Fracking LNG Gas Bubble Has Burst

2016 12 04 – A horror rout on the share markets has seen billions wiped from fracking companies between 2013 and 2016.

The continued bad news from the troubled LNG gas sector has hit a crescendo. There’s  even talk of Mergers & Acquisitions M&A to clear debt, sort out the taxes & royalties through the PRRT Tax Inquiry and take stock now the tide has gone out.

OPEC dropping production this week signals the end for some Australian fracking companies. The LNG sector needs some Mergers & Acquisitions to sort through the issues associated with the massive growth of the industry.

OPEC’s move puts the new oil price around the low $50’s for the forseeable future, maybe a year or more, to get through the world oil & gas glut.

The problem for Santos, and the circling Chinese firms ENN & Hony Capital Group investors, is that they went through some serious blood letting, sacking long term, valued workers and cutting costs to operate with a price of $55.

OK the price they can sell it is $50 but the cost to produce it is $55

Coal Seam Gas is a Net Loss Industry

Santos have racked up $4.7 billion in debt and billions more in write downs. Management will have to sell some more assets, even in a buyer’s market.

Santos just bought into PNG Papua New Guinea and are concerned with supply from their Queensland gas fields.

Hedging against the oil price is too little, too late. Management were spending $10,000 a minute 24/7 for years.

The PRRT Inquiry reports in April. As the gist of this story goes, the LNG ship has already sailed. Watch the  gas industry deflate between now and tax time.

Australian Treasurer Morrison, after announcing a PRRT Tax Inquiry,  must negotiate his way through the $187 billion that the has industry claims to have in tax credits. If they pay 30% in tax, they can earn $561 billion before they pay a cent.

Politicians saying “Gas Shortage” when there is a Global Gas Glut are not working in the national interest.

Gas Parity Pricing 101 Aussie manufacturing, agriculture & tourism sectors lost their competitive advantage in the global market – Gas is Net Loss.

The negative impacts on tourism and agriculture, the looming court cases,  etc … and the taxpayer funded clean up of the benefical waste the company leaves behind are not being considered or covered in PRRT tax.

If tourism loses more than 10% of their customer numbers then there are proportionately more businesses cease to be viable. Gas Industry does impact more than 10% of tourism operators – who wanats to holiday in a gas field?

Other signs that the LNG Bubble Has Burst is the shake up in LNG contracts.

Would you buy a business where the customer sets the price?

Japan and South Korea are under the impression that LNG has unlimited supply. By renegotiating the ‘destination clauses’ of their LNG ships leaving Gladstone, they create an international trade in gas.

The Asians want the gas price set free from oil. So Santos will lose their hedging.

The Gas Industry is having problems on their supply side.

Underperforming gas fields, massive land acquisition of some of the worst affected sites (Shell / QGC own 0.04% of Queensland’s land mass), court cases with more contamination cases looming once farmers speak up against their Confidentiality Clauses – the list goes on.

A Scientific Fracking Inquiry is underway in Northern Territory where a massive taxpayer funded gas pipeline needs to be built to get their gas to Gladstone.

Victoria put their clean brand ahead of the risky industrialisation of farmland and banned fracking.

Politics in South Australia & Western Australia is bristling now the gas industry has come to town.

The gas industry group Australian Petroleum Production and Exploration Association director – NT Matthew Doman wrote to new NT Chief Minister Michael Gunner the day consultation closed for the terms of reference, asking for the word “adverse” changed to the less negative “taking into account” when considering the impact of unconventional gas development.

APPEA changed the Terms of Reference to: “Provide advice on whether hydraulic fracturing of unconventional reservoirs can be safely and effectively undertaken under best-practice conditions, taking into account impacts on the environmental, social and economic values of the Northern Territory.”

The gas industry’s main competitor is … King Coal.

The gas industry is trying to expand their market and has begun lobbying for gas fired power stations, even though they are more expensive than coal.

Ironically the gas industry is up against King Coal in the electricity market.If natural gas prices trade at a discount to coal there is an economic incentive to switch to natural gas.

The existing infrastructure investment in coal is our transition, the taxpayers have already paid for it. Currently gas & coal share 33% of the market each. By 2020, only 22% of electricity will be generated from coal.

Political Risk in investments is assessment of the risk of political change. African coups set the benchmark for Political Risk assessment.The development of the CSG industry is another prime example.

Perhaps the Chinese investors think the government will arrest the protestors. If they haven’t taken notice of Political Risk of change in the west, then their investment is at risk.Seriously, ENN & Hony Capital should be made aware of the Polticial Risk being on par with the worst African examples.

Santos are currently progressing their land clearing and Water Treatment plant in the gas field in the Pilliga Forest, near Narrabri, NSW Australia.

They need to develop their NSW investment in gas at Pilliga, either for the relatively small amount of gas the Pilliga gives, or to make the investment attractive to buyers.

The Politicial Risk at Pilliga is enormous – too much for my portfolio. Let’s hope the Chinese don’t fall for the spin and buy it.

 

 

 

 

 

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