Today’s Blog – Monday 13th February 2017

Editorial

Late last week mining giant Rio Tinto announced the appointment of three new non-executive Directors.  Interestingly all three have very strong oil and gas backgrounds: Simon Henry – Shell’s recently retired CFO; Sam Laidlaw – ex-CEO of Centrica (and now CEO of a PE backed company looking for acquisitions called Neptune Oil & Gas); and, David Constable – ex-CEO of SASOL (and currently a NED at Anadarko Petroleum).

We think it unlikely (but not impossible) that Rio will follow BHP’s path and build (or acquire) a major oil and gas business unit.  However, the talent outlined above arguably has much stronger sector expertise than any of Australia’s pure play E&P companies have on their Boards.

In the energy space, Rio has been effectively getting out of thermal coal – leaving its single most interesting energy related asset as a potentially world class lithium deposit in Serbia.  Connecting that asset to the new Directors – Simon Henry was recently noticeably vocal about the short term threat that electric vehicles (using lithium ion batteries) would pose for global oil demand.

We consider it would be sensible for Rio to ramp up an energy division with a mining focused “new energy” angle to it – with lithium in Serbia being only a foundation asset.

Commodity prices

Crude oil traded up on Friday, with Brent closing at US$56.70 (up ~1.8% for the day, but flat for the week) and WTI at US$53.86 (up ~1.5% for the day, but also flat over the week).  News of solid (exceptional?) OPEC cut compliance boosted the market.

The weekly BHI rig count was bear-ish – but less so than recent weeks – with oil rigs up 8 and gas rigs 4.

Henry Hub fell ~2.6% to close at US$3.03 – down 1% for the week.

LNG and international gas

Japanese spot LNG prices for January averaged US$8.40/mmbtu.  This was the highest figure for around 2 years.

Meanwhile over in the Gulf of Mexico, Cheniere Energy’s Sabine Pass liquefaction facilities operated at record output levels in January.

The demonstrable arbitrage between ~US$3.00 at Henry Hub and LNG prices as exemplified by the Japanese figure noted above strongly support the Cheniere business model – a key question though is will more and more US facilities coming on line trade that big price gap away?

Disruption

Yet another key “number” from the world of large scale solar plants – the initial results of a reverse auction in India have come in at US$53/MWh (A$70/MWh).

That figure is higher than seen elsewhere such as in the Gulf States – which benefit from higher solar radiation and better credit ratings.

The Indian numbers represents a large fall from the previous year – and in absolute terms compares very favourably with current wholesale electricity prices in Australia, before accounting for any solar sector support items such as renewable energy credits, cheap finance, etc.

Quote of the day

We considered it timely to repeat a previous quote (from November last year) from Simon Henry, in his then capacity as CFO of Shell:

“We’ve long been of the opinion that demand will peak before supply.  And that peak may be somewhere between 5 and 15 years hence, and it will be driven by efficiency and substitution, more than offsetting the new demand for transport.”

 

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