Today’s Blog – Tuesday 9th August 2016

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Late last week ASX listed utility company AGL announced the launch of a “virtual power plant project” in South Australia.  This was a A$20M investment (with A$5M coming from the Federal Government) into a 1,000 household array of batteries that could be controlled centrally – and despatched in an integrated fashion when the electricity market required it.  The delivery capacity of the array of batteries is to be 5 MW, with power storage of 7 MWh.

These are clearly small numbers in a system that needs 1,000s of MWh of incremental power on e.g. very hot days that dramatically increase the demand for air conditioning.

However, the project proponents would not disagree with that – and would say its importance is in demonstrating that a scale-able model can work.  Hopes for rapidly reducing battery costs, combined with the already demonstrated fall in solar power costs, could make this sort of smart storage system ultimately competitive with the current grid – which in the end of the day relies upon fossil fuels being delivered to power stations when required from coal stockpiles and gas reservoirs.

Coincidentally, this week’s edition of The Economist noted a potential breakthrough in battery technology – using a lithium air rather than lithium ion configuration – was increasingly looking feasible.  If this worked, it could deliver 100s of percentage point increases in battery storage capabilities and hence cost reductions.

AGL continues to assert a leadership role in Australia’s energy company space at present, as its traditional rival Origin Energy licks the wounds of its debt-bloated balance sheet and searches for a new leader.

Commodity prices

Crude prices rose ~2% overnight, with Brent closing at US$45.17 and WTI at US$42.87.

The bulls seized upon some unofficial comments from OPEC nations about an upcoming informal meeting to be held in Algeria.

As we have noted many times before – until Saudi Arabia says it, it ain’t so.

Henry Hub firmed ~1% to close at US$2.75.

LNG and international gas

The world’s largest LNG buyer – Japanese utility JV Jera – has explicitly joined the chorus of buyers opposing destination clauses.

The company’s Chief Fuel Transactions Officer ,Hiroki Sato, said he does not want to have any further discussions involving destination clauses with producers. “I’m aiming to have destination clauses out of the discussions.”

The “100” LNG projects chasing sanction will have little choice in our view but to follow this instruction.

Further reports have emerged about Exxon (XOM) striking a deal with ENI to acquire part of the latter’s massive gas resources offshore Mozambique.  Apparently a binding deal has been struck to acquire a ~20-25% interest, with operatorship of the onshore liquefaction facilities.  A formal announcement may however take some weeks or even months to follow.

As noted by Houston based investment bankers Tudor Pickering Holt in their daily email overnight, this move by XOM has negative consequences for the other unsanctioned LNG projects in its portfolio, such as Scarborough in Australia, Alaska, Sakhalin, Canada, etc.

All have their own challenges, but XOM seems to be prioritising PNG first then Mozambique.  And there is pretty much nothing Governments can do to change that, notwithstanding tilting-at-windmills efforts by the likes of the Alaskan Government to do their own project (“excuse me Mr Sato, I’m from a small State Government and we are going to appropriate gas from XOM, undertake a >US$50B technically challenging project and sell you gas at high prices.   Click…..Hello?  Hello?”)

Governments, fracking, etc

An interesting recent policy move from Britain’s new Prime Minister – Theresa May – using monies in a planned Shale Wealth Fund (funded by royalties from shale gas wells) to directly deliver cash to households rather than funnel it to local councils.

Whether this would be enough to create support for drilling on a crowded Island remains to be seen – but at least it is an effort to create the sort of social licence that prevails in the US shale fields, where locals directly benefit from private royalties.

Wary of being outflanked, Greenpeace UK’s chief scientist Doug Parr said:

“You can’t put a price on the quality of the air you breathe, the water you drink, and the beauty of our countryside.”

(Note to Mr Parr – how does he think he gets water from utilities, fresh air from regulated industries and a planning restricted countryside – without an economic system with a fairly extensive use of pricing mechanisms?  From the garden fairies perhaps).

Company news – Santos (STO)

STO’s partner in the offshore Northern Territory Petrel and Tern gas-fields, French utility Engie, has just appointed an agent (Bank of America Merril Lynch) to sell its interests therein.

STO no doubt has a pre-emptive right over this asset – but it appears unlikely to exerices it – the company does not have a lot of cash or much animal spirits at present.

Quote of the day

A recent one from an Exxon spokesman, who shows little sympathy – not unexpectedly, but rather more bluntly than would normally be the case for that famously tight-lipped organisation – for the types of views expressed by Greenpeace above:

“They can sit around in the dark and talk about how it worked out.”

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