NEWS OF THE DAY:
Oil Search Urged to Keep Talking After $6 Billion Takeover Snub
James Thornhill, Bloomberg, July 21, 2021
Oil Search Ltd. has been urged by investors to pursue takeover talks after rejecting an initial approach from Santos Ltd. to create a A$22 billion ($16 billion) liquefied natural gas export giant.
The Sydney-based producer, with oil and gas assets in Papua New Guinea and a development project in Alaska, described an all-share proposal which valued the company at A$8.8 billion as too low, though remains open to discussions.
“This is only the start, not the end,” John Ayoub, portfolio manager at Wilson Asset Management International Pty, which owns shares in both companies, said by phone. “I’d expect at a minimum that dialog is to be ongoing, with a deal to be explored further.”
TotalEnergies SE and Exxon Mobil Corp., partners with the target in projects in Papua New Guinea, could be potential alternative suitors, according to Allan Gray Australia Pty., which holds Oil Search and said it was supportive of talks to sell part or all of the company.
Oil Search shares rose 6.3% in Sydney trading Tuesday, the most in almost five months. Adelaide-based Santos declined 5%, to the lowest since Jan. 6.
“Santos continues to believe that the merger proposal represents an extremely attractive opportunity,” the company said in a statement on Tuesday. A combined entity would rank among the world’s top 20 oil and gas producers by market capitalization and have a portfolio of long-life assets, Santos said.
Oil Search, which on Monday announced the abrupt departure of Managing Director Keiran Wulff, has come under pressure from investors to deliver better returns after it plowed cash into its Alaska project.
The target agrees with Santos “that there is strategic logic in a combination of the two companies,” and would consider a higher proposal, Oil Search said in a statement.
“A higher bid could come from Santos,” said Jamie Hannah, deputy head of investments and capital markets in Sydney at Van Eck Associates Corp., which owns shares in both companies through its exchange-traded funds. “Oil Search is trading at very low levels and Santos can afford to bid more.”
Oil Search saw its value plunge in early 2020 as oil slumped on weaker demand as a result of the global coronavirus outbreak and shares remain well below pre-pandemic levels even as fuel prices have recovered.
Both Santos and Oil Search are junior partners in the Exxon-operated PNG LNG project, which produces as much as 8 million tons of LNG a year. Oil Search is also a partner TotalEnergies-led Papua gas project in Papua New Guinea.
OIL:
The Real Reason Oil Prices Aren’t At $80
Yahoo Finance, July 22, 2021
The UAE’s awarding last week of a slew of huge drilling contracts aimed at increasing its crude oil output capacity from around 4 million barrels per day (bpd) to 5 million bpd underlines that the principal market risk from an oil trader’s perspective is still skewed towards further supply against a backdrop of an uneven bounce back in demand following the height of the global COVID-19 crisis in 2020. In the short- and medium-term, significant supply increases are likely to come from ongoing failures in the OPEC decision and implementation structure, and in the longer term from a potential flood of new crude from Iran in the official oil markets and increases from non-OPEC crude producers.
This trader-centric view is the basic reason that, despite the huge recent buying in the crude oil market by some leading investment banks and their fund manager clients (and their frantic bidding of oil on dips) with a view to hitting the much-vaunted US$80 per barrel point, crude has failed to meaningfully threaten that level or the once-steady US$100 per barrel price that prevailed for years before the Saudis launched the 2014-2016 Oil Price War. This inability to threaten these key price levels is also a function of the political reality that, however much the supposedly environmentally-friendly U.S. President Joe Biden might, in theory, be happy to see oil prices go higher to narrow the retail pricing discrepancy between it and more ‘green energy’ alternatives, in the cold light of political reality the fact remains that he is acutely aware of how damaging for any presidency such a price rise would be.
