Today’s Blog – Thursday 11th May 2017

Editorial

Today the Australian Financial Review (AFR) carried a story about the Geelong refinery potentially shifting from buying gas as an energy input and instead substituting its own refined liquefied petroleum gas (LPG) instead.

Geelong was sold by Shell to massive private commodities trading company Vitol a couple of years ago.  Vitol would have as good a perspective as anyone on the different pricing dynamics of various products on the hydrocarbon spectrum.  At present it would observe Australian domestic gas prices as being close to or even above oil price parity – a generally rare – but not unheard of – event globally in the last few decades.

Your blogster is old enough to recall the rather unconvincing arguments a decade or so ago that US gas prices were higher than crude prices because they “deserved” to be so due to the cleaner burning nature of gas.  However, over the long term the much greater energy density and portability of petroleum liquids has meant that higher prices are rationally allocated to them.

The position in Australia is now such that not only Vitol might be considering burning LPG rather than buying methane – when the price of the latter is said to be being offered at in excess of A$10/GJ (or indeed considerably higher than that with up to A$20 being quoted).  The lower level of that band is close to oil parity – and a critical differentiator is that liquids have very low delivery charges compared to the pipeline imposts that burden methane.

In our view, presuming oil prices do not spike (a bold assumption maybe – but hedges can deal with the issue for some time) – peaking electricity generators may well run more economically on liquid fuels than gas – not the paradigm most observers seem to be expecting.

Commodity prices

Crude prices rose strongly overnight, with Brent up ~2.8% to US$50.32 and WTI up ~3.2% to US$47.34.  The cause was very simply some strong inventory reduction numbers from the weekly EIA report.  Crude stocks were down 5.2 mmbbls (or actually 5.7 mmbbls taking account of SPR sales), gasoline was down 0.2 mmbbls and distillate down 1.6 mmbbls.

Henry Hub also performed well – up ~2.5% to US$3.29.

LNG and international gas

Some recent elections could have consequences for LNG markets on both the demand and supply side:

  • In British Columbia the previously ruling Liberal party has been returned, albeit as a minority Government.  Their opponents would have been much less supportive of petroleum related developments generally – including the numerous LNG projects which hope to get up in the Province.
  • In South Korea new President Moon has a policy of materially reducing coal use in the country.  Presuming he can enact his agenda, renewables are set to grow substantially – but LNG demand should also receive a large boost, at least in the medium term.

Governments

One budgetary point that we omitted yesterday was a new Federal Government policy designed to encourage new East Coast gas developments by dolling out some cold hard cash to worthy projects (albeit only A$29M – likely requiring matching funding).  This policy seems to be based on a similar scheme in South Australia called PACE which dished out A$24M to empoverished companies like Santos and Beach Energy recently.

The Feds may deem therefore that SA should not get any further funds from it – a poor reward for being a first mover on the policy front.

Funds will not go the Vics, the Territorians and New South Welshmen – unless they change their anti onshore petroleum ways.  So projects in Queensland should be at the front of the queue.  We suggest to potential applicants to see if they can find projects with a political leg to them – as Beach did in South Australia’s South East, where money from the current Labor Government is a direct affront to the local Libs plans to impose their own regional moratorium.

Quote of the day

In a bizarre echo of what is happening over the pond in Washington, that whiter than white body known as FIFA has just sacked the leaders of its own ethics committee who were investigating 100s of cases of alleged wrongdoing.  And the reason why, according to FIFA’s old white male Vice President, Victor Montagliani:

“to better reflect the geographic and gender diversity that must be a part of an international organisation like Fifa”. 

We eagerly await to see whether the new FBI boss will be similarly diverse.

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