Today’s blog – Tuesday 10 March 2015

Commodity prices

The WTI/Brent spread narrowed slightly in the last couple of days, with Brent closing at US$58.53 and WTI at US$49.98.  The indices continue to listen to different drums, with WTI responding positively to the ongoing reduction in US land rig count and Brent looking at potentially weakening Chinese crude demand.

On the rig count, most market commentary focuses solely on the best known count, from BHI, which last week reported a 75 rig reduction (39% since last year’s peak).  Interestingly, the lesser known rig count source, Rig Data, estimates that the rig count has fallen 1,002 (47%) from peak.  If this is a forward indicator for BHI, then there appears to still be a lot of momentum in rig reductions (and hence support for WTI).

One last thing rig count wise: the numbers from Canada.  Canada and the US are effectively one oil and gas market, so these numbers are highly relevant to commodity pricing indices such as WTI, notwithstanding they are from a different sovereign territory.  BHI has the Canadian rig count down to 242 – compared to 592 at the same time last year – i.e. a fall of nearly 60%.

Henry Hub was flat at US$2.70.  Oil price bears will gain comfort from how well gas production has held up in recent years, notwithstanding the very large fall in gas orientated rigs since their peak a few years ago.

LNG

Goldman Sachs put out a report recently which estimated that later this year the global LNG trade will take over iron ore to become the second largest traded international commodity (after crude oil).

Buyers and sellers of LNG are responding to the developments in LNG markets in different ways (naturally), with the market at present looking like one where the sellers are making the running.  For instance, two very large Japanese buyers, TEPCO and Chubu, have recently formed an alliance which should see them combine LNG buying capabilities.  This joint venture would be the second largest LNG buyer in the world after Kogas – and one which would assert with some considerable heft the Japanese views on de-linking LNG from oil-pricing, increasing buyer destination flexibility, etc.

While this is going on, observers should note that few large LNG projects (apart from the quite different US LNG tolling model) are announcing the execution of binding sales contracts.  For instance, Anadarko recently announced a desire to FID its Mozambique LNG project later this year.  That timetable seems ambitious unless buyers sign more contracts.

The smarter producers, such as BG Group, are in turn building up increasing flexibility in their own LNG selling capabilities, with trading as well as producing being seen as an important profit centre.

CBM (CSG) in New South Wales

The NSW Government has continued to publicly demonstrate that it is “doing something” to address the potential evils of CBM exploration in the State, with an announcement over a deal to acquire certain acreage (known in the industry as moose pasture) from AGL.

Post the imminent election, and presuming the incumbent wins, then there may be a short political window for the State to actually adopt a rational approach to its energy needs, including from its indigenous gas (CBM) resources.  However, other political outcomes would well see “Frackman” being the primary driver of the politics of CBM extraction.

Company news – Santos and Oilsearch

Santos has confirmed the speculation in my blog of last Friday that all was not well with the Hides Deep well in PNG.  Later on Friday it issued an ASX announcement noting that the well had not encountered a reservoir of suitable quality.  The well will still be used as a development well for the overlying, already discovered formations, but that is of relatively minor economic impact compared to the potential to have found a new feedstock source below existing infrastructure.

Company news – AWE

Over in Western Australia, AWE issued an ASX announcement yesterday which contained very good news.  That was the results of a flow test on the conventional gas field it discovered last year – a well flowing at the excellent rate of 12.3mmscf/d.  No liquids were reported (which suggests the gas stream is pretty lean), but CO2 levels were advised as being at a pipeline quality low level of around 2%.  And “Frackman” can sleep at night, as this rate was achieved without stimulation.

AWE stated that it has commenced gas marketing in WA.  Results like this, from a company like AWE whose announcements are factual rather than hyperbolic, will certainly attract the interest of WA gas buyers.

Company news – Santos

On the WA theme, Santos yesterday announced that it had concluded an Agreement with the State’s largest gas buyer, Alcoa, to sell 82 PJ of gas from the John Brookes gas field, starting from 2018.

For some reason Santos also noted that the agreement included the right to extend it “by mutual agreement”.  In that vein, I will also offer to sell gas to Alcoa on terms that we have yet to agree!

Quote of the day

A joke rather than a quote today:

“A million guys walk into a Silicon Valley Bar.  No-one buys anything.  

Bar declared a massive success.”

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