Today’s Blog – Friday 29th April 2016

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This blog has often mentioned the “risk” of additional crude supply coming on from the currently largely shut-in fields of Libya – with a developed capability of >1 mmbopd, this is arguably a larger figure than the often more focused-upon numbers that could come from Iran and/or Saudi Arabia.

Another OPEC country has however significant risks the other way – of current production being shut in due to political instability.   This is Venezuela, where the almost daily news is of a country disintegrating on numerous fronts, as the wilful economic illiteracy of the Chavez era comes home to roost.

Depending on what published numbers one believes, Venezuela is one of the largest hosts of crude “reserves” and exports meaningful volumes of up to 2 mmbopd.

However, in addition to almost Zimbabwean inflation and a chronic shortages of critical goods, the country now faces electricity black-outs over much of the country.  This is due to a lack of water in the country’s largest hydro-electricity dam – and a lack of fossil fuel back-up due to Chavistan policies (why maintain a boring old electricity generation plant when you can protest against the damn Yanquis instead!).

Severe political dislocations could erupt – leading to large reductions in oil exports.  And one very much doubts that the damn Yanquis would want to come in and clean up the mess (unless the Chinese creditors of the country forget too zealously about the Munro doctrine).

Commodity prices

Happy days continued in crude markets overnight, with Brent up 1.5% to US$47.91 and WTI closing up 1.2% to US$45.88.  The weakening US dollar was the main driver.

We have often said that we expect crude prices to recover in the “medium” term as the current capital investment strike into a industry defined by depletion plays out its inevitable consequences of tightening supply and even shortfalls.

However, we don’t expect the definition of “medium” to be quite as long as implied in some recent output from industry analysts Wood Mackenzie, who were reported by UPI as stating that over-supply could reverse in “20 years” due to the current lack of exploration.

Henry Hub closed down 4% at US$2.06.

LNG and international gas

Coincident with our story of yesterday about Chinese/Russian wranglings over pipeline gas supplies, Forbes published a story this week about China’s increasing need for gas imports of all types as its indigenous supplies depleted.

If Power of Siberia fails – or even if it is just delayed (and we think delay is a best case) – there is a very big market opportunity for incremental LNG to China over the next 10 years that industry models would generally currently allocate to Gazprom.

Company news – Origin Energy (ORG)

TSX/AIM dual listed Falcon Oil and Gas – who has acreage in the Northern Territory’s Beetaloo Basin, recently issued a bullish update on its forthcoming work program there.

Falcon is the beneficiary of a generous farm-in program funded by ORG and also South Africa’s Sasol (with a level of promote that exploration companies can only dream of in present farm-in deal conditions).

Falcon announced that the farminees will fund the fracking of some previously drilled wells in the next few months.  Given the expected moratorium on fracking that will introduced into the NT if the opposition Labor party win the forthcoming election, the farminees may have a rather different view on this.

Which would be nice for them given they would no doubt not chose to spend high risk exploration dollars at present.  We expect force majeure claims and legal action in due course.

Some other company news from ORG emerged from Queensland. This was a move by private US company Tri-Star Petroleum to try to join a court case between ORG’s APLNG JV and the Queensland Government over royalty calculations.

Tri-Star has a very valuable private royalty over APLNG tenements as well as a right to have an interest in said tenements handed back to it in certain circumstances (basically if the projects developed thereon achieve returns beyond a certain point).  Therefore one can understand the money at stake (a lot!) and why this course of action has been followed.

Quote of the day

We noted recent bullish comments from US company Pioneer Natural Resources about ramping up drilling again when the oil price hits US$50.  These should be tempered by the following view of Wood Mackenzie representative, Fraser McKay:

“It’s not just about touching $50.  It’s about touching, maintaining and having the perception of future prices above $50 a barrel before you start sanctioning projects.”

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