As was very clearly demonstrated under the government of former President Donald Trump – but pertains to all U.S. presidencies of recent years – the top person in the White House does not, in general, want oil prices on the higher side. The economic reason for this is that for every US$0.01 that the U.S.’s national average price of gasoline rises, more than US$1 billion per year in discretionary additional consumer spending is estimated to be lost. As a general historical rule of thumb, it is estimated that every US$10 per barrel change in the price of crude oil results in a US$0.25 change in the price of a gallon of gasoline. Based on more recent historical precedent, a US$90-95 per barrel of Brent oil price equates to around US$3 per gallon of gasoline and a US$125-130 per barrel of Brent equates to around US$4 per gallon of gasoline. The ‘danger zone’ for U.S. presidents starts at around US$3.00 per gallon and at US$4.00 per gallon they are being advised to pack their bags in Pennsylvania Avenue or start a war to divert the public’s attention. The point was underlined by Bob McNally, the former energy adviser to the former President George W. Bush that: “Few things terrify an American president more than a spike in fuel [gasoline] prices.”
This is the key reason why an unofficial White House oil price cap of around US$75-80 per barrel of Brent has operated since the end of the 2014-2016 Oil Price War. On the only notable occasion when the Brent crude oil price rose significantly above the US$70 per barrel level for any sustained period and looked like threatening the cap – in the second half of 2018, with the Saudis ramping up prices in concert with Russia – President Trump sent the first threatening message in a speech aimed at the Saudis. The message made clear that in the U.S.’s view Saudi Arabia was contravening the foundation 1945 agreement on Bitter Lake between Roosevelt and Abdulaziz and, therefore, put at risk the U.S. support of the Al-Saud ruling family as the monarchy of Saudi Arabia. This came shortly after a similar comment from Trump in a speech before the U.N. General Assembly: “OPEC and OPEC nations are, as usual, ripping off the rest of the world, and I don’t like it. Nobody should like it,” he said. “We defend many of these nations for nothing, and then they take advantage of us by giving us high oil prices. Not good. We want them to stop raising prices. We want them to start lowering prices and they must contribute substantially to military protection from now on.”
Oil’s inability to break these key levels is also a significant reason why the U.S. shale oil sector producers and their Wall Street backers are under no government pressure to ramp up production right now. If Brent crude oil started to rise decisively above the US$80 per barrel level for a sustained period and looked like it was heading for US$90-100 per barrel, though, this status quo would likely change very quickly. At the same time, huge pressure would be brought to bear by the White House on Saudi Arabia and the rest of the OPEC producers to increase production and lower oil prices, as has been highlighted repeatedly by OilPrice.com.
Aside from the domestic political reasons why the U.S. government is happy to accommodate a big increase in the UAE’s crude oil output capacity in a relatively short time, the Emirates’ ambition also aligns perfectly with Washington’s new policy in the Middle East as a whole, which began with the ‘relationship normalization’ deals forged between the U.S., Israel, and various Arab states in the last days of the presidency of Donald Trump. In its most basic terms, this policy is aimed at engaging with anchor Arab states that are not already too tied into the rampant China-Russia-Iran power axis, whilst also trying to at least partially loosen the grip of Beijing and Moscow on Iran (and therefore Iraq). If the policy is successful – although the part of it relating to Iran and Iraq seems also certain to fail despite clearly being worth a try – the U.S. will also be able to further reduce any significant dependence on Saudi Arabia, at least whilst it is under the control of Crown Prince Mohammed bin Salman. In all eventualities, though, the UAE is vital to the U.S. plans, which is why it was one of the first countries to be approached for the normalized relations program.
