Today’s Blog – Friday 2nd November 2016


South Australia suffered another small black-out on Wednesday night – and oh the sky is falling in and of course its all the fault of renewables/gas producers/Victorians/etc (take your pick depending on your political affiliation rather than look at those pesky so-called facts).

And for those who say “its like being in a 3rd world country!” – try and see what it is actually like in a developing nation.

The engineering reality is that to have a system that delivers what BHP’s normally sober CEO calls an “uninterruptible” electricity supply costs an enormous amount – and in the real world there are trade-offs about delivering a 99.99% reliable system versus a 99.995% one.  Those trade-offs are called dollars.

Indeed whilst most media and political comment on electricity markets focuses on the wholesale price of electricity itself – at the actual retail level this is only around 1/3 of what is paid.  The balance goes to monopolists who are incredibly good at persuading governments that consumers should pay $100s of dollars each a year to only be interrupted for two hours and not say three hours per annum.

A story from Western Australia illustrates the other thing that the infrastructure utilities are good at doing – persuading regulators that their cost of capital is much higher than it actually is.  This was illustrated by analysis of the likely sale proceeds from privatising Western Power – which noted that Australian regulated assets typically sold for 150% of their book value.  That is prima facie evidence of the ability of the owners of such assets to hoodwink regulators over their cost of capital – they would trade at book value if they got this right – and the savings to consumers would be larger than any possible Government intervention in wholesale energy markets.

Commodity prices

Crude prices continued on their post-OPEC run overnight, with Brent up another 5% to US$54.00 and WTI up a bit less to US$51.11.

The Brent/WTI spread has widened over the last couple of days – we presume this is due to the market believing that OPEC’s actions will induce the production of even more light/sweet crude from US shales – which will trade at a discount given the refinery configuration in the US.

Henry Hub was up 5% at US$3.51.  Some observers have noted that if more US shale comes to market post OPEC, then the associated gas produced from the likes of the Eagle Ford would act to boost supplies and hence dampen the gas price.   The pace of US gas export expansion could however mitigate that effect.

LNG and international gas

LNG sellers are pushing back against Japanese buyer actions to remove destination clauses, with a Shell spokesman recently stating in Japan that:

“You have to be a very good buyer to get the cheapest price and most flexibility, because flexibility isn’t free.”

Having more options on a car costs more as they cost the manufacturer more.  Having LNG contract flexibility does not appear to do so.  In a competitive market Shell’s statement does not make sense.  Buyers like Shell and Woodside have sounded a bit desperate in their recent arguments arguing for the status quo.

Governments, fracking, etc

The Federal Government has taken some sound advice from Sir Humphrey and has set up its own enquiry into whether Australia’s oil and gas sector is paying its fair share of taxes.

For a modest fee of only a few hundred thousand bucks we will go into a locked room and produce a 200 page report that can be distilled into: “when commodity prices are low, commodity producers pay less taxes.”

Company news – Senex Energy (SXY)

SXY has today announced one of those rare events – a drilling program.  Although mostly development and delineation in nature – there is one exploration well (funded by Origin Energy – ORG – through a farm-in).

This is to test a deep tight gas target – and at a budget of only A$15M for a 3,600M deviated well seems to indicate either some optimistic planning or signs that Australia too is benefitting from productivity improvements.

Alternatively, SXY could save ORG some money and hire this ever versatile blog to tell them what this well will discover (hint: large gas column; 35% CO2; no liquids; and tight as the proverbial).

Quote of the day

Finishing off the week with another quote from Blackadder – one that perhaps could be directed towards the medieval Kingdom of Saudi Arabia:

“To you, Baldrick, the Renaissance was something that just happened to other people, wasn’t it?”



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