Today’s Blog – Wednesday 15th March 2017

Editorial

Yesterday the South Australian Government released a fairly broad suite of energy policies – in response to the black-outs and brown-outs that have occurred over recent months – with sharply rising electricity and gas prices imminent as well.  The main elements and our comments thereon are outlined below:

  • The State plans to fund the construction of a new 250 MW OCGT – at a cost of A$360M (seems pricey to us – there should be some better deals on turbines out there).  It is acknowledged that it is unlikely this project would make much difference to electricity supplies next summer.  In our view, FID will not even be reached in that time-frame (and construction would take a year or so after that) – and that leads us to conclude that this is a political strategy not an energy policy one.  The State election is due next March and the opposition Liberals are expected to win. Presuming they do they will then have been delivered the proverbial sh** sandwich by their predecessor – either deliver a very expensive project that the State is ill placed to afford – or cancel it pre-FID – and wear the blame of any subsequent outages.
  • Landowners will be granted a 1% share of the State’s 10% royalties. This echoes an existing practice in some parts of the Cooper Basin where aboriginal groups get a ~1% royalty (although from producers not the Govt) in return for granting native title, etc.  Again this policy has elements of partisan politics about it – it holds out a de-stabilising carrot to farmers in the more densely populated South East where the Liberals have promised to impose a moratorium on fracking, etc.
  • A new mechanism to flow revenues to at-call generators (basically the gas-fired ones) will be put in place.  It appears to have similarities to the Federal RET scheme in that retailers will be mandated to acquire a certain share of their purchasers from certain types of generators.  This seems likely to lead to price increases – the analysis performed for the State by consulting firm Frontier Economics concluding that it would not do so seems to be of the “tell me what conclusion you want” variety.
  • Again echoing a Federal policy, funding will be provided (grants and debt – up to A$150M in total) for energy storage projects.  Elon Musk, etc, will no doubt say “free money – yes please!”.

All up we hope that the Federal Government will be inspired by such State moves to actually come up with some leadership on energy issues.  But we fear that they won’t – as doing so would risk opening up toxic divisions within the Federal Liberals over greenhouse gas mitigation policies.

Commodity prices

The recent bear-ish trend continues in crude markets – with Brent down overnight ~0.6% to US$51.08 and WTI falling ~1% to US$47.92.  Hedge funds are closing their previous long positions as they have lost patience with ever-rising US inventory numbers notwithstanding the OPEC cuts.

On the latter, Kuwait has come out and publicly called for an official extension.  Over to you Saudi Arabia.

Henry Hub fell ~2.6% to below US$3 again – closing at US$2.94.

LNG and international gas

Last week Gazprom was out rattling its tin for some more debt funding. It announced it was pushing out its plans for an LNG expansion on Sakhalin Island and an import unit at Kaliningrad in the Baltic.

Looking through this need for funds – expect further delays in the very expensive and technically challenging Power of Siberia pipeline from Russia to China – good news for medium term LNG markets.

Governments

Today the Prime Minister is meeting the CEOs of gas producing companies like Santos, Origin, Shell, etc – basically to demand some responses to the sharply rising prices in domestic gas markets. We await any outcomes with interest.

Quote of the day

A recent apposite statement from Russia’s Rosneft on short term oil markets

“It became evident that U.S. shale oil output has become and will remain a new global oil price regulator for the foreseeable future.  There are significant risks the (OPEC-led) deal won’t be extended partially because of the main participants, but also because of the output dynamics in the United States, which will not want to join any deals in the foreseeable future.”

 

 

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