Today’s Blog – Friday 3rd March 2017


The Australian press has today picked up on BHP’s recent submission to the Federal Government’s enquiry into the National Electricity Market, headed by Chief Scientist, Professor Alan Finkel.  (Gloomy cynics such as ourselves expect Prof Finkel to come up with a well thought out report – which will be dumped immediately in Canberra in the “universal filing unit” that is the home of many such reports in the past).

Some of BHP’s key recommendations are a mixture of the sensible – but politically unachievable – such as asking the Federal Government to price carbon and not pick technology winners (one can imagine the World War III that would be unleashed in the Coalition or Labor parties if this advice was followed).

Like others, BHP seems to not understand what “base load” power is.  Its submission calls for more “base load” to be available to meet peak demand.  Err, that’s what a peaking generator, not a base loader, does.  And as to who will pay for that – “someone else” presumably?  Electricity systems with growing intermittent and zero marginal cost generators (i.e. pretty much everywhere in the World, not just Australia) need responsive generators – and energy storage systems of various types – not more base load.

BHP is one of Australia’s largest upstream gas producers – albeit almost exclusively as a non-operator.  Again it has called for the sensible but politically difficult course of removing silly State based moratoriums, etc, on gas exploration and development.

In our view, there is not really an awful lot of new gas that would be produced even if New South Wales and Victoria changed their anti fossil fuel policies.  What would be far more interesting would be if BHP actually undertook a major gas exploration effort in its Bass Strait acreage – with or without operator and partner Exxon – it would be entitled to do so commercially.  To our recollection they have not drilled a well for ~10 years here and the assets are operated in harvest mode only.

Commodity prices

Crude oil traded flat overnight on Wednesday and last night fell more than 2%, as Brent closed at US$55.06 and WTI at US$52.58.

The weekly inventory report from the EIA was the main driver – it announced a 1.5 mmbbl build in crude, albeit offset by a 0.5 mmbbl draw on gasoline and a 0.9 draw on distillate stocks.

News of growing US production also spooked the market.

In some ways this was exemplified by Exxon’s recently announced plans to spend a high proportion of its short term capex on developing tight oil wells in the Permian and to a lesser extent the Bakken.  As we have noted before, unconventional oil and gas plays and the Super-Majors have not necessarily rubbed along well together – so it will be interesting to see how well Exxon does here.  What is also interesting for oil markets more generally is whether the Bakken is in terminal decline, as industry pundits such as Art Berman have recently predicted.  Where the Bakken goes, the other plays will follow – and US oil shale could prove to be only a bump on long term supply graphs.

Henry Hub has had a better couple of days, closing up to US$2.81.

LNG and international gas

Bloomberg recently reported that the first formal sale of Canadian gas as LNG is imminent – albeit through the Cheniere Energy liquefaction facilities in the Gulf of Mexico than through the various stalled projects in British Columbia.

The Canadian and US gas markets are fairly seamless and all ultimately connect with Cheniere’s assets,  so this is a somewhat meaningless news item – other than to contrast and compare the pace of developments in the two countries.

Company news – Redflow Energy

Santos (STO’s) previous CEO, David Knox, has just joined his first corporate Board – and its not an E&P company but rather battery technology company Redflow.

The latter claims to have developed a more efficient technology than the more widespread lithium-ion batteries used by the likes of Tesla.  What is less apparent (to us anyway) is whether Redflow could have advantages in the area of producing a less toxic product at the point of its disposal.  Li-ion batteries are not very nice at that point.

Quote of the day

Our last quote from the recent Buffett annual shareholder letter reflects on a bad deal in the past whereby he had paid stock for an over-valued company.  No orphan there (Santos and Eastern Star Gas anyone….?)

“My error caused Berkshire shareholders to give far more than they received (a practice that – despite the Biblical endorsement – is far from blessed when you are buying businesses).”



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