Related: Oil Dips After EIA Reports Crude Inventory Build
Since that point, the UAE has broadened and deepened its relationship with India – which the U.S. is sponsoring as the prime regional political and economic alternative to China – embarked on a huge economic expansion project (‘Operation 300 Billion’), established a new global benchmark trading platform for its oil (ICE Futures Abu Dhabi platform) in partnership with the U.S.-based Intercontinental Exchange, and begun to expand the Fujairah oil export hub as a counterpoint to Iran’s new Goreh-Jask oil export route. More broadly, the UAE has also removed the previous impediments to the speedy realization of its oil ambitions by reorganizing its Supreme Petroleum Council and has increased its activities as part of a joint intelligence initiative between the UAE and Israel (and, by extension, the U.S.) of the purchase of commercial and adjunct residential properties in Iran’s southern Khuzestan province. The area is a vital hub for Iran’s oil and gas reserves and the influx of UAE-registered businesses, particularly those based in Abu Dhabi and Dubai, but in large part funded by Israel, provides a forward operating platform for various ongoing intelligence-gathering operations. Building on this, last month saw a landmark US$510 million deal with Italy’s Saipem to expand the capacity of the UAE’s flagship Shah Sour Gas Plant, which will ensure that the UAE becomes self-sufficient in gas. This is aimed at safeguarding it from any external pressure that might be brought upon it by the big gas powers in the region, notably Iran, were it to lack this self-sufficiency.
Exactly the same theme of major contracts being given to companies of countries supporting the U.S.’s new policy in the Middle East is seen in the awarding last week of US$764 million in drilling contracts aimed at boosting crude oil output to 5 million bpd as soon as possible on or before 2030. The UAE’s principal oil firm, the Abu Dhabi National Oil Company (ADNOC), through its Offshore trading unit, awarded the contracts to U.S. companies Schlumberger, and Halliburton, in addition to its own ADNOC Drilling. The contracts will provide integrated rigless services across six of ADNOC Offshore’s artificial islands in the Upper Zakum and Satah Al Razboot fields, according to ADNOC. “These important awards for integrated rigless services will drive efficiencies of drilling and related services and optimize costs in our offshore operations as we ramp up our drilling activities to increase our production capacity and enable gas self-sufficiency for the UAE,” concluded ADNOC Upstream’s executive director, Yaser Almazrouei, last week.
GAS:
Japan To Cut LNG, Coal In Power Sector As It Bets On Renewables
Tsvetana Paraskova, OilPrice.Com, July 22, 2021
The world’s largest importer of liquefied natural gas (LNG) and one of the biggest importers of coal, Japan, aims to significantly raise the share of renewable power in its electricity sector and reduce its reliance on fossil fuels, according to a draft energy policy plan through 2030.
Japan, like many other developed nations, aims to achieve net-zero emissions by 2050, or as Japan’s Ministry of Economy, Trade, and Industry (METI) said last month “a carbon neutral society by 2050.”
Under the draft new policy, Japan will target to have renewable energy sources make up between 36 percent and 38 percent of the country’s power generation by the end of this decade. The previous target was to have renewable energy generate between 22 percent and 24 percent of Japan’s electricity mix by 2030.
The new plan hasn’t changed the target for nuclear power generation, which was left at 20-22 percent of electricity generation. But the share of coal is now targeted to drop to 19 percent by 2030, from 26 percent now, while the share of LNG is planned to decline to 41 percent from 56 percent.
The world’s top LNG importer aiming to reduce the use of the super-chilled fuel for power generation is likely to rattle the market.
According to estimates from Lloyd’s List Intelligence, Japan was the single largest importer of LNG in the world in the first half of 2021, holding a 20.49-percent share of all LNG imports globally. To compare, all 27 members of the European Union (EU), plus the UK, combined, accounted for 20.94 percent of global LNG imports.
The fastest-growing market for LNG, China—which is expected to soon surpass Japan as the largest LNG importer—accounted for 18.22 percent of LNG imports in the first half this year, Lloyd’s List Intelligence data showed.
Reduced future use of coal and LNG in Japan is set to create disturbances in the Asian markets of those fossil fuels, especially for Australia, which supplies two-thirds of Japan’s thermal coal and is Japan’s top LNG supplier, too, Reuters columnist Clyde Russell notes.
