Today’s Blog – Thursday 20th October 2016

Editorial

Last month news emerged of a stunning new number in the energy world – an amazingly low bid in a reverse auction for a solar power plant in Abu Dhabi – of US$24.20 a Megawatt hour.  This compares to:

  • Australia’s wholesale electricity market prices of, on average, more than double this.
  • A BOE equivalent of U$14.30/boe.
  • If that BOE was converted to electricity at a high thermal efficiency rating of 50%, then the more direct BOE equivalent is US$7.30/boe.
  • Reverse auctions for solar plants in Australia conducted by the ACT over the last few years where the winning low bid has been in the region of US$135/Mwh.

These comparisons had to our mind put a question mark over the Abu Dhabi figure – was it correctly reported and/or was there some other hidden subsidy that was not disclosed?

We don’t know the answer to that, but some simple spreadsheet experimentation indicated that this sort of figure could in fact work if a very low discount factor of say 2% was used.

In essence the winning bid was buying a AA-rated Abu Dhabi Government backed US dollar bond – with say a 50 year life – and the price paid was less than would have been paid in the bond market.

The current world of effectively near-zero interest rates is a hidden factor affecting many major business, economic – and political – issues in ways that are not well understood.

Those of us brought up on high nominal and real interest rates have built in intuitions which need to be challenged – for instance, our first (20-year) spreadsheet noted above could not get the numbers to work.  But once we extended it by a few more decades, it delivered a large amount of additional NPV – which it would just not have done using a standard “commercial” discount rate of the sort that training in the old world points us to.

Commodity prices

The weekly EIA inventory report continues to drive the oil market in a bullish direction.  Yesterday’s numbers were again very positive – with crude down by 5.2 mmbbls with product only up by 1.3 mmbbls (gasoline up by 2.5 mmbbls and distillate down by 1.2 mmbbls).

Brent closed up ~1.5% to US$52.55 and WTI was up ~2% at US$51.41.

Henry Hub had a down day in the face of warm weather, closing down more than 2% to US$3.18.

LNG and international gas

China’s indigenous oil production has been rapidly falling this year – as high cost and ageing fields have been shut-in (or even down?) in the face of enduring low crude prices.

However, the PRC’s domestic gas production has been more robust, with unconventional gas in particular showing large supply increases – doubling this year.

Governments, regulation, fracking, etc

The Australian Financial Review today has picked up on what we have recently noted as something to watch out for – the role of two of the most effective communicators in the Australian energy sector, Richard Cottee at Central Petroleum (CTP) and Mick McCarthy at APA Group – in taking up opposing positions over the current Government review into the regulation of the gas transmission sector.

CTP’s typically robust submission to the relevant Government enquiry has snapped McCarthy’s apparently wafer thin temper, as indicated by his following measured comments on these as being: “sensationalist, untested garbage” that “belong to fantasyland.”

We are enjoying the show.

Company news – Cooper Energy (COE)

COE has been busy recently, announcing that it has entered into another gas contract from its pre-development Sole gas-field – this time with utility Alinta.  The company has also entered into a deal with minnow Bass Strait Oil (BAS) to sell its interest in a Sumatran gas production “service” contract.  The consideration is a mixture of up-front cash, scrip and payments down the track.

All up COE seem to be happy to just get this distraction off its books and for BAS it delivers an asset with price-related upside and a new start after many years of holding acreage offshore Victoria that it could not afford to do any work on.

Now COE just need to persuade 50% Sole partner, the wounded Santos, to get on with this project.  That sounds easy.

Quote of the day

The following quote on what the current tough times are doing for the industry takes its tone from the philosophy of Nietzsche (“that which does not kill us makes us stronger”):

“Whoever survives this is going to win. They’re going to come out smelling like roses.” – Michael Rothman,  oil analyst of Cornerstone Analytics of New Jersey

And of course those survivors will not, we repeat not, piss away the next oil boom….

 

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