Today’s Blog – Wednesday 10th February 2016

Please pass this blog onto others who may like to read it

This blog will be short and or intermittent this week due to travel commitments

Introduction

A recent news story from the Canadian province of Sasketchawan illustrates a growing issue for the oil patch in this time of low prices and economically weak actors.  This was a call from the Province for the Federal Government to fund abandonment and clean-up costs for a growing number of uneconomic late-life wells.  The call was dressed up in the clothes of job creation – but ultimately pointed towards a gap in funding such costs.

Low prices mean there are many more uneconomic wells than there used to be a few years ago – and the companies who are generally supposed to pay for clean-up costs have either much less funds or occasionally have gone broke.  In an offshore environment like the North Sea the costs involved are a higher order of magnitude.

We expect a sustained low oil price environment to leave Governments with a large pool of unexpected clean-up costs.  That could provide opportunities for those who can develop business structures or offer business services to address such a phenomenon.  It will also make Governments much warier about such risks in the future – which could lead to e,g, burdensome new regulations and less liquidity in asset markets.

Commodity prices

Crude fell overnight (following another fall on Monday).  Brent was down ~6% at US$30.79 and WTI is again plumbing the sub-US$30 depths, down ~5% at US$28.41.

Monday’s falls were driven by the realisation that Venuzela’s current global wanderings to try and gain pan-OPEC cooperation over a production cut were optimistic.  Tuesday’s falls were driven by “numbers” – estimated builds in US inventories and a report from the IEA foreshadowing ongoing excess supply over weak demand.

The scale of Venuzela’s economic problems – caused by falling oil prices and the collapse of the bizarre Chavez-ista dream of South American socialism – was illustrated last week by a news story that noted that three dozen 747s had had to be chartered to import sufficient new bank notes to deal with the country’s current hyper-inflation.   Supply risks from the largest holder of reserves in the continent are not often commented on, but are not immaterial.

Henry Hub closed down as well – at US$2.09 – but that was after a rise on Monday.

Quote of the day

With the formal start this week by new Santos CEO, Kevin Gallagher, we return again to some words of wisdom from Edward Gibbon’s Decline and Fall of the Roman Empire:

“The ascent to greatness, however steep and dangerous, may entertain an active spirit with the consciousness and exercise of its own power: but the possession of a throne could never yet afford a lasting satisfaction to an ambitious mind.”

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