Today’s Blog – Tuesday 16th June 2015

Introduction

Today’s out-take from BP’s Statistical Energy Review (released last week) focuses on oil (which as noted yesterday, is a term with no agreed definition – BP includes natural gas liquids as oil, although in market terms they are different products).

The key message from BP’s data is that ~90% of the increases in oil production in recent years came from only two countries – the US and Canada, driven by tight oil and tar sands respectively (no other country has delivered any material unconventional oil production to date).

These production increases fed into a market that also – completely coincidentally – saw major supply falls from various OPEC countries that were be-set with geo-political problems (“events”), particularly Libya.

On the demand side, growth was anaemic, but given the supply side balancing effect noted above, the market was balanced.

Then, in the second half of 2014, ongoing supply growth from North America could no longer be matched by Middle East/North African disruptions, with the resultant effect of excess supplies and falling prices.

Commodity prices

Crude oil prices fell somewhat overnight, with Brent closing at US$62.61 and WTI at US$59.52.  Data from reporting agency Platts confirmed strong OPEC production (well above agreed quotas) of 31.1 mmbbls per day.  This, combined with US EIA numbers indicating (albeit based on forecasts rather than hard well data) that US production was still slightly increasing.

Henry Hub bounced up ~4% to US$2.89 on hot US weather.

LNG

Following on the news reported yesterday about the Petronas led Pacific Northwest LNG venture in British Columbia reaching “conditional” FID, there has been a mixed bag of responses.  Naturally the mainstream Canadian politicians are delighted with the potential very large investment coming closer.

However, the First Nations groups who recently rejected a C$1B deal to provide key land access for the project were vocal in their continued opposition.

It is not clear (from this Australian perspective) whether that opposition is just a negotiating tactic – but I suspect it is more complex than that, and therefore consider that an unconditional FID in this calendar year seems optimistic.

A bit closer to home, some new data points on the ongoing evolution (revolution”) in LNG markets:

  • Singapore’s SGX exchange has recently announced a formal plan to create a tradeable LNG pricing point, notionally (not linked to physical deliveries) at Singapore.  This is yet another move by the Island Nation to make itself the centre of Pacific (if not global) LNG trading.
  • However, LNG trading (via spot cargoes) into Japan must have been very thin last month.  Japan’s METI has announced that it will not release any spot pricing data for deliveries into Japan in May, as less than two cargoes were delivered in the month (it has a cut off point of two cargoes for announcing pricing data, no doubt in order to maintain confidentiality).

Governments and fracking

Some movement in the UK on the long delayed Caudrilla shale gas exploration program (the last well was drilled four years ago).  The local Lancashire council planners have given its approval for the exploration to re-start (subject to full council approval).  The Westminster Government is supportive.  However, the population is in my view still not ready for the evils of fracking to blight their green and pleasant land – and likely won’t be for the forseeable future.

Expect protests from Frackman’s English cousins!

Company news – A J Lucas Ltd (AJL)

AJL has a 45% stake in Caudrilla and its share price has responded favourably today to the above news.  AJL has to date spent ~$90M on this venture – not far off its current market cap of ~$100M (which covers all its multiple service business lines).

Company news – AWE Ltd (AWE)

AWE has provided the market with another update on its onshore Perth Basin well, Waitsia-1 (held 50/50 with Origin Energy Ltd – ORG).  AWE has advised that the well has identified a gross gas bearing column of 95M with good (conventional) reservoir quality.  Commerciality appears to have been established.

Waitsia-2 will now be drilled whilst Waitsia-1 will be used as a production well.  AWE is aiming for commercial sales to commence in ~one year’s time.

Quote of the day

What I call the Mr Micawber explanation for the current oil price (i.e. a pithy summary in numerical terms for the cause of the current “misery”) – Exxon’s Rex Tillerson in December last year:

“If you take a 1.6 million barrel per day supply growth and put it on top of a 1 million bpd demand growth, you’ve got a surplus of capacity.  You fill storage up, you fill inventories up, at some point it’s got to show up in prices.”

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