Today’s Blog – Monday 20th March 2017

Note – blogging will be intermittent over the next few weeks due to travel 

Editorial

The spectre of sovereign risk is abroad in the Australian energy sector at present on all sorts of fronts.  (Although as someone who has worked in developing nations , we think it extremely hyperbolic to compare what happens here to countries with real dysfunction).  We have the following ghosts roaming abroad:

  • Federal Government plans to disrupt electricity markets though the development of a 2,000 MW pumped storage asset.  Little is known about how it will operate – in line with private sector principles – or intervening in markets to deliver political outcomes?
  • South Australian Government plans to own their own gas peaking generator.  The State has signalled that will only intervene in markets in limited circumstances. Phew!
  • Some gazetted areas in Queensland only being available to parties who will produce any gas discovered therein into domestic markets (although the Government might have to die each molecule to actually monitor this).
  • However, in our view the biggest issue is one that to many seems arcane – a review into the long established petroleum resources rent tax (which we have commented on many times before).  A Government hungry for money could listen to the siren voices about “getting our fair share” rather than the dull voices of reason who say that “PRRT take is designed to be low when commodity prices are low and costs are high”.

To us the point was illustrated well by a debate on ABC TV’s Insiders program yesterday, when the editor of the Guardian Australia unwittingly demonstrated her utter economic ignorance by complaining that it was unfair that oil and gas companies got “write-offs” in determining taxable profits. This instantly reminded us of the following legendary exchange in Seinfeld:

  • Kramer:   “It’s just a write-off for them.
  • Jerry:       “How is it a write-off?”
  • Kramer:   “They just write it off.”
  • Jerry:       “Write it off what?”
  • Kramer:   “Jerry, all these big companies, they write-off everything.”
  • Jerry:       “You don’t even know what a write-off is.”
  • Kramer:   “Do you?”
  • Jerry:       “No. I don’t.”
  • Kramer:   “But they do, and they are the ones writing it off.”

We can laugh at this – but this came from someone who presumably has a tertiary education.  Risks of changing a tax system post the investment of $200B could be much worse for Australia’s reputation than the other relatively minor items noted above.

Commodity prices

Crude traded flat on Friday, with Brent closing at US$51.76 and WTI at US$48.78.  Prices gained 1% over the week – with the good inventory news being the main supporting factor.

However, the weekly rig count “numbers” issued on Friday by BHI were distinctly bear-ish – increases in oil rigs of 14 and gas rigs of 6.  All other things being equal we would expect those numbers to dampen trading later tonight.

Henry Hub was up 1% (and 2% for the week) to close at US$2.95 on Friday.

LNG and international gas

In a fillip for those looking for new LNG markets as well as the traditional utilities, last week saw good news in terms of LNG’s increasing use as a shipping fuel.  Finnish company Containerships ordered 4 new container freight vessels to be fuelled by LNG.  Tougher and tougher emissions limits will mean that over time much a good part of the world’s shipping fleet could change to gas as a fuel.

Disruption

As even the most casual of energy system observers might have noticed recently – energy storage and deliverability is becoming the keystone that a more variable system requires. On that front we noted with interest a Bloomberg news article late last week about a pumped hydro storage project that planned to use an old coal mine in Germany as the lower water reservoir.

The sunk costs creating that reservoir – handily located more than 1 km underground – could make for a viable project. (However we are uncertain about the integrity of said reservoir given its soft rock environment).

Whether any old Australian coal-mines could present similar opportunities is to our knowledge an un-researched topic.

Quote of the day

Seinfeld fans will know what Kramer was referring to with the following:

“I’m out there, Jerry. And I’m loving every minute of it!”  Kramer

“There’s nothing between him and us except a thin layer of gabardine.” Jerry

 

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