MINING:
US judge to rule by July 29 on request to block Lithium Americas mine
Reuters, July 21, 2021
A U.S. federal judge said on Wednesday she will rule by July 29 on whether to temporarily block Lithium Americas Corp from excavating its Thacker Pass site in Nevada, which could become one of the country’s biggest lithium mines.
Environmentalists sued earlier this year to block the proposed lithium mine, arguing that it could threaten sage grouse habitats and that the former President Donald Trump’s administration erred when it approved it in January.
Top of Form
Chief Judge Miranda Du of the federal court in Reno held a Wednesday hearing to determine whether excavation work at the mine site should first be blocked while she considers the broader question of whether approval should have been issued in the first place.
After a nearly three-hour hearing, Du said she will rule by next Thursday. The company had previously agreed to pause digging through that date, pending the court review.
Environmentalists hope to stop Lithium Americas from minor excavation work needed to determine whether the land holds historical import for Native Americans and others. The project cannot move forward until that work is complete.
Du, an appointee of former President Barack Obama, gave little hint as to which way she may rule and asked probing questions of attorneys for the Vancouver-based company, environmental groups, and the Bureau of Land Management, which is supporting Lithium Americas.
Thacker Pass would be one of the largest lithium mines in the United States if completed, producing 30,000 tonnes of lithium.
Laura Granier, an attorney for Lithium Americas, argued that temporarily blocking the project would harm President Joe Biden’s efforts to address climate change, including promoting a switch to cleaner electric vehicles which use lithium-based batteries.
Talasi Brooks, who represented the environmental groups, told Du that any excavation – even if small – could cause irreparable harm to the area’s wildlife.
Rival projects from Pioneer Ltd and Piedmont Lithium also face opposition.
POLITICS:
Senate braces for a nasty debt ceiling fight
Naomi Jagoda, Jordain Carney, Sylvan Lane, The Hill, July 22, 2021
Republicans are digging in on the federal debt limit, warning Democrats that it will be up to them to avoid a default as President Biden pushes for trillions more in spending.
GOP senators are taking a firm line as Democrats plot a path for their $3.5 trillion spending measure, which the party plans to pass with budget reconciliation rules that will prevent the GOP from blocking it with a filibuster.
Given those plans, Republican senators say they won’t lift a finger to help Democrats raise the debt ceiling.
“I’m not sure why there’s much of an incentive right now given what the Democrats are doing, trying to run roughshod over the minority in the Senate, to help them,” said Sen. John Thune (S.D.), the No. 2 Senate Republican.
Thune added that if Democrats are going to use a go-it-alone approach to push through a sweeping spending package, which is expected to include other priorities like immigration reform, then Republicans believe “the debt limit can ride on it, and they can own it all.”
Senate Minority Leader Mitch McConnell (R-Ky.) previewed the GOP tactics to Punchbowl News, in remarks confirmed by his office.
“I can’t imagine there will be a single Republican voting to raise the debt ceiling after what we’ve been experiencing,” he said.
The government will reach its spending limit on July 31, though the Treasury Department will be able to shuffle funds for an additional period to prevent the U.S. from breaking the ceiling. Actually, doing so would cause a severe disruption to markets and the economy, as the U.S. government would be unable to meet demands from its creditors and pay its bills.
The limit on how much debt the federal government can owe has been suspended for nearly two years thanks to a bipartisan deal struck under former President Trump. The Congressional Budget Office estimated Wednesday that the Treasury would most likely run out of cash in October or November, though that is just an estimate.
Experts have said that the coronavirus pandemic is making it harder to estimate precisely when the U.S. would default on its obligations absent any action.
“There is so much spending that is going out in a relatively short period of time, and because there’s lots of uncertainty about when that spending is going out the door, it makes it even more difficult than usual to predict what spending patterns in August, September, October, etc. are going to look like,” said Shai Akabas, director of economic policy for the Bipartisan Policy Center, a nonpartisan think tank.
Republican senators are planning to use the specter of crisis to secure major fiscal concessions, in a throwback to the Obama years.
