Today’s Blog – Wednesday 13th July 2016

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Editorial

Overnight the International Tribunal on the Law of the Sea ruled that China’s infamous “nine-dash-line” (see map below) claim over vast nautical territories to its South were invalid.  Not surprisingly, China’s response has effectively been “sez you!” (the polite version).

SEA-ninedash600

Any media coverage of this topic almost invariably mentions that “it is rich in oil and natural gas” (e.g. today’s Australian Financial Review [AFR]).  The Economist rather more accurately describes these riches as the area’s “purported hydrocarbon riches“.

There is oil and gas production and reserves on the fringes of the South China Sea – off Vietnam, Indonesia, Malaysia, the Philippines and the PRC itself.  But the volumes are low in global terms – this is no Gulf of Mexico or North Sea – and indeed in a long-gas-supply world seems gassy rather than oily.  Who would explore in this region given the prior and now escalated political risks?  The “purported” potential is likely to stay just that for a very long time.

The real issues for the oil and gas industry arising from the region are global stability and transit for petroleum bearing vessels.

We think the PRC will huff and puff over this – but do no more at this point.  The main risk to the World is if The Donald enters the White House at the end of the year and China decides to immediately test his announced West Pacific policy of unconditional retreat and getting his allies to pay for falling American support.

Hello Australia!  We live near here!  (I better check my EU, I mean British, I mean Scottish, passport out…).

Commodity prices

Crude prices bounced strongly over-night, closing up nearly 5% at US$48.17 (Brent) and US$46.62 (WTI).  The Reuters and API estimates of tomorrow’s EIA crude/product inventory numbers were quite bullish.  Market commentators also referred to the slippery “technicals” again (the thing to refer to when things move for less obvious reasons).

Henry Hub also came back – although only 1% to US$2.73.

LNG and international gas

To the surprise of few, the Shell led Kitimat LNG project located in Western Canada announced yesterday that it had deferred the making of any FID decision indefinitely.

This decision reflects the general tightness of LNG markets, particular issues associated with Western Canada – e.g. likely high greenfields construction costs, stakeholder opposition from indigenous and green groups, etc.

It also reflects the likelihood that Shell has better LNG projects elsewhere.  The best of those might be the expansion of Sakhalin LNG off Eastern Siberia.  Readers may recall Shell’s CEO signing MOUs in Russia recently on this and other topics.  What’s the Russian for “quid pro quo?”

Governments, fracking, etc

The liquidators of failed underground coal gasification (and conventional hydrocarbon) company Linc Energy have apparently done a deal to sell certain assets – but not the UCG assets in Queensland which appear to have caused major pollution problems.

The conventional assets include exploration acreage in South Australia’s North which the company said a few years ago contained “gazillions” (if memory serves us correctly) of barrels of oil.  Buyers for this would be few – we speculate a Chinese company.

Domestic gas markets

Its cold down here in South Australia!  (but not if you have ever lived in the UK, the US, Europe, China, etc, etc, etc).  That has caused local electricity and gas prices to spike (the latter to ~A$26/GJ).

A classic demonstration of market inefficiencies – the Queensland LNG producers should capture this market (it is not even that high volume) rather than sell to Asian customers at fractions of these prices.

And if they don’t – Governments will be watching.

Company news – InterOil

InterOil said yesterday that an un-named party was continuing to do due diligence.  The media still expects this party to be Exxon.

Quote of the day

Another quote from US based industry commentator Art Berman on the oil price consequences of the capex cuts over the last year or so:

“Half a trillion dollars. That is going to come back and hammer us. It is absolutely going to hammer us. You can’t do that. You can’t do that in any business and you certainly can’t do it in a capital-intensive long-term business like we are in.”

 

 

 

 

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