Today’s Blog – Tuesday 26th April 2016

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Introduction

Last Friday saw the release of a report from Australia’s competition regulator, the ACCC, which has many potential consequences for the gas industry on the country’s East Coast.

The Federal Government last year gave the ACCC the task of reviewing the structure of the East Coast gas market and making recommendations to improve it.  Legislative and regulatory changes should follow to implement a good part of those recommendations – however likely not all of them.

For instance, the ACCC make the obvious point that the cowardly policy of “moratoriums” and “reviews” into developing on-shore gas in much of East Australia has retarded supply, reduced competition and hence increased prices.  However, this a matter of State not Federal policy and we think it unlikely that the States will be brow-beaten by the voice of reason when the voices of reaction and populism – from both left and right – are much louder and when “kicking the can down the road” is usually the preferable policy.

One set of recommendations from the review concerns much more detailed disclosure of reserves and resources – including stating price assumptions.  In some ways, (if implemented) this will drive the Australian disclosure regime to look more like that prevailing under the SEC in the US.  However, we still expect much whinging from the E&P companies about this (including those such as BHP and Exxon who disclose under SEC rules in the US).

It was no surprise that APA, as the owner of most of the gas transmission pipeline network on the East Coast, slammed the report.  Hubris appears to have led the company to forget the famous quote from Hamlet – “the lady doth protest too much, methinks.”

Commodity prices

Due to the public holiday in Australia yesterday we are bit behind in our oil price monitoring.  Friday’s close saw a rise on the day of ~1%, with Brent closing at US$45.11 and WTI at US$43.73.

The rise for the week was 5% in London and 8% in New York.  So much for our predictions last Monday, post the debacle in Doha, of numbers starting with a “3”.

The rig count on Friday was bullish again – with a drop of 8 oil rigs and 1 gas rig.

Monday’s trading was more bearish – with Brent falling 1.4% to US$44.48 and WTI dropping 2.5% to US$42.64.  Various news stories, from Kuwait and Iran in particular, about production increases, weighed down the market for the day.

Henry Hub closed at US$2.06 yesterday – rising on Friday and then falling on Monday to close pretty much at Thursday’s price again.

LNG and international gas

More stories about the liberalising LNG gas market:

  • Indian gas buyer GAIL is seeking to swap contracted cargoes from the US with LNG supplies nearer to  home – thereby saving on shipping costs of ~50c/mmbtu.  It has formally tendered to do so.  The obvious swap counter-party would be Qatari volumes contracted to Europe.
  • Japan is considering restricting (or even banning) “destination” clauses in LNG contracts.  These have traditionally limited the buyer’s ability to on-sell cargoes and are clearly anti-competitive in nature.  Europe has already gone down this path.

Governments, fracking, etc

Opponents of a gas pipeline planned to take Marcellus gas into New York State have had a victory, with a regulatory decision blocking this (for just now anyway) on grounds associated with disturbing water courses.

Coal fired generators and sellers of heating oil will no doubt join with the green crowd in celebrating this decision.

Company news – Santos (STO)

STO released its quarterly report on Friday.  Volumes were up, but revenues flat, given falling oil (and hence LNG) prices.

The company’s strategy of what we have mischievously called “fighting the last war” was evident in a number of backwards looking (in our view) statements about focusing on cutting costs, etc.

Quote(s) of the day 

Regular readers will be well aware of our views that much “producivity improvements” and cost cuts obtained over the last year are not sustainable (and hence have implications for oil prices surprising on the upside in due course).  This was vividly illustrated by the following quotes from the 2 giants of the service sector last week:

“The decline in global activity and the rate of activity disruption reached unprecedented levels as the industry displayed clear signs of operating in a full-scale cash crisis.” – Schlumberger CEO Paal Kibsgaard

“What we are experiencing today is far beyond headwinds; it is unsustainable. My definition of an unsustainable market is one where all service companies are losing money in North America, which is where we are now.” – Jeff Miller, President of Halliburton

 

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