Sen. Lindsey Graham (R-S.C.), the top Republican on the Senate Budget Committee, is expected to put forward a proposal next week, accusing Congress of “spending like drunken sailors.”
“We need to make some structural reforms down the road. … About half the time the debt ceiling has been increased has been accompanied by something, and I think now is the time to put some ideas on the table,” he said.
The effort comes after a GOP Congress approved a massive tax-cut bill during the Trump years that added to the deficit. It also follows a series of big spending bills signed by Trump and Biden that were intended to help the economy survive the pandemic.
Republicans are digging in on the federal debt limit, warning Democrats that it will be up to them to avoid a default as President Biden pushes for trillions more in spending.
GOP senators are taking a firm line as Democrats plot a path for their $3.5 trillion spending measure, which the party plans to pass with budget reconciliation rules that will prevent the GOP from blocking it with a filibuster.
Given those plans, Republican senators say they won’t lift a finger to help Democrats raise the debt ceiling.
“I’m not sure why there’s much of an incentive right now given what the Democrats are doing, trying to run roughshod over the minority in the Senate, to help them,” said Sen. John Thune (S.D.), the No. 2 Senate Republican.
Thune added that if Democrats are going to use a go-it-alone approach to push through a sweeping spending package, which is expected to include other priorities like immigration reform, then Republicans believe “the debt limit can ride on it, and they can own it all.”
Senate Minority Leader Mitch McConnell (R-Ky.) previewed the GOP tactics to Punchbowl News, in remarks confirmed by his office.
“I can’t imagine there will be a single Republican voting to raise the debt ceiling after what we’ve been experiencing,” he said.
The government will reach its spending limit on July 31, though the Treasury Department will be able to shuffle funds for an additional period to prevent the U.S. from breaking the ceiling. Actually, doing so would cause a severe disruption to markets and the economy, as the U.S. government would be unable to meet demands from its creditors and pay its bills.
The limit on how much debt the federal government can owe has been suspended for nearly two years thanks to a bipartisan deal struck under former President Trump. The Congressional Budget Office estimated Wednesday that the Treasury would most likely run out of cash in October or November, though that is just an estimate.
Experts have said that the coronavirus pandemic is making it harder to estimate precisely when the U.S. would default on its obligations absent any action.
“There is so much spending that is going out in a relatively short period of time, and because there’s lots of uncertainty about when that spending is going out the door, it makes it even more difficult than usual to predict what spending patterns in August, September, October, etc. are going to look like,” said Shai Akabas, director of economic policy for the Bipartisan Policy Center, a nonpartisan think tank.
Republican senators are planning to use the specter of crisis to secure major fiscal concessions, in a throwback to the Obama years.
Sen. Lindsey Graham (R-S.C.), the top Republican on the Senate Budget Committee, is expected to put forward a proposal next week, accusing Congress of “spending like drunken sailors.”
“We need to make some structural reforms down the road. … About half the time the debt ceiling has been increased has been accompanied by something, and I think now is the time to put some ideas on the table,” he said.
The effort comes after a GOP Congress approved a massive tax-cut bill during the Trump years that added to the deficit. It also follows a series of big spending bills signed by Trump and Biden that were intended to help the economy survive the pandemic.
Democrats would need at least 10 GOP votes to defeat a filibuster on a stand-alone debt limit increase, and several progressives have ruled out ceding to Republican spending-cut demands. Several top Senate Democrats — including Majority Leader Charles Schumer (N.Y.) — accused McConnell of holding the U.S. economy hostage.
“The leader’s statements on the debt ceiling are shameless, cynical and totally political,” Schumer said at the Capitol on Wednesday.
“This debt is Trump debt. It’s COVID debt. Democrats joined three times during the Trump administration to do the responsible thing,” Schumer added. “And the bottom line is that leader McConnell should not be playing political games with the full faith and credit of the United States.”
Republicans have suggested that Democrats add a debt-limit increase to the budget reconciliation process.
