Today’s Blog – Tuesday 2nd August 2016

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Last week we noted that the recent reporting season of results from the Super-Majors had generally disappointed the markets – with a key reason being significantly declining profits from their downstream refining operations.

Not surprisingly, high refining profits in recent years has brought in new entrants into an industry without very high economic barriers to entry.  The key source of refining growth has been in China – which is now a major exporter of refined product.

That has fed back negatively to crude markets – with the current glut of gasoline in particular being taken as a major bear signal over the last month.

Rapid and large build of new and cheap refining capacity in China will have similar implications for global rivals as has been the case for other PRC driven industrial developments – such as its massive steel production basically shutting in capacity elsewhere in the world in e.g. Australia and the UK.

Australia’s refinery fleet is old, small and inefficient.  Within 10 years it will likely all be shut down – with probably the only major factor acting against that being the sheer cost of abandonment and rehabilitation.  Refineries in places like Europe face similar issues (and for instance recent French strike action will reinforce that).

To date, energy security issues have not grabbed political attention in Australia and politicians are either sanguine about or unaware of the looming abandonment of the local refining capacity.  As we have noted before, this development should spark some thinking about e.g. strategic petroleum reserves – but there is no sign of that at present.

Commodity prices

Friday’s reprieve in crude markets was short lived, with Monday resuming the sell-down of recent weeks.  Brent was down ~3% to US$42.24.  WTI even went below US$40 during the day’s trading – finishing slightly above this figure at US$40.06.

General gloom pervades oil market commentators (for the short term at least) as the summer slips by without the US driving season or the Saudi air-conditioning season really denting over-supply.  In June, North American production increased as Canadian supplies came back on stream post the wild-fires – more than off-setting Lower 48 production declines.

And over in Saudi Arabia, production has hit new records and the Kingdom is fighting hard for market share – posting publicly new low prices to capture Asian customers.

Henry Hub also had a down day – closing down ~4% to US$2.77.

LNG and international gas

At the end of last week Shell announced that it was deferring a FID decision on its Louisiana based Lake Charles LNG project – citing the over-supplied global LNG market.  This should be seen as a signal to the other “100” LNG projects – if the world’s largest LNG player can’t make a Gulf of Mexico project work – why will their higher cost/risk/etc projects go ahead?

One rival LNG project area which does seem to have momentum behind it is Mozambique – with a fair bit of media chatter at present about Exxon buying a share of the massive offshore resources there.

We noted yesterday that Gorgon LNG was experiencing a worse than expected ramp-up of production.  Another – previously flagged – problem is now “ramping” up there – Indian company Petronet’s plans to re-open LNG gas contracts – as it has recently successfully done with Qatar.

The Indian press reported over the weekend that the Indian Oil Ministry had asked Petronet to send a letter to Gorgon partner Exxon seeking a price reduction.  When Governments get involved, legal positions get weaker.

Governments, fracking, etc

A couple of weeks ago we pointed out the anti-fracking policies of Australian arch-populist Pauline Hanson.  Not wanting to be left out,  her cross Pacific rival The Donald now seems to be thinking about joining her (and we can only imagine what his putative Energy Secretary, Harold Hamm – King of the Bakken frackers – would make of that).

In Colorado recently, The Donald seemed to express some sympathy towards a local political issue in that State – the rights of townships to block fracking over oil leases within their city areas – which has been resisted to date by the forces of reason.

Company news – LNG Ltd (LNG)

Yesterday small scale liquefaction hopeful ASX listed LNG announced that its founder and long term CEO, Maurice Brand was to leave the company.

As noted above, if Shell can’t make liquefaction work at Lake Charles, the chances of LNG doing so at its unsanctioned project sites in the US, Eastern Canada and Queensland, seem remote.

Quote of the day

Following on from yesterday’s Art Berman quote, another one from a recent blog of his focusing on the trend of US shale companies to mislead the market on production costs (a trend which could be followed in Australia as Boards bluntly focus on e.g. “costs per BOE”):

“The shale gas and tight oil companies have developed a culture of exaggeration and misrepresentation. They have consistently tried to make the ludicrous case that a terrible reservoir and super-expensive technology can somehow out-perform much cheaper wells and better reservoirs in conventional plays.”




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