Today’s Blog – Monday 7th September 2016

TRAVEL AND OTHER COMMITMENTS MEAN THAT BLOGGING SERVICES WILL REMAIN INTERMITTENT

Editorial

Earlier this week we noted that US private equity backed Caelus Energy had announced a potentially fantastic oil find in Northern Alaska – capable of producing 200,000 bopd with ultimately recoverable reserves of up to 2.4 billion barrels.  With those sorts of numbers, this is potentially one of the largest oil discoveries in recent years – and for instance could rank up with the massive Norwegian North Sea discovery of Johan Sverdrup which was first drilled in 2010.

Caelus has spend $100Ms in Alaska – and is owed money under that State’s credit system (the payment of which has been delayed by populist Governor Bill Walker who at the same time is rather incredibly trying to persuade LNG buyers that he can be trusted in delivering one of the world’s most challenging LNG projects).  The timing and tone of Caelus’ announcement (which is thin on detail – it is a private company and this news has not created as much impact if it had came from a public company) seems designed to put some pressure on Walker to actually pay his State’s debts.  Caelus is yet to conduct a flow test – and maybe will wait until Walker pays what he owes before they do.

To us one of the most interesting factors about this discovery is that is has been backed by private equity.  It could turn out to be one of the most profitable PE investments in the E&P industry ever – 2.4 billion barrels of oil in the USA has to be worth $10Bs (once delineation has confirmed the potential).

Most PE investment into the sector has followed what we could characterise as the “Dilbert” strategy: “go and buy some low risk assets for less than what they worth.  There, we have set the strategy, you just deliver”.  Such PE investments (typically made in whatever US shale basin is the most popular du jour – but also including a few production assets in our region) might generate rates of return better than cost of capital.

However, Caelus’ fabulous potential returns for its investors shows what can happen if risk appetites are sharpened a bit from this standard approach.

And did we mention that we have an exploration venture seeking capital!

Commodity prices

Over the last two trading days crude has risen by 2% and then 1.2% – closing overnight at US$52.51 (Brent) and US$50.44 (WTI).

The primary driver has been another week (the 5th in a row) of bullish US inventory numbers.  Crude in storage fell by 3 mmbbls, gasoline grew by 0.2 mmbbls and distillate fell by 2.4 mmbbls.

Henry Hub has also been on the rise again, closing above $3 at US$3.05.

LNG and international gas

A few recent developments in the smaller parts of the LNG value chain (which regular readers know we think will cumulatively be an increasingly important part of the industry compared to the old days of mega-projects and mega-buyers).  These were as follows:

  • The Singapore Government has announced it will disburse various small grants totalling US$12M to boost the use of LNG as a marine fuel bunkered in Singapore harbour.
  • Shell has signed a deal with cruise ship line Carnival to supply LNG as a fuel for its cruise ships in the Mediterranean and North Sea.
  • A consortium led by Total has signed a preliminary deal with the Government of the Ivory Coast to import LNG through a FSRU to supply growing gas generation needs in the West African nation.

Governments, fracking, etc

The Western Australian Labor party – and likely next Government in that State – is honing its anti-fracking policy.  Current plans are to ban this in the South of the State (where there is no genuine exploration planned anyway in our view).  Parties such as AWE will have their fingers firmly crossed that any such ban (or “moratorium”) does not start to inch North to the Perth Basin.

Over in England – as we noted earlier in the week – opportunities to actually frack are opening up for Caudrilla (in which ASX listed A J Lucas has a material stake) – permission to go ahead and drill/frack next year has now been formally given (the protestors will have marked this in their diaries already……).

Disruption

Tesla just released its quarterly sales figures.  These are still fairly low in absolute terms – 15,800 Model S’s sold in the quarter – but the growth is exponential – a doubling compared to the previous year.  It is the forward shape of that growth curve that will determine whether EVs will hit crude demand – the question is effectively “will a battery focused version of Moore’s Law apply here?”

Company news – Karoon Gas (KAR)

KAR has just announced it is in exclusive talks with Brazil’s PetroBras over the purchase of producing and pre-production oil fields located offshore Brazil.  The terms of any deal were not disclosed.  KAR has substantial cash reserves (thanks Origin Energy!) – but these would likely not be sufficient in isolation to purchase/develop the assets in question.

Quote of the day

Goldman Sachs Head of Commodities Jeff Currie continues the gloomy tone on oil prices from the Vampire Squids in the last few years:

“Oil is very oversupplied.  We’re still seeing a lot of oil enter this market.  It’s hard for this market to go above $55.”

 

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