Today’s Blog – Thursday 10th December 2015

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Introduction

Fatah Birol, the head of OECD energy body the IEA, has been a vocal proponent of the theory (which we share) that current cut-backs in oil and gas investment will inevitably lead to tightening supply – and hence large price increases – in the future.

Interviewed this week at the Paris climate conference, Birol noted that the investment cuts made were the most dramatic in the long history of the oil and gas industry.

Notwithstanding this view of the outlook for the “medium” term (NB – by far the most important question in the oil industry right now is what “medium” means), Birol considers that 2016 will remain another year of gloom for the industry, with the re-balance of supply and demand taking far longer than many expected this time last year.

Commodity prices

Oil prices were fairly flat to negative overnight, with Brent closing slightly up at US$40.40 and WTI down somewhat at US$37.37.

The weekly report from the EIA had good and bad in it – but the market in its current mood focused firmly on the bad.

The good news from the report was a large inventory draw of 3.6 mmbbls (much better than expected and in a “neutral” week, this would have been seen as unconditionally good news).   However, there was a more than countervailing build in product builds, with gasoline increasing by 0.8 mmbbls and distillate by 5 mmbbls.

The Henry Hub natural gas price continued to slide in the face of warm weather, closing down at US$2.06.  The forward strip for this indice for January (normally the highest demand and hence highest price month) is at its lowest seen for 17 years.

LNG and international gas

The PRC has put substantial efforts into increasing its domestic gas production in recent years, particularly from unconventional targets.  However, its hopes of emulating the shale revolution in the US have to date been thwarted by factors such as complex geology, water limitations, much less sub-surface knowledge – and most importantly in our view, by the pursuit for shale being led by inefficient NOCs rather than nimble independent US oil-men.

Recent reports have put the current production of shale gas in China as being materially less than planned.  And the latter word is important – politically significant numerical targets in China are normally pursued without that much concern for economics or the environment.  It is therefore likely that Chinese NOCs CNPC and Sinopec are losing money on their shale endeavours in China – and likely a lot of it.

However, from the point of view of LNG suppliers looking wistfully on what was widely expected to be an ever-expanding Chinese gas market, whether the NOCs make money or not does not matter – they deny market share.

Governments and fracking

Few will be surprised that a recent Victorian Government enquiry into CBM and fracking in the State has not come up with anything than a recommendation to conduct more “studies”.   The current so-called moratorium on onshore oil and gas exploration in Victoria will therefore stay in place.

Perhaps no-one told the Parliamentary committee about a place to the North called Queensland, where tens of billions of economic wealth has been created by CBM without any material environmental impact.

Company news

Its a very thin time of year for company news in Australia’s rapidly shrinking (by market capitalisation and number of companies) oil and gas sector.

However, one company that we have noted before that is actually conducting a high impact exploration and delineation program at present is FAR Ltd.

FAR announced today that the SNE-2 delineation well (offshore Senegal) had been drilled to TD on time and budget and that DSTs were currently being performed.  Results to date were said to be in line with expectations.

Company news – Origin Energy (ORG)

News from ORG’s downstream energy business was reported in The Australian Financial Review (AFR) today – that it had struck a deal with Elon Musk’s Tesla to market the powerfully branded “Powerwall” home based electricity storage system.

This is one data point that we think could support our view that ORG could well undertake a dramatic change of strategic direction next year – ultimately spinning off all its upstream assets.

European energy companies such as E.on could provide a road-map for ORG.  In response to energy – and capital – market trends, it is splitting into a sexy renewable energy/retail business, leaving its boring old fossil fuel assets behind in a separate company.

In 2016 ORG could well:

  1. Sell its non-core E&P assets as it has previously flagged.
  2. Divest its much larger Queensland LNG business to the likes of Woodside, Santos, Scepter Partners – or others who would be interested in a rare opportunity to acquire an operated LNG business.
  3. Focus on a rapidly evolving downstream energy supply business where the focus is shifting from utility scale investments to households, and where solar, storage, finance, flexibility, etc,  are replacing vertical integration.

Quote of the day

Summarising his views as set out above, the EIA’s Fatah Birol said:

“We have never seen, in the last 30 years, two years in a row of oil investments declining and this will have a impact on production in the next few years…We may well see some surprises down the road as a result of lack of investments in oil production.”

Note – the word “surprises” is a polite one.