts.

Meanwhile, over in the US oil patch, the rig count just continues to climb. Friday’s BHI weekly report indicated a rise of 8 oil rigs and 8 gas rigs.

Henry Hub had a poorer week than crude – down 5% – closing at US$3.26.

LNG and international gas

We have previously noted that the only global LNG project to make a FID last year was the rather obscure (and smaller scale) Woodfibre project in British Columbia.  This was facilitated by a degree of vertical integration into Chinese gas markets that its Indonesian billionaire owner delivered through various business interests.

Last week Reuters reported on ongoing developments in this vertical integration process, with plans for a small scale (2 mtpa) regas facility in Guangzhou being developed by Woodfibre and a local gas retailer.  The owners of the other “100” projects looking for FID might take note of what it takes to move forward gas resources into long LNG markets at present.

Governments, etc

Balance of power holder in the Senate, and all round expert in everything, Nick Xenephon, has added his input to the local Australian gas crisis debate.  According to him, the price here should be A$5 and its all the fault of the gas companies holding back developments – “use it or lose it!” he has cried.

Now, apart from the rather distant (and somewhat more than A$5 to develop and deliver) Browse resources, we look forward to Xenephon telling us where these cheap resources are.  Then we could take a class action against the companies involved for wilfully missing out on profits for shareholders.

Company news – Santos (STO)

Late last week STO sent emails to its shareholders inviting them to “support Australian natural gas”.  Details were scant, but presumably this represents a timely effort to counter the scaremongers, lock-the-gaters, anti-frackers, etc, who otherwise have been much better at using modern social media to advance their agenda than has been the industry itself.

Quote of the day

Presumably the following recent quote will not be on the front page of the forthcoming Aramco prospectus:

“We are planning to be leaving totally the dependency [on oil] that we have been living for the last 40, 50 years. Hopefully by even 2030, I wouldn’t care if the oil price is zero, although I would like it to be $100 and $150.” – Mohammed Al-Jadaan, finance minister of Saudi Arabia

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