Some Recent Developments

A Gas Glut
The natural gas market will soon be flooded with new sources of gas. The US has already licensed the export of LNG (liquefied natural gas) as a result of the discovery of massive resources of shale gas. It has a distinct advantage as it already has a number of LNG import terminals that only require a liquefaction plant to convert them to export terminals.

The domestic US gas price has collapsed; but so have gas imports. Consequently, cheap Qatari LNG now heads to Europe, where it puts pressure on Gazprom, the main Russian supplier. It is also finding its way into Asia.

Meanwhile gas resources in Mozambique continue to grow and some expect it will soon be the third biggest exporter of LNG behind Qatar and Australia. It will also compete in the markets of those two suppliers. Elsewhere Russia and Turkmenistan are looking for further export markets and a number of new gas discoveries have been made around the world, even in the Mediterranean.

Shale Gas Play Returns Big Oil
On 1 June 2012, the second biggest natural gas producer in the US, Chesapeake Energy Corp, announced a significant oil discovery in the whimsically named Hogshooter Play in the Anadarko Basin of the Texas Panhandle/Western Oklahoma.

Over the first eight days of production the well returned a daily average of 5,400 barrels of oil, 1,200 barrels of gas liquids and 4.5 million cubic feet of natural gas. This is approximately equivalent to 7,350 barrels of oil equivalent per day – a superb result for a shale gas play.

Chesapeake is the second largest shale gas producer in the US, with production from around 45,000 wells.  It has recent changed its focus to oil and liquids due to the gas glut, with evident success.

While Chesapeake has been severely criticised in recent months over unsustainable debt, corporate governance and other issues, legendary investor Carl Icahn recently acquired 7.6% of the company and has called for change to help unlock value. Chesapeake has acknowledged his concerns and has agreed to board changes. Great timing again by Mr Icahn.

Russian Natural Gas to China
Russia and China have been negotiating for years for Russia to supply natural gas to China. Whilst most technical points have been resolved, the stumbling block has been pricing. Russia wants USD $400 per 1,000 cubic metres, China offers $250. Russia ties its pricing to oil and European prices. China, at least until recently, has fixed gas prices.

Putin is in China now for the eighth round of bilateral energy talks. There are good reasons to think a negotiated settlement on price is achievable this time around.

Australian Coal Bed Methane
The much hyped “Coal Seam Gas to LNG” industry in Australia has run into strong headwinds.

Competition from other suppliers, as touched upon above, will result in substantially lower than forecast revenue for any production not already under contract.

More worryingly, drilling to increase reserves to justify new development has proven much more difficult than first thought. More holes will be needed and the various basins appear to be less productive that first estimated, requiring a search further afield that anticipated. This is on top of continually rising costs for the resource sector in Australia.

It is likely that these two factors, allied with increasing environmental opposition, will cause a scaling back in LNG production plans from coal bed methane in Eastern Australia.

05 June 2012 Commodities