Today’s Blog – Monday 28th September 2015

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Introduction

The recent scandal of Volkswagen deliberately adopting a systematic program to fool emissions controls could have significant long term implications for global oil markets.

Crude oil is currently the source for transport fuels – its other market roles are either effectively over (electricity generation) or smaller scale (chemical feedstock).  However, this key role has arguably never seen as much competition as at present from well resourced players such as Tesla, Apple, Google, etc.

This week’s The Economist summarised the issue with: “If VW’s behaviour hastens’s diesel’s death, it may lead at last, after so many false starts, to the beginning of the electric-car age”.

In the medium term, a re-balance in the demand for the gasoline/diesel fractions of crude oil could also affect the demand and hence prices of the different grades of crude oil, with light sweet crude (and hence WTI at present) becoming comparatively less of a premium product.

Commodity prices

Crude oil prices finished up at the end of last week, with Brent closing at US$48.60 and WTI at US$45.70.  A fourth straight week of BHI rig count declines was the major factor giving succour to the bulls on the day (the decline last week was another four oil rigs).

The Henry Hub gas price fell to US$2.56, on numbers from the EIA that indicated that production has higher than demand by a greater than expected margin.  In July, gas once again surpassed coal as the largest source of fuel for the US electricity generation sector.

LNG

Further to the news story on Friday about the sovereign risks facing LNG projects even in the USA, such as Alaska LNG (AKLNG)  – Alaska’s populist Governor has subsequently formally introduced a concept that no doubt will look attractive to his peers in Mozambique, Tanzania, etc – a “gas reserves tax”.  The intent of this concept is to tax resources in the ground, thereby presumably encouraging oil companies to develop assets.

The concept shows a fundamental lack of understanding as to what are “reserves” – which seems surprising for a State which is built on the oil industry.  Although Alaska’s North Slope contains very substantial and well understood contingent resources of gas – it contains no gas reserves and will not do so until AKLNG reaches FID (i.e. reserves require commerciality).  By seeking to tax in-ground resources, Alaska’s Governor reduces the chances of such resources actually becoming reserves.

Governments

When your blogster was in the North Sea’s oil capital of Aberdeen recently, he noticed for the first time some hydrogen powered buses, which provided an interesting contrast with the fossil fuels which underpin the wealth of the city.

These buses (which cost more than one million pounds each) are fueled by hydrogen sourced from a depot which uses electricity to produce hydrogen from water.  That electricity is said to be sourced from wind-farms – although likely by contactual structure rather than physically.

Although this appears to be a vanity project funded in a time of US$100 oil, it does demonstrate another competitor to petroleum fuelled vehicles, albeit one that would seem down the merit order from electric powered ones.

Company news – Woodside Petroleum (WPL) and Oil Search (OSH)

The Australian today reports that WPL is increasingly unlikely to up its bid for OSH.  This may of course be deliberately leaked misinformation for tactical reasons, but does seem to be more likely than not.

WPL’s other options for taking positions in PNG remain open and on that front we note recent positive flow tests from US listed InterOil.

Company news – Inpex Corporation and Total

The West Australian has today reported what it calls a “snag” in the Ichthys LNG project (operated by Japan’s Inpex) off Northern Australia.  This however may be far more than a mere “snag” – apparently two production wells could not be completed and the whole production well program may need to be re-designed – and this for a project which is already spending US$10Bs.

Ichthys LNG recently reported cost over-runs and delays, which were largely from the downstream end of the project.  However, engineering challenges in building big fridges could well be preferable to geological challenges – sometimes the latter cannot be fixed.

Inpex (and partner Total – seemingly cursed in its choice of LNG projects such as Yamal and GLNG) will be fervently hoping that this project is not another one in a seemingly long line in recent times in the oil patch whereby development proceeded before appraisal was adequately performed.

Company news – Beach Energy (BPT)

BPT today reported that one of its JV partners had pre-empted its deal to sell its Egyptian assets to AIM listed Rockhopper Exploration PLC.  It appears that only one of the suite of BPT’s Egyptian assets was pre-empted, so it could well be left with an immaterial and non-core asset to manage and/or deal with in the country.

This is the second time in recent weeks that BPT has been thwarted by contractual pre-emptive rights – its acquisition of an interest in a Queensland Cooper Basin permit from AGL was recently pre-empted by another partner in the relevant joint venture.

Quote of the day

A recent quote from the irrepressible Elon Musk:

“What Volkswagen is really showing is that we’ve reached the limit of what’s possible with diesel and gasoline. The time has come to move to a new generation of technology.”

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