Today’s Blog – Wednesday 24th May 2017

Editorial

The Trump administration has now put a more fulsome (i.e. longer than the earlier one page effort) budget to Congress.  Unexpectedly this contained US$16.6B of revenue over the next 10 years from selling down half of the crude stored in the strategic petroleum reserve (SPR).

We think that the White House’s budget proposals will not carry a lot of weight over on Capitol Hill and therefore consider that a lot of water would have to flow under the bridge before this ever happened.  The former colleagues of the Secretary of State – as well as the rest of the not-afraid-to-lobby US oil industry – and the Defence establishment – might have something to say about this new long term overhang on oil markets.

Some would say – “its only 100,000 bopd, that won’t move markets“.  However, we think the psychological impact would be higher than the arithmetical one.

Also coming out from Washington was news of a move which we have flagged before – the opening up of what many consider to the most prospective conventional crude oil ground in the world – the coastal strip of Alaska’s Arctic National Wildlife Refuge.  The potential billions of barrels located here are much more material than half of the SPR. However, even if non-legislative opposition to exploration/development here is overcome, it would likely be 10 years to bring it to market.

Given the high cost location, likely strong social opposition (including potentially significant shareholder groups) – and this timeframe – this oil might never be developed for economic and social rather than legal reasons.

And over-riding all of that is the echo of Sheikh Yamani’s famous comment – “the Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil”.  If the impressive solar/wind cost reduction trajectory continues – how will that affect Board decision making on making FIDs in ~10 year’s time on massive projects such as this?

Commodity prices

Crude prices have risen steadily over the last two days, closing last night at US$54.19 in London and US$51.47 in New York.  There is now a strong consensus that the imminent OPEC meeting will deliver a 6-9 month cut extension – and last night the API estimates of inventory reductions were bullish.

Henry Hub has oscillated +/- 2% over the last two days – closing at US$3.23 last night.

LNG and international gas

We recently reported on a successful flow test on sub-sea methane hydrates currently being undertaken by the Japanese Government.  The Chinese have now gone one-up on that – announcing a much higher (but still uncommercial) flow rate of what we understand was ~0.5 mmmscf/day.  They even published a picture of the flare – always a good sign of confidence.

Methane hydrate resources are massive – and often “owned” (nine-dash line anyone?) by major consumers.  A low probability tail-risk maybe for the industry – but massive in its disruptive effect on existing conventional gas resources if it was to come good.

Company news – Woodside Petroleum (WPL)

WPL provided the market with an updated corporate strategy presentation yesterday. This was a cautious focus on dollars rather than barrels in the short term (hurray! say many shareholders) and a clear indication that no greenfields LNG projects would be FID’ed for 10 years (a timeframe however that plays into our question above).

As we flagged last week, over the medium term, WPL shareholders could arguably make more money from the success of its infrastructure management skills over its E&P ones – but does it make sense to maintain the current corporate structure to do this?

Company news – Origin Energy (ORG)

The Australian Financial Review (AFR) today provided an update on the parties who are said to be interested in a trade sale of ORG’s upstream Lattice Energy business.  No new operator names emerged – although the apparent interest of various US PE groups in partnering with ASX listed companies was emphasised.  None of the mooted buyer combinations appeared to have a particularly compelling competitive advantage however.

Calling all Chinese billionaires – please come and buy us!

Quote of the day

Although we have expressed some doubts above on the White House’s budget passing skills, we have to acknowledge The Donald nailed it with yesterday’s tweet:

“I won’t call them monsters, because they would like that term. They would think that’s a great name. I will call them from now on losers, because that’s what they are. They’re losers. And we’ll have more of them, but they’re losers. Just remember that.”

 

 

 

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