Today’s Blog – Friday 1st July 2016

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

We only have time for a flash blog today


The Australian Financial Review (AFR) today published a story about spiking domestic gas prices on Australia’s East Coast – caused by a combination of liquefaction train ramp-up in Queensland together with chilly weather driving higher local demand.  Wholesale prices in Sydney reached an incredible A$29 per GJ earlier this week – although such published spot prices are only a small part of the over-all, largely contracted, market.

This scenario begs the question: why are the LNG exporters not selling into this high priced market instead of selling LNG at much lower prices?  Pacific LNG spot prices are a fraction of this sort of price – as indeed are LNG contract prices, albeit to a lesser extent.

In addition to the economics of the issue, there is also a political angle – it is surely not prudent of the producers to allow domestic prices to spike like this – it invites Government intervention.

Markets can be very inefficient in the short term and this is a classic case of that. The reasons for the inefficiencies here likely include:

  • Cumbersome joint venture ownership of the LNG facilities, including Government controlled entities, that are institutionally (currently anyway) incapable of making quick decisions.
  • Engineers driving decisions on e.g. the smooth commissioning of liquefaction plant.
  • Corporate bonuses set on meetoing sales contracts rather than maximise profits.
  • An ingrained culture that selling LNG is “better” than selling domgas, due to the historical typical price premium for the former.

Commodity prices

Crude traders took some profits overnight – with a long weekend looming in the US for the 4th of July.  Brent closed at US$49.71 and WTI at US$48.33.   Over the course of some fluctuations in the month of June, the ending point was pretty much the same as the starting price.

Henry Hub continued its rise, with US$3 now being in sight, as it closed at US$2.92.

LNG and international gas

Rumblings are building over in Alaska over the potential for its maverick Governor to call a default on the hugely valuable Prudeau Bay State leases – possibly to try to drive the Producers to move faster on developing the massive Alaska LNG development.

It is not clear why the Governor would think that would make the slightest difference to the dynamics of the global LNG market – i.e. one in which there is effectively no “room” for new projects.

If this story is true, it could lead to a spend on legal fees about equal to Alaska’s GDP.

Quote of the day

With the overnight news that Boris Johnson will not run for leader of the Conservative Party, we looked for the Latin version of “you broke it, you fix it”, but our poor erudition in the classics unfortunately reflects our lack of an Etonian education.

Instead we have something which Boris might have thought of before the Brexit vote:

Sic faciunt omnes.”

(If it ain’t broke, don’t fix it – or possibly for Python fans, “He who is called Romanes leaves the house.”)

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