Today’s Blog – Monday 18th July 2016

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Editorial

Much media comment has followed the recent spiking of energy prices – electricity and gas – in South Australia.  The tone of the comments have tended to spring from the particular prejudices of those who are making them, rather than being overly fact-based.  For instance, we note the following misconceptions:

  • Today’s Australian Financial Review (AFR) has made the common mistake of believing that the high penetration of renewable generation in South Australia is a result of State Government policy.  In reality, renewable investment is driven entirely by Federal policy through the national renewable energy credit scheme – South Australia just happens to be windy (and has more private sector friendly planning laws and unions – something the AFR would normally applaud).  The mistake partially derives from State politicians claiming credit for something they have no influence over – e.g. at the ribbon opening ceremonies of wind-farms.
  • South Australia in this context is not a “mendicant” State – rather its citizens subsidise (through a higher priced State based electricity pricing system) the citizens of other States in meeting national renewable energy goals.
  • The State Energy Minister had to “ask” electricity generator Engie to turn on a moth-balled gas-fired plant.  He had no really firm directive powers to do so – but more importantly, it was in Engie’s self interest to generate electricity when the price of it was high.
  • The AFR mistakenly notes that the East Coast gas markets are “State based” and not “fully connected”. Taking these in turn – they are not (they were 20 years ago) – they are (they weren’t 20 years ago).  Economic concentration amongst pipeliners and utlities – and distance – have lead to high costs of moving gas.  The ACCC has recommended various changes to ameliorate this – but are being heavily lobbied agasint (quelle surprise!).

Commodity prices

Crude prices rose a notch on Friday, with Brent up ~0.5 % to US$47.61 and WTI about the same to close at US$45.95.  Over the course of a week of high volatility, the overall move was a rise of 1% (Brent) and 2% (WTI) respectively.

The rise came about notwithstanding yet another week of a rising rig count.  BHI’s weekly report indicated that oil rigs increased by 6 and gas rigs by 2.  Friday’s trading up was mostly a response to earlier declines in the week.

Henry Hub rose ~1% on Friday (but was down ~1% for the week), closing at US$2.76.

LNG and international gas

In close parallels with recent developments in California, the British gas market has come under stress (with prices rising markedly) due to the closure of the country’s largest gas storage facility, Rough.  Like the Aliso Canyon facility in the Golden State, concerns about gas leakages from poor well integrity in old production wells is the problem.

The UK has much less gas storage than other European countries (if the UK is still in Europe that is) such as Germany.  Partly this is down to geology – the Germans have suitable salt domes, partly it is down to planning laws/NIMBYs and partly down to historical flexibility from offshore production (now much diminished).

Australia also has a tight gas storage supply side – basically one merchant asset at Iona – and similar secular factors as in the UK.  If Iona came out of service in a cold Victorian winter – very high gas prices and even physical shortages would ensue.

Governments, fracking, etc

The slow burn of oil patch induced small earthquakes keeps on turning up a few notches in Oklahoma – with yet more seismic activity in the otherwise ultra-industry-friendly State.  Last week saw more than a dozen registered earthquakes and the petroleum regulator is continuing to investigate potential causal links with waste-water injection.

Company news – Oil Search (OSH)

As foreshadowed in the media recently, OSH has announced today that Exxon Mobil (XOM) has made an offer to its target US listed company, InterOil.  The latter has said XOM’s offer is superior to OSH’s (it includes XOM scrip – more palatable to US investors than ASX listed OSH scrip).

OSH can make a counter – but in our view, why would it? XOM acquiring InterOil is a good outcome for OSH.

All eyes will now be on the other Super-Major in this story – France’s Total – to see if it wants to make a play for InterOil.

Confirmation of XOM’s interest here is not good news for the other “100” LNG projects competing for the limited to non-existent LNG market that is open at present.

Company news – Woodside Petroleum (WPL)

One of those 100 projects is WPL’s Sunrise project located between Australian and East Timor.  The Government of the latter is currently making one of its regular calls to re-open the inter-Government deal with Australia about this asset.

Raising sovereign risk like this is not exactly likely to lead to the promotion of this project within the list of 100.  But then East Timor is not alone in somehow believing the LNG market is infinite.

Quote of the day

As Sultan Erdogan ruthlessly suppresses coup plotters – and anyone else he can think of – many Turk’s are quoting (although maybe not in the original Latin) the famous legal aphorism often attributed to Cicero:

“Cui bono?”

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