Today’s Blog – Monday 19th September 2016



Last week Perth hosted an annual conference for Australian oil and gas types (generally -but not exclusively – from the smaller end of town – the Good Oil Conference).  Your blogster can recollect more halycon days when said small end was less like the Incredible Shrinking Man and the occasional sustaining refreshment was quietly sipped at said Conference, but alas we had to endure a rather dryer week last week.

A highlight of the conference was no doubt the annual presentation by Oil Search’s CEO, Peter Botten, who invariably is one of the few if not only presenters from the industry’s big boys – demonstrating in true blue Aussie style that he has not forgotten his company’s battling roots.

Botten was not only awarded an annual prize given out at this conference for his lifetime contribution to the industry – the John Doran prize – but he also seemed to have had enormous fun resurrecting the old PNG pipeline to Queensland concept.  We assume his tongue was wedged very firmly in his cheek when doing so – but his proposal again shows up the market failures in over-building liquefaction capacity in Queensland during the boom years.

Commodity prices

Crude prices fell ~5% last week, with Brent closing at US$45.77 and WTI at US$43.03.  The main drivers were:

  • The wearing off of the effects of OPEC Ice, as the recent stories about production freezing gradually wore off.
  • A bounce down from the prior week’s very high inventory draw numbers – induced by a Hurricane reducing US imports.
  • The weekly EIA report was not that bear-ish, with only a small build of 0.6 mmbbls – but was offset by a large distillate build of 4.6 mmbbls (and a smaller gasoline build of 0.6 mmbbls).
  • The BHI weekly rig report was fairly neutral – an increase in oil rigs of 2 and a reduction in gas rigs of 3.
  • Over-arching everything was a downgrade in forecast demand by the IEA – combined with growing supply from the likes of Libya.

Henry Hub had a much better week – closing up ~5% to US$2.95, as inventories tightened more than the seasonal norm.

LNG and international gas

California’s Aliso Canyon gas storage leak (which we have been following from afar) generated a couple of news stories in the week. The first was what is likely only a small first step in an inevitable lawyer’s picnic – an initial fine of US$5M on the asset’s utility company owner.  It can expect to add a few zeroes to that.

The second was the awarding to Tesla of a contract to install – by year end – 80 MWh of battery capacity in the Golden State to mitigate energy supply risks.  This figure is fairly small beer compared to the energy deliverability of a gas storage asset – but demonstrates how the political winds are favouring batteries – and how nimble Tesla is.

Governments, fracking, etc

The South Australian Government recently announced a policy to actually encourage gas production (they must attend different conferences than the likes of their peers in California).  The policy will spend A$24M – but it is not clear how.  The likes of Senex Energy – who has some gas resources in South Australia’s Cooper Basin – rapidly commended the State Government for its policy wisdom……..

Meanwhile over in the Northern Territory, the new Government has introduced its planned “moratorium” on fracking whilst it conducts more “studies” (it must be a good job doing the same study again and again for spineless politicians…)

Company news – general

There is not a lot happening out there beyond the dismal world of cost cutting, etc.

Our favourite soap opera – the battle between large independent Woodside Petroleum (WPL) and plucky junior FAR Ltd (FAR) over the potential for the latter to pre-empt the former’s cheap acquisition of Conoco’s Senegalese oil assets has gone quiet (unless one reads the 100s of comments a day thereon in on-line battle-zone Hot Copper).

It appears that the parties (that is FAR and Conoco – WPL is not a direct party) could presently be conducting mandatory – but possibly fruitless – negotiations under the joint venture agreement.  If these pass without resolution then the next default step will likely be to proceed to an arbitration process.  This game could continue for a long time yet.

Quote of the day

Value orientated US fund managers GMO recently published an uncharacteristically bullish piece on how investing in resource companies can deliver high – and valuably uncorrelated – returns over the long term (readers please take note for when we suggest you might want to invest in one of our maturing ventures!).

The following particular piece showed the unpredictability of commodity price forecasting (and makes us feel a little better about our own rosy view of crude prices in the pre-2014 world):

“With oil at $91 in October 2011, the average forecast from 14 industry experts for the end of 2015 was $106; the minimum forecast was $88, and the maximum forecast was $137. At the end of 2015, oil checked in at $37 per barrel, far below even the most pessimistic forecast. And we’ve seen similar forecasting accuracy for copper, iron ore, and other commodities. One could reasonably conclude that even the experts have no idea where commodity prices are headed”. – Lucas White & Jeremy Grantham


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