Today’s Blog – Monday 19th June 2017

THE BLOG WILL TAKE A BREAK FOR A WHILE, DUE TO TRAVEL AND OTHER COMMITMENTS

Editorial

And when we come back we look forward to seeing:

  • The successful IPO of Aramco, with full reserves disclosure, impeccable ongoing corporate governance and happy investors.
  • Oil prices rising to reflect the long term cost of replacing current production.
  • LNG prices being fully reflective of gas – not oil – markets.
  • Greenies and farmers, having read the scientific literature, being persuaded that fracking is in fact a mundane, long term and safe practice.
  • Solar PV costs continuing to follow Moore’s Law (but in which case the second point above would be under threat….).
  • Australia’s E&P companies rapidly adapting to the new world and recovering their share prices of a few years ago (now we are being ridiculous).

Commodity prices

Oil prices fell ~2% last week, closing at US$47.37 in London and US$44.74 – i.e. pretty much what they were 7 months ago before the OPEC cuts.

Weekly inventory numbers were poor again, with a small-ish crude drop of 1.7 mmbbls (2.1 adjusting for SPR sales), a gasoline build of 2.1 mmbbls and a distillate rise of 0.3 mmbbls.

The weekly BHI rig count was also bear-ish – a rise of 6 oil rigs and one gas rig.

Henry Hub had a better time, closing at US$3.04.

Company news – Origin Energy (ORG)

The potential trade sale of ORG’s Lattice Energy upstream assets is getting to the pointy end – indicative bids were lodged last week.  And according to the media, this now included a previously elusive “Chinaman with a chequebook”.  ORG will be hoping some big numbers are written in that chequebook, as the other noted bidders seemed unlikely to pay too much.

Quote of the day

Even the Wall Street Journal is now starting to express the doubts that have long emanated from once fringe figures such as Art Berman over the sustainability of US tight oil production:

“The shale-drilling renaissance rocked global markets and helped send crude prices into a prolonged slump.  What it didn’t do was bring in much cash. Since 2011, the largest 30 independent U.S. shale producers spent an average of nearly $1.33 for every $1 they made drilling wells, according to a Wall Street Journal analysis”.

 

 

 

 

Today’s Blog – Wednesday 14th June 2017

Editorial

One largely unreported aspect of the recent escalation of tensions in the Middle East over Qatar’s blatant bribery to secure the FIFA World Cup, err, we mean its support for terrorism, is its likely to have flow on consequences for the pricing of Saudi Arabia’s planned IPO of 5% of Aramco.  To the downside, naturally – given the publicity it gives to the high level of regional sovereign risk, capricious medieval rule, etc.

Even before this erupted last week, we noted reports coming out from the LSE in London of key parties’ in the City’s desire to not have Aramco listed there.  This came from representative of large institutions (particularly passive funds) who would be effectively required to hold the stock, like it or not, given the weighting it would achieve in the index.  Not exactly a vote of confidence when major investors say: please list somewhere else.

Our view continues to be that an IPO of Aramco faces major hurdles – disclosure of reserves, what assets will be in and out, and over-arching everything – governance.

Commodity prices

Crude fell slightly (down 0.2%) in London overnight, closing at US$48.20.  In New York, WTI did better – closing up ~1% at US$46.46.  However, an ominous cloud emerged in the US later in the day – estimates that the weekly EIA inventory report will show another large build.  We await tomorrow with trepidation if this proves to be the case.

Henry Hub fell a couple of percent to close at US$2.96.

LNG & international gas

The Australian business media has today reported on the ongoing angst of the East Coast LNG exporters in dealing with the Commonwealth Government’s very new Australian Domestic Gas Security Mechanism (ADGSM).  They are right on the money in terms of their critique that the ADGSM is being rushed in, there is little time for consultation and unintended consequences might arise.

But the politicians don’t care – there is no political cost to them for fixing the gas shortfall issues – which are seen by the Australian public – and critically international investors – as being caused by mistakes of the oil and gas companies’ making, rather than a manifestation of unfair sovereign risk.

