Today’s Blog – Thursday 27th October 2016

Editorial

In today’s Australian Financial Review (AFR), veteran resource-focused columnist Matthew Stevens took the opportunity presented by recent EIA numbers on growing renewables penetration (see below) to look into the ugly child of greenhouse gas mitigation measures – carbon capture and storage (CCS).

As he observed – “the science on CCS is in” – technological breakthroughs are not required to make CCS work.  What is however required are large, depleted, high quality and proven reservoirs.

The news article refers to the US$1B PetroNova project located near Houston as a successful project that proves that CCS works.  Texas arguably is the best location in the world for CCS from a sub-surface point of view:

  • Many tens of billions of barrels of oil and tens of trillions of cubic feet have been produced there – arguably as much as any other location in the world.
  • That production has been proximate to population centres, power-lines and power plants.
  • Data-sets on the sub-surface are good, reliable and generally publicly available.
  • Unlike e.g. Saudi Arabia, water-flooding (occupying pore-spaces that are hence not available to store CO2) has not been massively prevalent.
  • It is obvious but worth pointing out that production has been onshore not offshore.
  • Community support for activities related to the sub-surface is strong.

What works in Texas will be harder if not impossible elsewhere on any sort of large scale – CCS needs decent and proven reservoirs – although these are often treated as an afterthought by much of the media commentary on the issue.

Commodity prices

Crude prices have fallen over the last two days – by around 1.3% on Tuesday and then more of the same last night, with Brent falling below US$50 to close at US$49.98 and WTI down to US$49.23.  The primary cause was ongoing concerns about OPEC nations squabbling about who is going to agree to cut production at next month’s OPEC meeting.

However, the principal “numbers” based event of the last couple of days was yet another set of good inventory figures from the EIA’s weekly report.  This week crude was down 0.6 mmbbls, gasoline down 2 mmbbls and distillate down 3.4 mmbbls.

This ongoing nibbling away of the large volumes of crude/product in storage is more important for the market in the medium term than the comments du jour from OPEC.  Eventually this is aspect of crude markets that will be the Mouse that Roars.

Henry Hub continues its bad run – down 20% in 2 weeks, closing at US$2.74 overnight.  Again in our view short term news about warm weather is dominating medium term trends that should support higher prices this winter.

LNG and international gas

Singapore continues to develop as the primary Asian LNG market centre:

  • Yesterday the AFR reported on a private Australian company called GLX Holdings – that has a business plan of acting as a facilitator for public LNG spot trading, based in Singapore.  GLX’s Chairman is ex-Woodside and ex-Beach Energy executive, Rob Cole.  Its model is simple – to match buyers and suppliers for what is now ~33% of LNG cargoes – spot ones.
  • The Singapore Government recently awarded a contract to Shell and Temasek owned Pavilion Energy – a 3 year 1 mmtpa LNG import deal.  Shell has apparently cleanly stepped into BG Group’s shoes in terms of being the dominant LNG importer – and wider player – to the Island Nation.

Governments, fracking, etc

We came across a report yesterday from the Melbourne Institute of Energy (MIE) that we hope APPEA will prepare a prompt and combative response to.  This was a claim that Australia’s CBM production gives rise to a massive amount of fugitive methane emissions.

These were said to occur not only from well-heads and facilities (although we note a lack of fires, explosions, etc – and the fiscal incentives of producers not to lose a valuable commodity) – but also from the sub-surface.

To us the latter is the far more important issue – and one where APPEA should be able to draw on technical resources to (hopefully) refute.

Disruption

This week the OECD’s energy body, the IEA, released an already much commented upon report – which noted the massive rise in the installation of wind and solar generation facilities globally – much more than previously forecast.

Regular readers will know our view that current very low interest rates are a key facilitator for this development.  Wind and solar give rise to very long term and predictable cash-flows – a lot more so than oil and gas investments – so attract a very low cost of capital as they provide at least some yield to otherwise income starved investors.

Company news – Cooper Energy (COE)

Further to our reporting on COE of a couple of days ago, we were pleased to note that its recent institutional fund raising was significantly over-subscribed.

We might be wildly optimistic, but we can detect some small shoots of growth of support from capital markets for oil and gas.  No-one will want to miss out on a replica of what has recently happened in the strongly rebounding coal and iron ore sectors.  Career risk could be at stake!

Quote of the day

Olivier Jakob, a consultant at Petromatrix GmbH, recently quipped on Twitter that:

“OPEC stood for the Organisation of Producers Exempt from Cuts”

 

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