Today’s Blog – Thursday 21st April 2016

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

Introduction

In the face of declining LNG spot prices – with US$4/mmbtu now common in the Pacific – the question is begged: “how low can it go?”.

In our view LNG spot prices could (in theory at least) go negative.

Lets look at Australia’s liberalised electricity markets – where prices are occasionally negative.  Such outcomes are driven by:

  • Electricity supply is long.
  • Power stations are highly capital intensive, but with low operating costs.
  • Coal fired power stations in particular are hard to shut down in response to falling prices and face cost structures such that it is economic to occasionally pay to generate rather than shut down and then have the costs of starting up again.
  • Renewable generators receive income from two sources – Government mandated credits as well as the sale of actual electricity.

LNG ticks a lot of the same boxes: long on the supply side; sunk costs (particularly US liquefaction with third party capacity contracts); low operating costs – and in many cases, two income sources – gas and valuable liquids.

We can therefore forsee it making sense for some LNG participants to pay off-takers to take gas cargoes in order to still realise liquids revenues.  If gas and oil prices increasingly bi-furbicate – as we expect them to do given their very different supply side situations in the “medium” term – then this driver could be exacerbated.

Commodity prices

Oil prices continued their strong run upwards last night (so much for our post Doha prediction of big falls that we made on Monday).  Brent closed up ~4% at US$45.56 and WTI traded even stronger, closing up ~7% at US$43.96.

The weekly EIA report showed a crude build of 2.1 mmbbls, ameliorated somewhat by a product draw of 0.1 mmbbls of gasoline and 3.6 mmbbls of distillate.

The strike in Kuwait was resolved and the shut in capacity will come back very soon.

Given the strong bull sentiment in this market, one can imagine that only a few week’s of inventory draw data would drive prices back into the US$50s or higher.

Henry Hub closed down ~1% at US$2.07.

LNG and international gas

Australian LNG suppliers Woodside Petroleum (WPL) and Oil Search (OSH) have both issued quarterly reports in the last few days. Both noted that their plants in Western Australia and PNG respectively are producing at above name-plate capacity.

Such production will be into spot markets (with prices as noted above).  This makes economic sense at US$4 given the dynamics noted above – and would continue to make sense at much lower – even negative? – prices.

In a recent article on the website of Russian news agency Interfax it was speculated by a Singapore source (promoting the hub role of that city) that up to half of Pacific LNG sales could be spot sales by as early as 2020.  If that is correct – it is revolution time in the traditionally slow-moving world of LNG.

Governments, fracking, etc

As we have reported upon before, the opposition Labor Party in the Northern Territory has recently successfully managed to curtail a few hundred million dollars of investment in the NT’s E&P sector by promising (post an election later this year which it is expected to win) the usual dishonest “moratorium” and “studies” into fracking.

Now some politicians in the Territory are calling for an even worse political solution – a referendum on the emotional but technical issue of fracking.

That is a terrible precedent which will hopefully be resisted.  Referendums are very blunt political instruments that should be reserved for constitutional matters not populist (but highly economically damaging) gesture politics.

Company news – BHP

BHP’s recent quarterly report contained some news that must make geologists at pretty much every other oil and gas company go green with envy – an increased, rather than slashed to the bone – exploration budget.

We consider this a wise move by BHP and it demonstrates its fiscal and strategic ability to truly invest through the cycle.

Contrast and compare this to its smaller listed E&P peers, who seem to be planning to be busy over the rest of 2016 down-sizing their businesses for a US$30 oil world (note curernt price above – fighting the last war anyone?).

Quote of the day

From German statesman Otto von Bismarck on the subject of trying not to fight the last war:

“Only a fool learns from his own mistakes. The wise man learns from the mistakes of others.”

 

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