Governments

Two business days in and the Finkel Report is under a lot of pressure – maybe even fatally.  Its efforts to find a middle ground are tripping over demands for everlasting cheap coal power from the right.  Our simple view – throw them a bone, but with no real meat on it – capital markets won’t fund coal in Australia no matter what regulatory system is put in place.

Over in the States, the soft hearted vampire squids at Goldman Sachs are starting to underwrite major wind-farm investments – and will apply their GFC honed financial skills to slice and dice the output therefrom to meet different parties’ needs in terms of duration, volume, risk, etc.

Company news – Santos (STO) and Oil Search (OSH)

STO and OSH reported today upon further positive results from the Muruk well in PNG. A choke constrained production test flowed a handy 16 mmcfd.  Estimates of resources will follow in due course – and a further delineation program is flagged.

PNG’s sovereign risks will now be looking a little bit better to buyers in light of what is happening in Qatar.

Company news – Senex Energy (SXY)

SXY announced today that it to commence a 30 CBM well program in its Western Surat project – with production due to start in just over a year’s time.  SXY will be hoping that the market’s love for East Coast gas – particularly as manifest over Cooper Energy – will rub off on its own share price as flow rates, etc, build news-flow from this project.

Quote of the day

From Michael Lewis’ classic, the Big Short, which makes us wonder who the vampire squids have identified as the patsies in their new renewables dealings:

“When the Goldman Sachs saleswoman called Mike Burry and told him that her firm would be happy to sell him credit default swaps in $100 million chunks, Burry guessed, rightly, that Goldman wasn’t ultimately on the other side of his bets. Goldman would never be so stupid as to make huge naked bets that millions of insolvent Americans would repay their home loans.”

 

 

 

Today’s Blog – Tuesday 13th June 2017

Editorial

Last Friday saw the release of a long awaited report on Australia’s electricity systems and markets by the country’s Chief Scientist, Alan Finkel.  To us this sought to find a middle ground of what might work politically whilst subsuming optimal economic efficiency to what might garner the most support.  That approach has not surprisingly enraged the extremes of both the left and the right who want to sacrifice the good for their versions of the unattainable perfects.

At the heart of the recommendations in the report is a system replacing the current renewable energy target scheme with a technology agnostic low energy target – with a carbon intensity level still to be set by politicians.

Much media comment has concluded that this will be good for gas and bad for coal.  We agree with the latter – but think the former could be a bit over-cooked if the scheme takes account of the growing carbon emissions associated with the total gas cycle.

The unfortunate reality for Cooper Basin gas in particular is that its methane production is associated with very high associated CO2 production – which is separated and vented. Counting that CO2 (as well as any CH4 involuntary emissions) can make gas no better or even worse than coal.  Although not as bad, Gippsland gas is also increasingly burdened with a growing waste CO2 by-product.  East Coast low CO2 gas from Queensland is largely exported.

Commodity prices

Crude oil prices on Friday closed down ~4% for the week – largely on the very poor weekly EIA inventory numbers.  Yesterday prices inched back up a few notches to close at US$48.28 in London and US$46.00 in New York.  This week’s EIA report will be especially closely watched – another bad week could send prices materially down again.

The BHI weekly rig count indicated that the US oil  patch keeps on coming on, despite the gloom, with Friday’s numbers being another increase of 8 oil rigs and 3 gas rigs.

Henry Hub is fairly flat in the ~US$3 range at present – closing at US$3.02 overnight.

LNG and international gas

In what was a rare piece of positive news for LNG companies, Reuters reported late last week that Sino-Russian talks about new gas pipelines to the PRC (the Altai pipeline to the West and a Sakhalin Island backed pipeline to the East) had stalled.

These projects have a mix of major technical and commercial challenges – and a desire by China not to become too beholden to the Bear.

Disruption

One of the most important – if not the most important – questions for the overall energy sector is whether the path of cost reductions in solar PV will follow a Moore’s Law type path of ongoing exponential reductions – or might plateau.  Moore’s Law is of course not a Law of nature  – but rather a successful prediction.

