Today’s Blog – Tuesday 7th April 2015

Introduction

Back from the Easter break, not much has been happening on the ASX (not surprisingly, given the great weekend of sport and general carousing) but elsewhere the geopolitical factors currently driving oil and gas markets have not been on holiday.

Commodity prices

Crude oil prices have firmed somewhat since Thursday, with Brent at US$57.85 and WTI at US$52.14.  Late last week we saw a price fall as the market reacted to the provisional deal done over Iran’s nuclear program.  However, since then the market has recognised that there is still some considerable way to go before a binding deal is struck (and the hardliners on both sides will have a period of months to try and sabotage the compromise reached to date).  Also on the plus side, the market liked recent news of a Saudi price increase for Asian buyers – taking it as good evidence of the strength of Asian crude demand.

Recent comments from within the PRC about the imminent filling up of the nation’s strategic petroleum reserve (SPR) have been rebutted somewhat with other comments emerging suggesting that further material SPR capacity is still under construction and will be available for filling in the second half of this year.

The US onshore rig count continues to fall – albeit at a declining rate (the BHI count fell 17 rigs last week).  That decline rate was pretty much in line with consensus.

Henry Hub was up slightly at US$2.65.  US gas storage levels are currently below their 5 year average for the time of year by 190 bcf.  My view remains that demand side pressure from LNG exports (by year end) will change these rolling averages on a systemic basis.

LNG

Reuters reported a Gazprom source as advising that the mighty Power of Siberia pipeline from Eastern Siberia to North East China will be delayed by 3 years, with deliveries now commencing from 2022.  This delay comes less than one year since the pipeline was announced and appears to reflect a lack of cash for Gazprom (and Russia Inc generally).  Sources said that Gazprom may instead concentrate on a Western pipeline (the Altai Pipeline) to deliver gas into China from existing Western Siberian gas production sources.  However, this pipeline is not an easy one either.  In my view, China will ultimately strike a tough deal with the Russian’s over providing further finance for these pipeline(s) – in exchange for material up-stream equity positions.

In the meantime, LNG markets should benefit from delays in Russian supplies coming to China.

Governments and fracking

Late last week the Wall Street Journal published a story about earthquake risks from oil and gas activities in a State that is normally accommodative of industry activities, namely Oklahoma.  In the context of a Court case about earthquake damage, the Oklahoma Geological Survey has reported materially increased seismic activity in recent years and some have sought to correlate this with oil-field activities, particularly fracking.  However, researchers seem to be pointing towards another potential cause – namely the disposal of “used” frac fluids – and their potential ability to “lubricate” faults.  In the long term, any such identified problems from a State like Oklahoma are likely to be more serious than unscientific reactions from luvvy States such as New South Wales and Victoria.

Company news – Carnarvon Petroleum Ltd (ASX: CVN)

CVN has today put out an independent study into the oil potential in its Apache operated acreage off Northern WA (where the promising Phoenix South well was drilled last year).  C2 gross contingent resources of 31mmbbls were quoted, together with more than double that in risked prospective resources.  However, with a current EV of ~$10M, the market does not seem that interested in CVN’s prospects, no doubt reflecting a general lack of interest in the sector and a fear of future capital raising requirements.

Company news – Sino Gas and Energy Ltd (ASX: SEH)

A rather more favoured company on the ASX, SEH (EV of ~$250M) provided an update on its Chinese operations today, as production and reserves continue to increase.  The market currently likes production more than potential – and the PRC gas price environment remains a good one (as noted above, no Russian gas for some time, etc).

Quote of the day

Keen readers will note my recent comments about the effect that the lifting of Iranian sanctions could have on LNG markets.  The Economist has possibly joined the readership base, with the following quote coming from its magazine of last Friday:

“So the best long term prospects [for Iran] may be not in oil, but in other hydrocarbons.  Iran has even richer reserves of gas than it does of oil, and those fields are in a less parlous state.  The EU yearns to lessen its dependence on Russian gas imports.  Why not from a newly approachable Iran?”

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