David Fuller and Eoin Treacy's Comment of the Day
Category - Energy

    Musings from the Oil Patch

    Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report dated February 4th. Here is a section:

    The Dutch government earns about €12 ($16.3) billion annually from the sale of Groningen production. The decision to cut output means state income will fall by €600 ($813.2) million in 2014, €700 ($948.7) million in 2015 and €1 ($1.4) billion in 2016, given the projected production and gas prices. The lost income will be in addition to the €1.2 ($1.6) billion to be spent over the next five years to strengthen buildings, houses and infrastructure in the region. These investments hope to reverse the decline in house prices due to the actual and potential earthquake damage.

    Making up for the potential €3.5 ($4.8) billion drain on the Dutch treasury over the next 3-5 years is the first order of business for the government. Expectations are that some of the lost income will be recouped by increased imports and exports that will find their way through the Dutch energy hub. The expectation that Groningen’s gas volumes would be cut has already boosted local gas prices, which should not be a surprise, but also a pain for citizens and businesses. The biggest beneficiary of the Dutch cut will be Gazprom (GAZ.BE), which sees being able to sell an additional 175 Bcf of gas to Europe, thus earning an additional $1-2 billion in revenues, and further strengthening Europe’s dependency on Russian gas. Oil-price-linked gas imports will keep energy prices in Europe high providing an environment in which slightly cheaper Russian pipeline gas can capture a greater market share.

     

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    Monthly Oil Short Term Bearish

    Thanks to a subscriber for this interesting heavyweight 197-page report from DNB which may be of interest to subscribers. Here is a section: 

    The global supply-demand balance is weakening in coming months. It will not help neither Brent-prices nor WTI prices that the spring refinery maintenance season is just in front of us. Watch the Dubai time spread which has violently moved into contango recently. This could be an early bearish warning signal for Brent prices just like we have seen before.

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    Winter storm Janus: Natural gas prices soar in Northeast

    This report from the Christian Science monitor highlights the tight situation currently evident in the USA’s natural gas market. Here is a section:

    "While supply is greatly increased because we have plenty of natural-gas production, right now we have a transportation and storage issue," Dennis Weinmann, a principal at Coquest Inc., a Dallas energy brokerage and consulting firm, told The Wall Street Journal. "We don't have gas where we need it right this second." 

    On a typical day, industry watchers say the Northeast's natural gas infrastructure is in need of an upgrade, particularly as natural gas production booms in the US. When extreme winter hits suddenly, and everyone stays home and turns up the heat, the strain on that pipeline system increases. Nearly all natural gas pipelines headed into New York and New England were constrained Wednesday, according to the US Energy Information Administration (EIA). 

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    Upstream MLP/Trust Earnings Preview; Recalibrating Trust Ratings

    Thanks to a subscriber for this report from Raymond James which may be of interest to subscribers. Here is a section: 

    At this time last year, we thought 2014 U.S. natural gas prices would average $3.75/MMBtu. We still think prices will average $3.75 in 2014. Yes, we know the 2014 gas futures strip has surged well above $4.00 as cold weather has drawn inventories sharply lower. In fact, the recent surge in the year-over-year gas storage deficit to more than 500 Bcf has driven gas prices so high that we are increasing our 1Q14 forecast to $4.15/MMBtu. But we cannot assume that colder-than-normal weather will continue through the remainder of winter. Therefore, we remain of the view that strong U.S. gas supply growth will outpace slowly improving gas demand over the next two years. Specifically, we are looking for Henry Hub to average $3.75/MMBtu for both 2014 and 2015. Obviously, weather will continue to drive volatility, but the fundamentals suggest U.S. gas should trade mostly between $3.25 and $4.25. Beyond 2015, faster expansion of natural gas-consuming infrastructure in the U.S. should allow gas prices to slowly drift higher. Our long-term U.S. gas price deck remains $4.25/MMBtu.

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    Juanito and his bright manana

    Thanks to a subscriber for this interesting assessment of Mexico’s recent energy reforms from Deutsche Bank. Here is a section:

    Engineering services, equipment and pipes suppliers, and offshore/onshore drillers should be among the first to reap the benefits of the sector’s opening. Their dependence on congress enforcing operating rules is limited; thus, they are already starting to provide services to companies exposed to the sector. Deep-water crude oil exploration and extraction and complex downstream projects should be target businesses for global integrated oil companies. Returns for these should be evident in the long term.

    Globally listed vehicles with potential long-term positive spillover It is still early to assess the impact on listed companies but we have made a first attempt to identify our preferred names to play Mexico’s Energy Reform.

    And

    Look out for better entry points to play this secular story Hefty expectations behind Mexico’s current rich valuation should soon undergo a reality check. In the short-term, consensus’ potentially lower estimates on the elimination of the fiscal consolidation regime could push the IPC to a 2014 P/E above 20x, 50% higher than 10-year average multiples and 100% over the MSCI EM index. Such large premium is difficult to prevail as the full impact of the Energy Reform is likely to materialize post 2015.