Doing so would make it easier for Democrats to lift the ceiling but would also shield GOP senators from a vote that is necessitated by spending decisions by both parties.
Senate Budget Committee Chairman Bernie Sanders (I-Vt.) said that Democrats are “looking at various approaches” while also criticizing Republicans’ comments on the debt limit.
“It goes without saying, I think the world expects the strongest economy in the world to pay its debts,” he said.
It’s unclear whether Democrats could pass such a bill before a debt ceiling deadline.
Democrats are expected to vote on a budget resolution, which greenlights the party-line bill, before they leave for an August recess. But once they return, they will likely be negotiating for weeks on a separate deal to fund the government.
Passing a bill under reconciliation is already filled with challenges: Democrats need total unity in the Senate and near-total unity in the House, a tricky balance that will take time to negotiate. And proposals in the Senate need the greenlight from the Senate parliamentarian, who makes decisions on what does or does not qualify and who isn’t expected to start making rulings on what can be included in the spending plan until after Democrats pass their budget resolution next month.
Graham predicted that Democrats would ultimately try to find another way to raise or suspend the debt ceiling, arguing that folding it in with their $3.5 trillion plan would be a political gift to Republicans.
“I doubt if they’ll take them up on that … I think it would be a great add there,” Graham said, asked about McConnell’s suggestion Democrats do it through reconciliation. “You’re raising taxes, you’re growing the government, you’re raising the debt all by yourself.”
Trillion of dollars in Treasury bonds held by foreign governments and investors are underpinned by faith in the federal government’s ability to pay its bills. A default on the national debt could shatter that confidence and trigger a catastrophic financial crisis.
“At that point we would be purely playing defense, trying to figure out how to best salvage a potentially catastrophic economic scenario,” Akabas, of the Bipartisan Policy Center, said.
In testimony before a Senate panel last month, Yellen warned that a federal default “would have absolutely catastrophic economic consequences” and cause “unthinkable” economic damage.
It’s not unusual for Republicans to take a hard-line stance on the debt limit when Democrats are in power. Most notably, S&P downgraded the United States’ credit rating from AAA, the highest level, to AA+ during the Obama administration in 2011 shortly after a debt limit standoff was resolved only days before the U.S. would have defaulted.
But the debt limit was suspended several times during the Trump administration without much difficulty.
Democrats accused Republicans of a double standard after 23 GOP senators voted for a deal that included a debt ceiling suspension in 2019.
“It is not business as usual. When Donald Trump was president of the United States we didn’t say we’re going to have a political agenda of one, two, three before we pay our bills,” Senate Finance Committee Chairman Ron Wyden (D-Ore.) said.
The White House said that Congress should address the debt ceiling on a bipartisan basis, like it did when Trump was president.
CLIMATE CHANGE:
U.S. Chamber of Commerce lays out clean energy standard plan
Ben Geman, Axios, July 22, 2021
The U.S. Chamber of Commerce is laying out what it wants to see in Democrats’ brewing push to mandate escalating amounts of zero-carbon electricity.
Why it matters: The K Street powerhouse is closer to Republicans, but its views could influence some moderate Democrats, so that’s important given Democrats’ razor-thin Capitol Hill margins.
Driving the news: The Chamber explained its posture on a “clean energy standard” (CES) in a letter to lawmakers that comes as the White House and Congress hope to move a CES in a reconciliation package.
- One noteworthy part: It wants “partial credit for electricity generation resources that feature a reduced (rather than zero) carbon footprint.”
- That means, among other things, natural gas, which emits far less CO2 when burned than coal.
Yes, but: “This conflicts with the path sought by Democrats working on a CES such as Sen. Tina Smith of Minnesota, who has said natural gas should only be credited if plants are equipped with carbon capture technologies,” notes the Washington Examiner, which first reported on the letter.
Elsewhere, the Chamber letter says the CES should “insulate” existing power plants from “conflicting” regulations and provide a “realistic” timeframe for emissions cuts.