Research recently reported on by the IEEFA – by a couple of economists who investigated the history of development of a number of technologies to see which might follow Moore’s predicted path for transitors – found that solar PV costs exhibited similar patterns.

If solar costs continue to follow a Moore like path for a sustained period – than every other form of energy needs to take account of that competition.

Company news – Origin Energy (ORG)

The twists and turns of ORG’s plans to off-load a parcel of its upstream assets through the Lattice Energy spin-off – as revealed by leaks to the media – continues.  Last week it was the turn of The Australian to flag a lowering of price expectations – now ~A$1B rather than the nearly A$2B that was previously hoped for.  And the hoped-for “Chinaman with a cheque-book” is still nowhere to be seen.

Quote of the day

The inevitable emergence of the likes of Tony Abbot to bemoan the Finkel Report reminded us of this classic Churchill quote about the ever dreary disputes of Ireland following the end of The Great War:

“The position of countries has been violently altered. The modes of thought of men, the whole outlook on affairs, the grouping of parties, all have encountered violent and tremendous change in the deluge of the world. But as the deluge subsides and the waters fall short we see the dreary steeples of Fermanagh and Tyrone emerging once again. The integrity of their quarrel is one of the few institutions that have been unaltered in the cataclysm which has swept the world.”

 

Today’s Blog – Thursday 8th June 2017

Editorial

The Game of Thrones over in the Middle East continues to rapidly notch up its conflicts, violence and intensity – with potentially very consequential impacts on energy markets.

Immediately following on from the unexpected embargo imposed on Qatar by the Saudis and friends (an expanding group – now including African Muslim nations, etc) has been a series of suicide attacks against major targets in Iran – its Parliament and possibly the even more sensitive (in religious terms anyway) – the tomb of Ayatollah Khomeini.  These events are arguably related – and threaten major escalation in the centuries old Shia/Sunni rift.

Some intelligence analysts have been quoted as saying that President Trump has been played for a fool by the Saudis (no!) and there are clearly major rifts in the US Administration over support for Qatar.

So what do these “events” mean for oil and gas markets:

  • The bear case for oil is that the current OPEC deal will either openly collapse – or as a minimum cheating will escalate.  Result – more oil into markets and an oil price that could hit the US$20s again.
  • The bull case for oil (if not the world) is that military escalations result in the passage of crude cargoes in the Gulf being interrupted.  Result in this instance – hello US$100+ oil again.
  • On LNG, our view today is somewhat less sanguine than yesterday.  Again physical interruptions to Gulf traffic – Qatari LNG cargoes – could arise.  Spot LNG prices would respond on the upside.  Unlike for crude, there is no behind pipe gas that could just be turned up and flood markets.

“Events, my dear boy, events!”

Commodity prices

Crude markets took exactly zero notice of these “events” last night – rather they were focused on a very poor and unexpected set of “numbers” from the weekly EIA inventory report.  Brent closed down ~3.5% at US$48.19 and WTI was smashed nearly 5% down to US$45.72.

Earlier in the week predictions were that the weekly crude stocks would be a continuation of the previous few months’ withdrawals of a few million barrels each week.  Instead the EIA reported a build of 3.3 mmbbls (although 1.7 of this related to SPR sales).  Gasoline also grew by 3.3 mmbbls and distillate rounded out the unfortunate trifecta with a build of 4.4 mmbbls.  If this is repeated for a few weeks, the bears will have a field day.

Given these multiple issues, oil prices are likely to be highly volatile – and could dramatically break up or down depending on the news flow du jour.

Henry Hub was more sedate – falling 1.3% to US$3.02.

Governments

The Victorian Government deserves a prize (in a highly competitive contest) for its sheer shameless hypocrisy – a State that has banned all onshore petroleum activities (“why? – just because we can  – one of our hipster mates in Melbourne saw that movie Gasland and do you know what, gas came out of a tap!”) has just escalated its calls for tougher domestic gas reservation policies and export restrictions.  Pathetic.

Not as bad – but still somewhat pathetic – is news that the New South Wales Government is gazetting some exploration acreage.  But in the West of the State – as far away from Sydney as possible – where the sound of braying Mooses is the only noise one might hear (do Mooses actually bray – any Canadians out there?).  And where capital markets will not put any exploration dollars.  Pointless.

