Today’s Blog – Monday 15th August 2016

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A column in yesterday’s News Ltd’s Sunday Mail showed this correspondent the depths of the misapprehensions we in the oil and gas industry face.  The article – in a conservative newspaper – concerned BP’s upcoming exploration program in the Great Australian Bight.

Whilst the massive investment involved – with say only a 10% chance of finding developable resources – should be welcomed, but it was in fact something to apparently be feared.

The context is the incredible lack of understanding of how energy systems work and the difficulties in changing them, exemplified by:

“But oil as an energy resource is an old technology that’s nosedived in price due to a world glut and is expected to be superseded with a generation by battery technology.”

Now maybe on Facebook it is “expected” that oil will be replaced by batteries, but there are no real world views to that end that we are aware of.

All we can conclude is:

  • The presence of panels on roofs and visible wind-farms has induced people to conclude that they are supplying a far bigger part of our current energy needs than the small fraction that they are actually doing.
  • People love conspiracy theories – this impulse is satisfied by sharing a story on Facebook about Big Oil deliberately stopping the growth of renewables (those of us who actually work in the sector know that no-one even saw the current price fall, let alone has the wit to organise a vast international conspiracy).
  • Risk, science and trade-offs are not intuitively understood.  There will be always “somewhere else”, or the “Government”, etc, from which our energy needs will be met.
  • Our industry is losing the communications wars by a large margin.

Commodity prices

Crude had another good day on Friday, rising by 2% in both London and New York.  Brent closed at US$46.97 and WTI at US$44.49.  Over the course of the week, prices increased by 6%.

This rise appeared to be ongoing momentum from the previous day’s excitement about a potential OPEC supply retarding deal.

It completely swamped – for one day anyway – the bad news from the BHI weekly rig report, which had a large oil rig increase of 15 (mostly in the Permian) and a gas rig increase of 2.

On a more macro scale, it is often forgotten that China is in the top 5 crude oil producing nations.  Last week saw the release of some statistics from the PRC which indicated that its crude production had fallen 8% year on year.  Low prices are clearly not just hurting the US tight oil producers – who are in fact likely (as seen by the rig count) to come back when prices rise – whereas much of China’s production is from mature fields that will not be responsive to higher prices.

Henry Hub had a poor week – down 6% on lower than expected inventory numbers.  It closed on Friday at US$2.59.

LNG and international gas

Two stories from the Caribbean on the LNG front last week:

BHP reported that its offshore Trinidad exploration program had discovered gas rather than oil.  Trinidad hosts Shell owned liquefaction facilities which presumably this discovery might feed into (assuming – a big ask – that large LNG players can put ego aside and concentrate on shareholder value).

Kogas signed a MOU with a regional Mexican Government in the province of Yucatan in the Gulf of Mexico – which is intended to lead to Kogas building a gasification facility and downstream pipelines.  Like most such MOUs between Government-type organisations, its probability of being converted into a binding arrangement must be considered as slim.  Still this shows that even dowdy Kogas is seeking to build an international vertically integrated gas business to take advantage of opportunities (and mitigate risks) arising from the liberalising international gas market.

Governments, fracking, etc

Australian Governments will meet later this week at a COAG meeting and consider energy market issues.  We are not holding our breath on the emergence of reason rather than “moratoriums” over the exploration for gas in New South Wales, the NT, Victoria, etc.

Company news – Santos (STO)

STO today announced a US$1.5B write-down over its GLNG assets.  It was not clear whether the liquefaction or upstream assets were the subject of this charge.

STO indicated that the cause of the write-down was an increasing cost of third party gas, presumably partly driven by higher prices and partly driven by higher volumes as GLNG’s own upstream assets had either performed worse than expected or a decision had been made not to invest in them due to capital shortages and instead buy other people’s gas.

Company news – FAR

A favourite topic of ours – FAR’s pre-emptive rights over its Senegalese joint venture – are the dog that is not barking in the night at present.  No news has followed the expiry of 30 days since Woodside’s purchase of Conoco’s interests in this JV.  That does not necessarily mean that they have not expired, as noted on Friday – but on balance we conclude that they are still alive for at least another month.

Quote of the day

A recent quote from Houston based energy industry investment bankers Tudor Pickering Holt which explains why Woodside is purchasing the Senegalese assets on very cheap metrics:

“From a perception standpoint, offshore has become the proverbial dead man walking”.  The erstwhile foundation of the majors and legacy E&Ps is beginning a period of atrophy from which it will take years to recover, in our view.”




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