Today’s Blog – Friday 14th October 2016


For some reason various groups such as academic researchers, politicians, etc, have just noticed that Australia’s Petroleum Resource Rent Tax (PRRT) is only levying taxes on a small proportion of the country’s production.

If they had looked at this blog’s dismal share portfolio and observed the share prices of companies like Santos and Origin Energy over the last few years this news would not have exactly been a shock to them.  The simple reality is that at current prices most Australian oil and gas production does not provide equity investors with anything like their cost of capital.  Indeed the issue has not been one of returns on capital – but loss of capital.

So to expect the PRRT – designed to capture excessive returns only – to deliver anything is to misunderstand completely the current economic environment the industry faces as well as the nature of the tax.

But how naive are we to think that reason will prevail in this sort of debate.  As we are seeing in Western Australia just now, where the supposedly conservative National Party has a policy of seeking to re-write long term iron ore fiscal terms and basically steal money from BHP and Rio shareholders, it is not just the left that might make ill-considered moves on resource companies.

Commodity prices

Crude prices rose slightly over-night, with Brent closing at US$52.03 and WTI at US$50.44.  This followed a fall on the previous day due to OPEC production figures coming out of 33.64 mmbopd – an 8 year record.

The weekly EIA inventory report came out a day late – and although had a large and unexpected crude build of 4.9 mmbbls, this was more than offset by a product draw of 5.6 mmbbls (1.9 for gasoline and 3.7 for distillate).

Henry Hub rose 4% overnight to close at US$3.34.  Falling US gas production, combined with fears of a cool upcoming winter (and growing LNG exports) are now building towards a consensus market view that prices are going to need rise quite a bit more from here to bring back material drilling efforts.

LNG and international gas

Those Japanese are at it again – doing creative things in the LNG space – against the expectations of sellers for decades.  The latest move by utility industry giant JERA has been to buy an international commodity (coal) trading business from French energy company Engie.

This is presumably only one chess (or Go) move in terms of building up wider commodity trading expertise and assets – that will naturally include LNG in a more and more material way.


BP’s Chief Economist has recently echoed views from the likes of BHP on the issue of the threat of electric vehicles (EVs) to the demand for oil.  He thinks this will be minor and that increased efficiency of petrol engines will have a greater retarding effect on demand.

On the other hand, we note that sales of EVs in the first half of 2016 doubled from those in the previous year.  Demand is being driven by a range of factors around the world, ranging from Government mandates (e.g. in Norway), pollution reductions (e.g. in China) – and of course “Teslas are cool” (in the US and many other places).

Company news – Cue Energy Resources (CUE)

On the topic of BP, it was likely coincidence that a day or so after it announced it was not going to proceed with drilling in the Great Australian Bight, that ASX listed junior CUE announced that BP was farming into some permits it holds in the Carnarvon Basin off Northern Western Australia.

Although a small farm-in into low quality acreage, BP will at least be able to say to regulators “look we are still investing in Australia”.

Quote of the day

A sobering view (which we think worth quoting at length) on the limits of the much-mooted “productivity” gains being made in the oil patch (in US shale in particular) at present, from respected analysts Bernstein Research, talking about the Barnett Shale in Texas:

“The E&P narrative is that a revolution in technology of improved completions (more sand, water, clusters, geo-steering, landing, etc.) is pushing down the cost curve. Yet we fail to see it in the most complete data record we have….We believe that the Barnett shale offers compelling evidence that technology improvements ultimately cannot overcome geology…….We believe the implication is that shale is a scarcer resource than generally considered and thus are more constructive longer-term as the world must seek a more marginal barrel to match future demand growth. That is bullish for longer-term oil price.”



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