Company news – Woodside Petroleum (WPL) and FAR 

The longstanding pre-emptive rights dispute between WPL and FAR might finally be publicly hotting up. WPL has issued an ASX announcement this morning stating that FAR is seeking to block its assumption of certain operating roles – on the grounds that its deal to acquire Conoco’s interests in Senegal was not properly dealt with.

FAR has not issued its own ASX announcement – which gives the impression, no doubt deliberately – that it is playing a cool hand whilst WPL’s CEO is coming over all emotional.

Company news – AWE Ltd

AWE has announced today it is moving to FEED over its onshore Perth Basin Waitsia gas development.  It will be fervently praying that the East Coast frack ban moratorium (already in place South of Perth) does not infect Sandgroper politicians as much as Victorians.

Quote of the day

WA’s Premier McGowan might be far too busy dealing with the big issues to impose a gas moratorium.  In sticking to impeccable socialist principles he is developing a policy for when and where mid-strength beer should be sold in Perth’s new football stadium:

“I have a view that if there’s going to be midstrength for the crowd there should be midstrength for the people in the boxes.  I don’t think it should be a two-tiered system.”

 

 

Today’s Blog – Wednesday 7th June 2017

Editorial

Oil – and LNG – markets have over the last few days been focused on the medieval – dare we say Game of Thrones-ish – political “events” in the Middle East.  It seems that House Baratheon has taken offence with the Eastern Kingdom, at the urging of the Mad King over the water.  Or something.

That something maybe being to think twice when someone says “hey lads, lets go and do a bit of hunting with our cool pet Falcons in ISIS controlled Iraq. If we get caught then Daddy can pay dip into his small change jar and pay >US$1B to release us.”

Upon news breaking of the Saudi led embargo over the average football fan’s favourite World Cup location ever, beer-drinker welcoming Qatar, oil markets did not know what to think.  First prices went up, in the usual response to Middle Eastern “events” – then they went down as markets feared OPEC unity might crack.  Then they went back up again.

Qatar is an OPEC minnow but an LNG giant.  The Saudis fear it is too close to Iran politically (encouraged by the US President but not the Pentagon it seems) – but that is after Qatar decided to lift its self-imposed moratorium over LNG expansion – arguably at Iran’s expense.

A few days ago the Qataris were publicly advising the Japanese not to rattle the cage over changing LNG contracts.  Now they might need a few more friends – so all things being equal LNG prices might fall in the medium term as a consequence of these events – or maybe more likely, the trend of contract term liberalisation will be strengthened.  But they also might rise in the short term if a physical embargo tightens.

We are watching with interest.  “High cost, but reliably boring”, could be a new marketing slogan for Australian LNG suppliers.

Commodity prices

As noted above, crude prices rose then fell on Monday’s trading on the Qatar news – and were overall down on the day.  Then in Tuesday’s trading a ~1% rebound took place, with Brent closing at US$49.96 and WTI at US$47.99.

“Technical” support apparently came to the rescue.  Hopefully “numbers” support will come in overnight from the weekly EIA inventory report.

Henry Hub closed overnight at US$3.06.

LNG and international gas

With all LNG eyes on Qatar, a more unusual story is a Gulf of Mexico floating LNG project called Delfin.  This is not designed to monetise otherwise stranded gas, but locate a liquefaction facility just outside the jurisdiction of US regulators that may limit where US gas can be sold to.  Some interesting entrepreneurial thinking – but our initial response is to think there is a lot of gas sloshing around the world anyway and ways and means can be readily found to effectively swap US gas into any market anyway.

Governments

Over recent days the Queensland Government has released a multi-pronged energy strategy that contains the currently popular mix of encouraging more renewables and energy storage with specific measures to support short term reliability (an election may be called in the next 6-12 months you will be surprised to hear).

Reliability should be increased by de-mothballing the 385 MW CCGT at Swanbank E owned by Queensland Government company Stanwell.  The latter will have the interesting challenge of procuring gas & pipeline capacity within a few months.  In a region where liquefaction plants are running well below capacity.  And prices are high.  And negotiations are slow.

