Today’s Blog – Monday 11th January 2016

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Introduction

In last Friday’s blog we raised the question of the true nature of Saudi Aramco’s reserves position.  At a rather different end of the energy market, later on Friday we saw an ASX announcement from small-cap Leigh Creek Energy (LCK) about what it called “contingent resources” at its South Australian underground coal gasification (UCG) venture.

Incredibly, LCK announced a 2c booking of nearly 3,000 PJ of “gas” (for UCG this would presumably be a weak-energy mix of H, CO and CO2).

From our point of view, this announcement was a case of an ASX resource booking announcement really jumping the shark.  LCK has done no sub-surface work and certainly has not flowed any fluids to surface.  Our rough rule of thumb is that C2 bookings require fluids (oil or gas) to flow to surface and reserves bookings require such flows to be commercial.

As we have noted before, politicians (and the wider community generally) can fall prey to visions of hope from such announcements – particularly in the context of Leigh Creek’s recent coal mine closure.  However, we put the chances of LCK (or anyone else) actually developing these contingent resources at close to zero.  And this is without even going into the serious issues of pollution, etc, that UCG operations (or even tests) would be likely to cause.

LCK’s share price rose substantially on the announcement – giving a clue to the only beneficiaries of this sort of news – the company’s promoters.

Given the failure of every other UCG company that has listed on the ASX, we are surprised that there are enough suckers left to support this sort of promotion, but perhaps the apparent political support for this venture has left shareholders to conclude that “this time it is different”.

Commodity prices

It was a shocking week for crude markets last week – with 10% falls in London and New York.  On Friday, Brent closed down at US$33.55 and WTI at US$33.16.

Good economic news from the US (strong employment figures) didn’t do much to act against the overwhelming bear-ish sentiment of markets at present.

The BHI weekly rig count was also positive, with a large fall of 34 rigs (20 oil rigs and 14 gas rigs).  In the middle of last year, a fall of that size would have been taken very bullishly – but for just now, the market concludes that the correlation between falling rig count and falling US production is weak.

The US dollar continues to prosper as the safe-haven currency and commodity exporting currencies like the AUD face systemic weakness.

Thankfully the gleam of light that is a rising Henry Hub gas price continued, with a strong close on Friday at US$2.47 (up 6% for the week).

Governments

Confusing (to us) news has been emerging in recent days about a gas leak from an underground gas storage facility in California ultimately owned by Sempra Energy (through utility SoCalGas).

Media reports indicate that the company has spent ~US$50M trying to fix the problem since the leak started in October, to little avail.  A relief well is now being drilled – but is estimated to take 3-4 months (question – why so long for an onshore well?).

Californian tort lawyers are rubbing their hands with glee at what is claimed to be a multi-billion dollar liability.

From afar, we wonder why the storage reservoir cannot be blown down from other wells (it seems unlikely to only have one) and why intervention is so expensive and time consuming.

The results of this gas leak could have consequences further afield – for legitimate and un-related reasons.  Well integrity will rightly come into focus – and also fossil fuel opponents will use any negative material they can get to oppose un-related matters such as fracking.

Company news – Shell and BG

The shareholder votes for Shell’s takeover of BG are coming up soon and various media reports over recent days have generally noted shareholder support for the transaction (notwithstanding a persistent large discount to the implied deal price in BG’s share price).

In its media interviews, Shell has taken a bullish line on the prospects for medium term LNG markets (which are the key strategic driver for the BG deal).  It notes that current low prices are doing their usual job in stimulating new demand, as are such technical advances as more floating re-gas facilities.

Shell also said that it had recently rolled over 10 LNG contracts with oil price linked formulas intact – i.e. buyers have not leveraged the rollover to secure something lower (although we remain wary about such disclosures – have buyers got something else they were looking for, such as destination flexibility, etc).

Company news – Origin Energy (ORG)

ORG today announced that the first cargo from its Queensland APLNG project had sailed (which it had previously flagged as being due by 2015’s year end).

Media reports today also flagged that ORG expected to make infrastructure sales of ~A$800M by the end of June – for various assets including pipelines and wind-farms.  This is in addition to its upstream asset sale program.

The company is being more pro-active than others (Santos anyone?) on managing its balance sheet and for instance we note that the cost of the oil price hedges which it bought at the end of last year would now cost considerably more if done today.

Quote of the day

They are only just warming up – the Californian lawyers circling Sempra:

“There’s no study to know what the long-term effects are. What about some of these children? Do you think people’s homes are going to be worth the same?”

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