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    Email of the day on generation IV nuclear reactors

    "Last year I forwarded some information about nuclear molten salt reactors. I thought I would provide a brief update and have attached an article from Reuters on China's push for future nuclear technologies, in particular thorium and the molten salt reactor design. The article, in my opinion, places too much emphasis on thorium, as I believe the reactor design is the crucial factor. The article highlights considerable efforts being made by China, while one wonders what goes around in the heads of US Government that seems to be taking a back seat in the push for our nuclear future! I find that amazing when one thinks about the technological capacity of the US, and one may speculate about the incumbent nuclear industry's lobbying efforts to protect the status quo.¡±

    "Best regards for 2014"

    Here is a section from the article: 

    "Beijing's long-term goal: commercialize the technology by 2040, after building a series of increasingly bigger reactors. The Shanghai Institute of Applied Physics is recruiting nuclear physicists, engineers, project managers and support staff, according to a regular stream of job advertisements it publishes online. Its team is expected to expand to 750 by 2015 and eventually include 1,000 researchers.

    "A director at the Shanghai Institute, Li Qingnuan, and other senior researchers are wooing top young talent across China to join the project. After lecturing on molten-salt reactor technology at Sichuan University in April, Li invited students from the audience to apply for positions at the institute, according to a report on the university's website.

    "China's sprawling network of nuclear-research and industrial companies are gearing up to assist. In early June, the China National Nuclear Corporation, the body overseeing all Chinese civilian and military nuclear programs, announced that state-owned China North Nuclear Fuel Company had signed an agreement with the Shanghai Institute to research and supply thorium and molten salts for the experimental reactors.

    "The push into thorium is part of a broader national energy strategy. The government wants to reduce its dependence on coal-fired power plants, which account for about 80 percent of the nation's electricity but have darkened its skies. Nuclear energy is a big part of the plan: China aims to have 58 gigawatts of nuclear power on the grid by 2020, an almost five-fold increase from 12.57 gigawatts today.

    "Thorium is a hedge on that nuclear bet. China has 15 conventional nuclear reactors online and 30 under construction. But energy authorities are also investing in a range of different technologies for the future, including advanced pressurized water reactors, fast-breeder reactors and pebble-bed reactors. China has little uranium but massive reserves of thorium. So, the prospect of cheaper nuclear power with secure supplies of fuel is a powerful attraction.

    "At last year's Shanghai thorium conference, Jiang described how clean nuclear power would allow China to make a "revolutionary" move towards a greener economy.

    "The bet on unconventional nukes, he said, explains "why China is the first one to eat a crab" - citing an old Chinese proverb about the individual who dares to make a discovery important to civilization."

     

     

     

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    Email of the day 2

    On the oil complex:

    “Thanks for a great service. Here’s to a hugely successful and healthy 2014. 

     “I was just wondering what your thoughts were regarding the oil complex given your thoughts on industrial metals and soft commodities. Where will the oil complex be headed or will it remain range bound? Welcome your thoughts.”

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    Lifting of the US crude exports ban. Will it be quicker than most people think

    Thanks to a subscriber for this report from DNB discussing a potentially important development. Here is a section

    No fresh legislation seems required to lift the ban. With US crude and condensates output expected to hit record levels within the next two years, it is hard to argue that they are still in short supply or that the US faces an excessive drain of scarce materials or serious inflationary impact. It is no longer clear the Export Administration Act is applicable to crude. The ban ensures domestic crude oil prices remain below world levels because producers cannot arbitrage the difference. But no such restrictions apply to refined products, so the price paid by US consumers for oil products are linked to world levels. Domestic US refineries pocket the difference, buying cheap domestic crude below global prices while selling their output at international levels. New Jersey Senator Menendez is in our opinion wrong to argue that ending the export ban would result in higher prices for US consumers at the pump. It will not increase prices at all, it is in fact much more likely that the prices of refined products will drop if the US allows crude oil exports in our opinion. The coming year we are likely to see oil producers lobbying intensely to allow exports of crude while refiners will lobby intensely to maintain the ban on crude exports. It will be interesting to see what happens. If we have to bet on this we would put our money on a lifting of the ban during the coming two-three years and it could happen already during 2014 if the Reuters interpretation is correct.

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    UK fracking chief pledges billions to villages

    Here is the opening from this Sunday Times (UK) article which quotes the sensible, plain-talking Aussie who runs the private company Cuadrilla Resources (subscription registration required for the full article but a PDF is in the Subscriber’s Area.) 

    THE founder of the controversial shale-gas explorer Cuadrilla Resources wants to hand towns and villages billions of pounds from fracking what he calls “the people’s gas”.

    In his first interview in Britain, Allan Campbell, the Australian behind Cuadrilla, claimed his company has discovered “another North Sea”, but bemoaned the lack of political will to develop it.

    “I’ve got a great admiration and fondness for this country from whence my ancestors came, but the regulatory and planning system here is just bullshit,” he said.

    “There is no leadership, there is no oomph.”

    The company claims to have discovered 200 trillion cubic feet of gas thousands of feet underground in Lancashire — sufficient to meet typical British demand for more than 50 years — but has been hamstrung by mounting opposition to fracking.

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