Today’s Blog – Friday 3rd July 2015

Introduction

Sitting just to the North of China here in Mongolia, I’m aware of one otherwise opaque factor which could affect potential Chinese gas demand – the possible extent of the PRC’s plans to develop coal-to-gas (CTG) projects.

In effect, these are energy inefficient, polluting and capital intensive projects whose prime purpose is to move pollution from the densely populated parts of Eastern China to the likes of Xinjiang in the West and Inner Mongolia in the North – and even to the neighbouring country of Mongolia.

Chinese NOC Sinopec in particular has in recent years invested many billions of dollars in CTG in China itself (and is investigating doing the same to the North).  However, its projects have been plagued with technical difficulties and production therefrom is immaterial in total Chinese gas demand terms. If these problems are fixed and further investment goes into the sector, it will be another negative on LNG demand from China.

In my view CTG is almost entirely driven by politics not economics – but as the casual visitor to the non-climate controlled Beijing airport knows, the politics of reducing coal pollution in Eastern China is important.  If that comes at the cost of loss-making and polluting CTG plants elsewhere in the country, so be it.

Commodity prices

Crude oil prices were flat overnight, with Brent closing at US$62.07 and WTI at US$56.93.  This was notwithstanding a negative BHI weekly rig report (which came out a day early due to the Fourth of July holiday). The report said the total rig count was up by three – with an increase of 12 oil rigs and a decrease of 9 gas rigs.  It looks like the statements from the tight oil focused companies about increasing drilling at US$60 oil were more than mere bravado.

On the “events” side of the crude markets ledger, moves appear to be afoot amongst Libya’s warring statelets to unite to crush ISIL in the country.  If such unity was maintained, then Libya could bring back quite a lot of crude production onto world markets – certainly at a much faster ramp rate than could Iran post any nukes deal.

Henry Hub ticked up a couple of cents to US$2.82.  Gas injections were slightly less than normal for the time of year due to the weather and as noted above, the gas rig count fell.

LNG

Reuters has reported that Japan’s average LNG cost for the month of May was US$8.84/mmbtu – the lowest for around six years.  Spot prices were lower than the average price.

Governments and fracking

A recent quote from one of the Lancastrian councillors who blocked the Cuadrilla drilling program: “I’m not against fracking as such, but I feel it’s in the wrong place.”

That captures the essence of the problem well.  And in the densely populated British Isles, which councillor would think his area was the “right” place?

The British Government will have to make significant changes to the regulatory environment if it is serious about developing tight gas in the UK.  However, the opponents of same will usually include typical Conservative supporters – so the question becomes – will Cameron spend political capital on such an issue when it would only produce benefits years down the line.

Company news – Oil Search Ltd (OSH)

OSH has announced progress on the Elk/Antelope LNG project in PNG in which it is a partner with operator Total and US company Interoil.  In the JV’s march towards entering FEED next year, it has identified preferred sites for its liquefaction plant (next door to PNG LNG), etc.

However, customers will be kings for this as for nearly all other LNG projects at present.  Such customers, if they for portfolio balance reasons wanted PNG gas, would likely prefer to deal with the Exxon led PNG LNG brown-fields expansion project, as being a less risky supply option.

OSH also released a monthly drilling report yesterday.  The Elk/Antelope drilling program appears to be going well.  However, the company’s Kurdistan well, Taza 3 ST 1, has come up dry in its primary target and will now move onto testing some secondary targets.

Drillsearch Energy Ltd (DLS)

DLS has today announced that its MD, Brad Lingo, is leaving the company with immediate affect, “by mutual agreement“.

The company’s COO, ex-BG executive Walter Simpson, is now the acting CEO, whilst the normal “global search” is undertaken.

What this might signal or otherwise mean in the context of Seven Group’s 20% holdings in DLS and Beach Energy Ltd (and the latter’s own holding in DLS) remains to be seen.  The market has priced up DLS today.

Quote of the day

From Mongolia’s Genghis Khan (more accurately Chinggis Khan), whose family founded the Yuan Dynasty in China nearly 800 years ago:

“Heaven has abandoned China owing to its haughtiness and extravagant luxury. But I, living in the northern wilderness, have not inordinate passions….In the space of seven years I have succeeded in accomplishing a great work, and uniting the whole world in one empire.”

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