Today’s Blog – Monday 8th August 2016

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Over the last 18 months the oil patch – in the US in particular – has resounded with cries of “productivity savings!”   We have been somewhat sceptical about these, due to factors such as the cost cuts imposed on the service sector being cyclical not secular – and that the fact base for the claims is often derived from CEO statements (CEO job definition – increase share price).

However, we came across one particularly juicy fact a couple of days ago which we think shows that at least some of the productivity improvements are very real.

This was news that Chesapeake Energy had managed to pump a huge amount of frack sand into a single gas well in the Haynesville Basin.  The figures are staggering for the layman and expert alike – 5,000 lbs of proppant per foot in a 10,000 feet lateral – or 50,000,000 lbs in total.  That’s around 23,000 tonnes of sand being placed into a well – at a cost of say $40 per tonne, that equates to US$1M worth of sand.

That sand is obviously going somewhere – each foot of lateral taking 5,000 lbs of sand means that penetration into the reservoir is extensive to say the least.  Ultimately that translates into higher recoveries per well.

In Australia there is not much public evidence of similar productivity improvements in proppant use.   Tight gas formations in e.g. the Cooper are being fracked on an ongoing basis – but only a tiny amount of wells compared to the US.  Fracking in Queensland’s CBM fields is kept fairly quiet for public relations purposes – but presumably there would be scope here to load up on proppant injection per well.

Commodity prices

Crude prices closed fairly flat on Friday – with Brent at US$44.27 and WTI at US$41.98.  Overall prices were up 1-2% for the week.

The weekly BHI rig count report issued on Friday was not favourable – showing an increase of oil rigs of 7 (albeit with a decline in gas rigs of 5).  Given its recent performance, the market might chew on this news for a bit and react negatively today.

A longer term issue for oil markets that has recently emerged in the US is the potential for regulatory changes to shut in a large part of the stripper well (< 15 bopd) market – which currently produces nearly 1 mmbopd in total.  These changes relate to oil and gas industry methane emissions – which judging by a recent article in The Economist, are increasingly the subject of greenhouse concern.

A lot of political, legal and regulatory water would have to flow under the bridge before such changes came into affect – and the oil price is a bigger issue for stripper wells to deal with.  But – one could see a reasonable chunk of current production (100,000s of bopd) coming under threat.

Henry Hub had a down day – and week – closing down 2.5% at US$2.76 (down 4% for the week).

LNG and international gas

One of our favourite topics in international gas is the massive Power of Siberia pipeline connecting remote East Siberian gas fields to Eastern China.

Interfax quoted today a senior Chinese executive form CNPC as saying China was unaware of any delays to the project.

The fact that in mid-2016 a virgin territory pipeline extending 3,000 kilometres that is supposed to start shipping gas in two years has to date laid about 100 km of pipe might cause some concern in other circles.

Governments, fracking, etc

Next week Australian Governments and territories will hold a COAG meeting to discuss energy market issues, which are particularly front of mind in South Australia recently following electricity price spikes and high futures prices.

Unlike most COAG events, this one might actually lead to some policy changes, so will bear closely watching than normal.

Company news – Woodside Petroleum (WPL)

The Perth based media has reported that WPL has entered into a gas sales agreement with Government owned energy retailer Synergy.  This is the first sale of North West Shelf gas since separate rather than joint venture marketing was introduced.

The pricing mechanism was said to be “spot” in nature – but what this means was not that clear – a linkage to oil prices would seem most likely.

Quote of the day

A quote from Georges Simenon Inspector Maigret’s 1931 novel The Carter of La Providence, which shows that French cyclists have for a long time enjoyed something stimulatory:

“He was breathing hard and was hot.  He had just ridden fifty kilometres without once stopping for a beer.”


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