Today’s Blog – Friday 19th August 2016

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Today the Council of Australian Governments (COAG) is meeting in Canberra and a review of potential reforms for national energy markets is the number one agenda item.

We never cease to be surprised by the lack of understanding in supposedly informed quarters of the issues that the sector currently faces.  For instance, Australia’s premier business newspaper (i.e. one towards the intelligent end of the media spectrum), the Australian Financial Review, today contained an editorial piece on “Fixing our energy mess” from which we picked up the following misapprehensions:

  • “States such as South Australia have imprudently plunged into dependence on wind” – renewables investments have been driven from a regulatory perspective by a national RECs scheme which does recognise State boundaries. South Australia happens to be windy.  State politicians have however foolishly claimed credit when investments are made that are nothing to do with them, with resultant current blowback.
  • “Domestic gas has become scarce”– in fact domestic gas production has never been higher.  The private sector made almighty stuff-ups in over-building liquefaction capacity on Curtis Island – but Governments might have tried to trammel companies in more sensible directions there.
  • “Coal has been rendered uncommercial in the State [South Australia]” – in fact the State’s only coal mine at Leigh Creek has been fully economically exploited rather than shut-in for any other reason.   Furthermore, the owner of the State’s only coal-fired plant – PE owned Alinta Energy – found it was capital markets’ current hatred of brown coal, rather than regulators, which drove them to expeditiously close down its plants prior to a sale process.
  • “The remaining gas producers can charge what the market can bear” – if true, surely an issue for competition regulators and/or new anti-competitive regulations/law?
  • “There is not enough access to onshore Victoria and New South Wales” – there are no contingent gas resources in Victoria and in our view no prospective resources in that State that the private sector would materially fund exploration for.

Commodity prices

The crude run-up continued, with Brent smashing through the anti-goldilocks barrier to close at US$50.89.  WTI was not far behind, closing up nearly 3% to US$48.22.  In less than 2 months we have seen crude fall from US$50 to nearly US$40 (for Brent – WTI went below this figure) and back again.

Chartists are pointing to various arcane candles and double-bottoms and other strange shapes to justify the movements – but the recent move appears to have largely been driven by hopes for rational and coordinated behaviour from OPEC.  Yes, those rational and coordinated people.

Henry Hub was also up – closing at US$2.67.

LNG and international gas

We have previously reported on the woes suffered in California through the closure of the State’s largest gas storage asset, Aliso Canyon, due to leaks from old wells. The State’s large utilities are now seeking regulatory support to manage the issue through the commissioning of large scale (and expensive) battery storage investments.

In our view the scale of these would need to be massive and hugely expensive to match the energy deliverability capabilities of Aliso Canyon, and although we never want to doubt good old US capitalism’s can-do spirit, the likelihood of energy shortages in the Golden State remains.

Fracking, Governments, etc

The US’s EIA has just reported that CO2 emissions from the burning of natural gas in the country are now exceeding coal – due to gas now capturing a far larger share of the total energy market.  If inadvertent methane emissions were included as well, the figure would look worse.

No-one can argue with the physics of combusting gas being cleaner than coal – but the total numbers will need to be borne in mind in industry advocacy programs.

Company news – Santos (STO)

STO released its half year results today.  Those looking for some sort of strategic vision from the company’s CEO, who is now around 6 months in at the company, would be disappointed with the accompanying presentation.  This read like a statement from a company administrator – costs cut, an ongoing battle to re-structure, pay down debt, etc.

The company’s “strategy” is simple – to cut costs to US$35-40 per tonne of coal (err, we mean barrel).

Company news – Woodside Petroleum (WPL)

WPL also released its half year results this morning.  Again they were not very exciting.

One point of interest for us was formal confirmation that the pre-emptive rights held by FAR Ltd and LSE listed Cairn Energy over WPL’s purchase of Conoco’s interest in a Senegalese JV are still live.

Quote of the day

Assertive Japanese statements on the changes being seen – and demanded – in LNG markets continue to come out, with Bloomberg recently reporting the following from Jera’s EVP Hiroki Sato:

“There will be 40 million to 50 million tons [annual capacity] of homeless LNG by 2020, which can go anywhere or doesn’t have any fixed customers.”




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