This could be one more cross to bear for the Santos led GLNG JV.  It used to supply Swanbank E from the Scotia field – but bought out the relevant contract.  A legal position is one thing – but a Government seeking an important political outcome is another.

Company news – AGL

AGL announced today a new 210 MW gas fired power station (at a cost of A$295M) to be built next door to its old Torrens Island plant in Adelaide.  AGL should be able to readily source gas for this from its existing portfolio – potentially to be enhanced by its proposed FSRU.

Interestingly for the engineers out there, the power station will use reciprocating engines rather than gas turbines – the former’s energy conversion efficiency is impressive these days – and multiple engines provide more flexibility and resilience than one or two larger turbines.

Quote of the day

Well known journalist Alan Kohler on the current wave of “disruption” hitting the energy sector:

“A lot of people, myself included, had hoped that newspapers wouldn’t be disrupted by the internet, but it happened…..the coal miners will find something else to do, along with the journalists and the other workers disrupted out of their jobs.”

 

 

Today’s Blog – Monday 5th June 2017

Editorial

Last week President Trump generated much news-flow following his “you’re fired!” response to the Paris climate agreement.   This over-shadowed a development that could have a more material impact on changes to the global energy system – a strong signal about priorities to Exxon from its institutional shareholders, in terms of a vote being overwhelmingly carried at a shareholder meeting that will require the oil and gas giant to publish analysis on the risks of climate change to its business.

As we have noted from time to time, the likes of super-giant fund manager Blackrock (who voted to change Exxon’s thinking on the issue) have immense power in terms of capital flows – and it is often “the money” that shapes things more than a political announcement.

That is arguably especially so in this case – where US emissions are low and getting lower due to cheap gas, the rapidly falling cost of renewables and more granular policy and business decisions in the likes of States like California and companies like Google.  The only real consequence of the US leaving Paris is a diminishment of its global soft power – it will not change the energy mix in the country itself.

Commodity prices

Crude prices fell in both Thursday and Friday’s trading, closing at US$49.95 in London and US$47.66 in New York.  Overall they were down ~4% for the week – notwithstanding some good “numbers” from the weekly EIA’s inventory report (which we incorrectly reported on last week – the real numbers were a draw of 6.4 mmbbls of crude, 2.9 mmbbls of gasoline and an increase of 0.4 mmbbls of distillate).

That was the 8th week in a row of declining inventories – all up a bullish trend.  What was not so bullish was the weekly rig numbers from BHI – an increase of 11 oil rigs and a decrease of 3 gas rigs.

Henry Hub was down ~9% for the week (driven by poor inventory numbers of its own) – closing at U$$3.00.

LNG and international gas

An ENI led LNG project off Mozambique reached FID last week – the first one globally in 2017 to our knowledge.  This is a FLNG project and hence of smaller scale than a full blow multi-train onshore development that the country would no doubt prefer to see.

However from our perspective, the most interesting item about this project is not that it is Africa’s first floating LNG development – but rather that the underwriting off-taker was BP rather than the traditional utilities.  BP is obviously not a consumer, so is presumably highly confident that it can sell the contracted gas in short and long term LNG markets.

Disruption

As Elon Musk is pulling out of a Trump advisory council following the President’s “Pittsburgh not Paris” decision, he is also copping some flack from a person who is not absolutely not The Donald’s friend, no sirree bob! – one Igor Sechin.  The Putin pal and Rosneft boss has joined the chorus of Tesla short sellers in saying:

“The market’s assessment of the prospects of electric car producers, in our view, is significantly overestimated.  The unconditional truth remains in the fact that the hydrocarbon power industry has been and will be in demand.”

Company news – Comet Ridge (COI)

Junior ASX listed explorer COI reported an unusual event for the E&P sector last week – an oversubscribed capital raising.  COI has contingent resources of gas in Queensland that should be able to readily find a high priced market if/when developed.  Investors can easily understand an East Coast gas investment story when they read about it on the front pages of the newspaper rather than in the dull business section.

