Today’s blog – Tuesday 26th May 2015

Introduction

Following on from yesterday’s observations on the Kingdom of Saudi Arabia, another interesting development in the country in recent times has been the rapid expansion of its refinery capacity.  This is now at more than 5 mmbopd – with plans to increase this to up to 10 mmbopd – i.e. around the total current crude production of the KSA.

This downstream integration strategy allows the Kingdom to not only capture downstream processing margins – it also gives it more global pricing power compared to selling its particular crude specification.  News reports recently that China’s requests for increased sales of crude from the KSA were rebuffed could well be connected with this increased refinery capacity – and possibly an alternative offer to the PRC to sell product not crude.

Recent analysis of EIA country-by-country production and demand numbers (albeit with the numbers being a few years old – data quality is of course not high in our industry) indicate that exports from the Middle East have in fact fallen in recent years despite global demand growth – as in-country demand in this area has increased rapidly due to population and economic growth (combined with high energy price subsidies).  The KSA itself has increased production but not increased exports – i.e. production growth has largely been about servicing its own needs.

Thus much of the growth in Chinese crude demand in the last few years has effectively been met by on-shore US production growth.

Commodity prices

Prices were fairly flat overnight (reflecting a US public holiday and resultant lack of trading activity), with Brent closing at US$65.52 and WTI at US$59.83.

Henry Hub was also flat at US$2.85.

LNG

The ongoing challenges of developing greenfields LNG projects in East Africa were again demonstrated recently – this time with a developing legal challenge to the validity of land use grants made to the Anadarko led Mozambique LNG project.

Some commentators speculated that this could give a competitive advantage to ENI’s Mozambique FLNG project.  However, Australian based observers who for years have seen the attitude of Timor Leste’s Government to proposals to develop the offshore Sunrise LNG project through FLNG rather than on-shore (i.e. the Government will not permit such a development) would be sceptical about ENI securing Mozambique Government approval to do this.

I remain of the view that Australia’s brownfield LNG development opportunities, at Darwin and Gorgon in particular, remain higher ranked LNG developments than the East African projects, notwithstanding our country’s recent history of cost blow-outs, etc.

The NSW Government and CBM

The Sydney Morning Herald (SMH) today reported that the Government’s junior coalition partners, the Nationals, are keen to ban gas extraction across large swathes of the North of the State.

This is likely to assist Metgasco Ltd (MEL) in procuring a deal with the State Government (as discussed in yesterday’s blog) about surrendering its licences in return for compensation.

Given such a surrender would require a shareholder vote, it will be interesting to see how a deal is negotiated and finally structured and what disclosure is made in the associated Notice of General Meeting.

Company news – AGL Ltd (AGL)

AGL put out a large strategy presentation today.  It noted that the future of its upstream gas business unit is still under review.

The overall theme of the new strategy was responding to a downstream energy revolution being influenced by solar, efficiency gains, battery and electric car developments, etc – all over-laid with rapidly improving IT connectivity.  So far, no large Australian upstream companies that I am aware of seem to have developed similar strategic responses to such developments.

AGL did say that it would re-commence flow-testing of CBM wells in its Gloucester Basin acreage in New South Wales.  I expect protestors to get up, have a shower heated by gas, make a cup of tea from a fossil fuels electric kettle, fuel up their cars with petrol and drive on asphalt roads to Gloucester to protest against petroleum extraction…..

Company news – Maverick Drilling and Exploration Ltd (MAD)

MAD held its AGM yesterday.  This small ASX listed junior has now been led by ex-BHP Petroleum, Mike “Chuck” Yeager for nearly 2 years.  Judging by the ever sliding share price, promises to shareholders about transformative acquisitions seem to be wearing a bit thin…..

Quote of the day

An observation from Henry Kissinger in the mid 1970s which, notwithstanding all the subsequent developments (and foreshadowed changes noted above), still has relevance today:

“[the oil weapon] altered irrevocably the world as it had grown up in the postwar period”

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s