Today’s Blog – Thursday 30th July 2015

Introduction

A consistent theme of this blog is the inevitability of a tightening in oil supplies in the medium term (with consequent price rises) as a result of the significant capital expenditure, personnel, etc, cuts that have been made since the collapse in oil prices that occurred at the end of 2014.

Wood Mackenzie has recently calculated the extent of these capex cuts as being at least US$200B.  In volumetric terms Wood Mack say this represents 20B BOE of resources (in comparison to annual total oil demand of ~32B bbls).  Wood Mack don’t break down the 20B into oil and gas (at least not unless you pay them lots of money) – but it appears to be largely oil (oil sands and deep water, etc).    In my view, one can’t take out ~60% of annual demand out of the system without pricing consequences.

Ah – but some would say that this is a mere deferral and that the taps will be readily turned on again.  But – oops, look around –  we have fired all the guys who know how to turn on those taps again and last time I looked labour markets weren’t a model of neo-classical economic efficiency.

Commodity markets

Crude oil prices continued to recover slightly from their recent China/Iran/BHI rig/etc shock, with WTI doing much better than Brent, rising to US$48.79, with Brent staggering up only a few cents to US$53.38.  The EIA’s weekly inventory data encouraged the bulls, with a large build of 4.2 mmbbls reported.

On the “events” side of the ledger, Dow Jones has reported that Saudi sources indicated that current KSA production of 10.6 mm bopd would be reduced to 10.3 mm bopd after summer (although one should note that the Saudi summer demand profile – its hot, damn hot! there – gives rise to a larger than 300,000 bopd seasonal increase in demand – so Global markets won’t feel much if any difference from this).

Henry Hub ticked up a few cents to US$2.86.  The KSA is not the only place that has incremental air conditioning loads calling on fossil fuels – although using methane rather than oil for electricity generation is somewhat more economically and environmentally efficient.

LNG

Parallel stories from Reuters today about LNG in the neighbouring (but not exactly best-of-friend) countries of India and Pakistan:

  • India is apparently struggling to meet its take-or-pay obligations under LNG purchase contracts from Qatar.  Prices thereunder are markedly higher than LNG spot prices – and hello! – markets are working and cheaper gas is replacing expensive gas.
  • Meanwhile Pakistan is said to be close to signing a new long term LNG purchase agreement with Qatar.

Here is a case of markets not working.   India should sell its excess take-or-pay gas to Pakistan, but prohibiitve contractual destination clauses – and sovereign emnities – seem to have precluded that.

Governments

The ongoing – but seemingly little noticed – story about earthquakes caused by oil-field waste-water injections continues its slow burn.  Earlier this week, oil and gas operators shut down a couple of injection wells in Oklahoma because of earthquake fears – and before the regulator told them to do so.  This tells me that the industry knows this issue is real – both technically and in terms of its ability to spark community concerns that could make fracking seem like a sideshow.

Company news – Elk Petroleum Ltd (ELK)

ASX listed minnow, ELK (market cap – ~A$5M) has recently secured the services of ex Drillsearch Energy Ltd (DLS) Managing Director Brad Lingo as its new CEO.  This follows the abrupt exit of Brad from DLS only a few weeks ago – presumably in connection with a Board disagreement over strategy and/or “merging” with Beach Energy Ltd (BPT).

ELK focuses on enhanced oil recovery in the Rockies – a tough game at current oil prices.  Brad is said to be keen to take EOR to his more familiar patch of the Cooper Basin.  An even tougher game.

Company news – BPT and DLS

The very slow waltz between these two Cooper Basin companies continues.  The Australian Financial Review (AFR) today reported that BPT has added Macquarie Bank to its existing adviser team of Flagstaff Partners – presumably to address the potential “merger” (note – there is no such thing) with DLS.  The latter is said to have engaged Goldman Sachs and UBS on its side.

The strong emphasis in public announcements from both companies about tight cost control would not appear to extend to the investment banking cost category.

Cue Energy Resources Ltd (CUE)

CUE’s Board changed yesterday following an EGM called by its large shareholders.  Not surprisingly, the votes of those shareholders counted for more than the desire by old Directors to keep their jobs.  More surprisingly is that said Directors actually put shareholders to the expense of having the EGM rather than counting numbers and accepting the inevitable.

Quote(s) of the day

A comparison of where the oil and gas industry unfortunately finds itself today, compared to one with rather longer term vision:

“A major reduction in capital expenditure is budgeted, with lower priority projects deferred” – recent yawn-worthy BPT announcement

“SpaceX is only 12 years old now. Between now and 2040, the company’s lifespan will have tripled. If we have linear improvement in technology, as opposed to logarithmic, then we should have a significant base on Mars, perhaps with thousands or tens of thousands of people.” – Elon Musk

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