Today’s Blog – Monday 5th September 2016

Editorial

BHP has just launched a public on-line blog called “Prospects” and a recent post therein set out some views on the extent of the threat that electric vehicles (EVs) might present to crude oil producers such as The Big Australian.

BHP’s view is that EVs could reduce the demand for crude by only slightly over 2 mmbbls per day within 20 years.  This is a relatively small amount of current demand – less than 3% of the current total.

The blog also went on to set out a view that increasing efficiency in the internal combustion engine could reduce the call on crude by a much heftier 9 mmbbls per day.

The history of the internal combustion engine has been one of more than one hundred years of efficiency gains – but over that period the demand for crude has gone inexorably up.   Why so?  In the mid-nineteenth century, British economist W S Jevons noted the same phenomenon with respect to the steam engine – as it had become more efficient, demand for coal had increased not decreased.

This is now known as “Jevon’s paradox” – fuel use increases with efficiency, as more things are found to apply the more efficient engine to.  In the case of cars for instance, better engines have driven demand for 4WDs, air-conditioning, on-board computing power, etc.

Accordingly, we think BHP’s blog is fundamentally wrong.  Oil demand will go up with increased combustion engine efficiencies.  We also think it is likely to be wrong in terms of extrapolating EV demand (which definitely does reduce crude demand) – we think this will be as disruptive and as unexpected on the upside as has been e.g. solar panel penetration in Australia.

Commodity prices

Crude prices bounced strongly on Friday, closing up ~3% in both London and New York, with Brent at US$46.83 and WTI at US$44.44.  However, the week overall was still a dirty one, with losses of ~7%.  US dollar weakness and the injection of some more of the tired old drug of “OPEC Ice” (i.e. freeze rumours) were the main drivers of the day.

The weekly BHI rig count was fairly neutral – oil rigs up only one (but gas rigs up by seven).

Some rare news emerged from the PRC on its strategic petroleum reserve.  This appears to be increasing by up to 200,000 bopd over the last year – but may be hitting tank-tops later this year – in which case demand going forward would be reduced by this amount.

Henry Hub was flat on Friday – closing at US$2.79 (it was down 3% on the week).

LNG and international gas

LNG vessel specialist Golar released its quarterly results last week.  These supported some general themes for the industry – particularly that small scale FLNG projects are proceeding along nicely and that FSRU’s are increasingly in demand.

Company news – Woodside Petroleum (WPL)

WPL continues to be busy on the deal front.  It announced today that it was purchasing 50% of BHP’s interests in the delineated but undeveloped Scarborough gas field off Northern Western Australia (operator – Exxon) and surrounding acreage.  The price is US$250M (plus a contingent payment of US$150M upon FID).

In deal metrics terms, this price is a great one for WPL – only 15 US cents per mcf.  This represents a very small fraction of the price paid for contingent resources during for instance the height of the Queensland LNG boom.

Scarborough is not going to be developed as a standalone LNG venture any time soon (or ever).  However, it gives WPL more optionality in terms of back-fill for the North West Shelf and Pluto.

The deal is subject to pre-emptive rights held by Exxon.  WPL should be getting the hang of what these mean by now.

Quote of the day

A pithy summary of his conclusions set out in his 1865 book The Coal Question by Jevons:

“It is a confusion of ideas to suppose that the economical use of fuel is equivalent to diminished consumption.  The very contrary is the truth.”

 

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