Industry Authority Mike Salter

Why A US/Iran Deal on Nuclear Capability could spell bad news for the Oil Industry

Well the world goes on. The recent UK Budget announcement about the reduction of the supplementary charge has generally been accepted as a step in the right direction. It was reduced to a level that hasn’t been seen since Gordon Brown was UK Chancellor. It will be useful, as will the surprise reduction in PRT, which will help mature fields. There were other incentives to help exploration and seismic- whether they will be enough remains to be seen. No one expected any changes to help the industry in the short term, but we can wait to see what the longer term brings. Going forward, I would expect a higher level of confidence, at least.

The industry here is trying to change and reduce its cost base, reintroducing equal time rotations, this time 3:3. In the past I have used this rotation very successfully and the guys actually liked the three weeks off as they could take a fortnight’s holiday. I don’t understand why the industry moved away from this, it saves not only on the numbers of people, but also the numbers of helicopter flights etc., which will be significant.

Elsewhere the oil price picked up a little as Saudi Arabia and allies attacked rebels in Yemen, but then the price eased back again. Pundits now predict a longish time at this level or lower, if a US/Iran nuclear capability deal is signed with the concomitant lifting of sanctions on Iran.

The lifting of these sanctions will increase worldwide supply as the sanctions have curtailed Iran’s oil being sold on the world markets.

In other areas there have been some interesting developments in the gas market in the Far East.

I have previously made mention of the Indian market for oil and gas — lng being an important element of this. China is also an important buyer of lng, but it has been Japan closing down its nuclear generating capacity (pending regulatory reviews) which has added to the demand for lng in the SE Asia region.

The principal suppliers have been Australia and Indonesia as well as the Middle East. The demand for lng in the region has been such that buyers have been paying a significant premium to European buyers- but this is already changing.

Australia is well on the way to becoming the dominant lng player in the region. The North West Shelf Venture started production in 1989, Darwin lng came on stream in 2006 followed by Pluto in 2012 with Queensland’s Curtis commencing with one train in 2014.

Curtis will commission a second train in 2015 bringing capacity to 4.25 million tonnes/ year.

In addition there are six new projects currently underway, Wheatstone, Prelude, Greater Gorgon and Ichthys all offshore Western Australia, with two, Australia Pacific and Gladstone in Queensland, in various stages of progress.

Shell’s Prelude flng project is grabbing the headlines with the construction of the massive vessel. In addition Ichthys has hit some important milestones, when the gas export pipeline deep-water lay commenced in February, using the Castorone lay vessel.

This field is probably one of the most significant hydrocarbon liquid developments in the last 40 years of Australian Shelf activity. Projections are to produce 8.4million tonnes of LNG/year and around 1.6 million tonnes of LPG/year coupled with 100,000bbl/day of condensate. The operator? I suspect it could be no accident that it is INPEX the Japanese Oil company in JV with Total. This would mean there would be a ready market for the production which should start around the end of 2016.

INPEX is a group of companies comprising Tokyo Gas, Osaka Gas, Chubu Electric Power and Toho Gas.

The decline in growth in the Chinese market, and the slowing of the Japanese economy on the one side and increasing production on the other has seen prices tumble, and an increase in lng shipping charters with diversion clauses.

US gas production is still increasing with domestic gas prices held pretty low, in spite of the longer than anticipated very cold winter in the populous North East. Production should ease back soon as the reduction in drilling takes effect, then we should be well into the cooling season. Lets see what happens then.

Clearly a lot going on, but those who think that this price slump in both gas and oil could last a wee while yet, could well be right!

More later…..