Quote of the day

The pressures on US inventories appear to be strong according to the following recent quote from EIA analyst Mason Hamilton:

“Refinery runs are ridiculous. I posted a meme where it’s the line from Top Gun: ‘I feel the need – the need to run the refinery full out.’ “

 

Today’s Blog – Thursday 1st June 2017

Editorial

The Australian Government is seeking to change the scope of what its Clean Energy Finance Corporation (CEFC) can advance concessional funding to, to include carbon capture and storage (CCS) projects.  The media narrative that has ensued has typically been driven by political allegiances rather than science – with on the one hand the left concerned that CCS will extend the life of its disliked fossil fuels (coal in particular) and on the other hand the right seeing this as a panacea for its beloved coal.

What is missing (in the Australian context anyway) is an answer to the question – where will the captured CO2 be stored? – with an apparent widespread assumption that there are many large caves underground just waiting to be stuffed with mega-tonnes of carbon dioxide.

The unfortunate reality is that the only proven underground storage sites are those that have held hydrocarbons for many tens of millions of years and in Australia they are basically:

  • Off the North West of Western Australia – far too remote to have any material CCS potential.
  • Off Victoria – although we are no subsurface experts – we understand that the nature of Gippsland reservoirs is such that the pore space previously occupied by oil and gas is now largely occupied by water – and an awful lot of energy would be required to displace that.
  • In the Cooper Basin. Again this is very distant from large CO2 emitters (other than from the operations at Moomba, but that’s a story for another day).

So never mind the politics – we can’t see the CEFC funding a genuine large scale CCS project – as no such projects will arise – even if its mandate its changed.

Commodity prices

Oil prices have fallen steadily over the last few days, with Brent closing overnight at US$51.04 and WTI at US$48.32.  An overall fall in the month of May was the third such monthly fall in a row.

The weekly EIA inventory report was OK – crude down 4.4. mmbbls (or 4.8 adjusted for SPR sales), gasoline down 0.8 mmbbls (likely a disappointment given the run into driving season) and distillate down 0.5 mmbbls.

However, the bears shrugged this off in the light of an Oliver Twistian ongoing disappointment that OPEC did not do “more” last week and news of growing Libyan and US output.

Henry Hub has had an even tougher time – its now down to US$3.07.

LNG and international gas

The recent election in British Columbia has now led to a left leaning coalition taking the reins of Government.  All things being equal, this is bad news for the Province’s many LNG projects (including Woodside Petroleum’s) – but good news for the other members of the “100” pre-sanction global LNG projects.

Putin’s favourite (“I don’t own any of it – that share certificate was just resting in my bank account!”) gas company, Novatek has announced progress in what appears to be a fairly fanciful new Arctic LNG project near its existing very expensive Yamal project – the floating Arctic-2 project.  Titantic LNG might be a better name.

Disruption

The tsunami of large scale solar PV projects continues – with Telstra just saying it will underwrite a new 100 MW plant.  Virtue signalling you might say (like Google, et al in the US) – but motives don’t count, market outcomes do – and more and more solar hollows out the economics of traditional base load gas and coal plants – and hence demand for the traditional flat delivery of their feedstock.

Company news – Strike Energy (STX)

STX’s new CEO made a strategy presentation this morning which included phrases no shareholder likes to see: “technical success”, “legal dispute”, “funding under review”, etc. Quelle surprise!

And, Ouch!, said the share price.

Company news – Cooper Energy (COE)

COE has announced that it has executed a suite of contracts with infrastructure giant APA Group over the sale and upgrading of its Orbost gas plant.   These contracts will complete upon the imminent FID of COE’s Sole gas field development.

Welcome APA to the world of taking reserves risk!

Quote of the day

From the disruption side of the ledger – but importantly from a hedge fund, not a hippy:

“This clean energy disruption has just started and what is striking is how much of a financial impact it is already having on some companies.  It hit the electricity sector first, in Europe in 2013 and then the US two years later. Now it has spread to the auto sector and I think the oil industry is next.”  Per Lekander, portfolio manager at London’s Lansdowne Partners hedge fund