Australia’s Natural Gas Price Cap Could Do More Harm Than Good
A price cap on natural gas for the domestic Australian market could make matters worse instead of better, energy major Woodside has warned. The cap, for gas and coal, was announced by the Prime Minister earlier this month as a means of mitigating the effects of the international tightening of gas supplies that has led to higher prices. “Extraordinary times call for extraordinary measures, and we know, with the Russian invasion of Ukraine, what we’ve seen is a massive increase in global energy prices,” Anthony Albanese told media. The energy industry was quick to slam the measures, which would see gas prices capped at $8.15 (A$12) per gigajoule and coal prices capped at $85 (A$125) per ton, with the cap in effect for a year. According to companies from the sector, a price cap would discourage investments in new production capacity and, as Woodside said this week, create more uncertainty. “A policy of such significance, proposed without any meaningful consultation with industry, creates an environment of uncertainty that will result in investment activity dropping across energy markets. This will make solving the underlying structural problems in the energy market harder, not easier,” the company said in a statement. Woodside then went on to call on the Albanese government to reconsider its intervention in local gas markets and “bring energy companies, retailers, manufacturers, and infrastructure owners together to properly engage on a solution.” Earlier this week, the local arm of Exxon put it more bluntly: “This reckless free market intervention by the government will divert investment away from Australia to other nations that support fiscal stability and free markets,” a spokesperson for Esso Australia said, as quoted by Reuters. Meanwhile, Albanese has shrugged off criticism from the energy industry, saying that “This is jumping at shadows. We’ve come up with measures which are responsible, that won’t have a negative impact on investment.” Even so, the PM has agreed to meet with energy companies to discuss the government’s measures for tackling the crisis.
Five Reasons Why U.S. Shale Production Won’t Soar In 2023
Last week, the chief energy adviser to the Biden administration, Amos Hochstein, blamed institutional investors for the stalled drilling in the U.S. oil and gas industry and called it outrageous and un-American. Indeed, large investors, most of them from the financial services industry, have been one reason for U.S. oil companies’ rearrangement of priorities from grow at all costs to shareholder returns. Nowhere is this truer than in shale oil and gas—the driver behind the latest U.S. oil and gas boom responsible for turning the country into the world’s biggest producer of these hydrocarbons. Yet investor pressure on the companies to boost shareholder payouts at the expense of investment in new production is only part of a story that confirms recent analyses suggesting the U.S. shale oil boom is over, and there is no coming back. For the last two years, the shale oil industry, like the broader oil and gas industry, suffered the consequences of pandemic restrictions like other industries and had to curb production massively. And the industry is still dealing with some remnants of the fallout from the lockdowns, such as workforce and raw material shortages. Yet these problems seem to be on the way out, and production is recovering from the low of 9.7 million bpd it reached in May 2020. Yet it has not reached pre-pandemic highs, and it is unlikely it ever will. Because in addition to some lingering effects of the pandemic, there are such things as natural depletion, government policies, and, indeed, investor pressure. In a recent analysis of the state of the U.S. shale oil industry, resource investors Goehring and Rozencwajg highlighted these three factors as drivers of the transformation of the industry from its pre-pandemic boom to today’s significantly more measured pace of both production and investment in future supply. Natural depletion is not something that gets talked about very often when it comes to U.S. shale. In fact, most reports about the industry like to note the resource wealth of the U.S. shale plays, especially the Permian, but fail to add that these plays have been exploited for quite some time now, and in some of them, drilling is not as lucrative as it used to be. In fact, Goehring and Rozencwajg note that drillers in the Eagle Ford and Bakken formations have largely run out of profitable drilling spots and production in these two plays is likely to plateau soon and start declining. The resource investment firm mentioned the story of Oasis Petroleum which illustrates this trend: Oasis said in 2017 that it had 20 years’ worth of top drilling locations in the Bakken. But months later, the company quit the Bakken and moved to the Permian with the acquisition of acreage from Forge Energy. Three short years later, it filed for bankruptcy protection. A year later, in 2021, it sold its Permian acreage and merged with Whiting Petroleum in a $6-billion deal. In addition to natural resource depletion, there is also the issue of political support or, rather, the lack of it. The Biden administration has made its anti-oil and gas stance a central point of its energy policies, and it appears that no amount of belated efforts to get oil drillers to drill would have any effect as long as these policies remain unchanged. Amos Hochstein is not the first, and he won’t be the last to criticize drillers for not drilling, even indirectly, as he did. Yet it is the administration of which Hochstein is a member that declared its intention to squeeze the U.S. oil and gas industry as it prioritizes the transition to low-carbon forms of energy. As Goehring and Rozencwajg put it in their analysis, “Every proposal by the Biden Administration in response to high energy prices is either outright antagonistic towards the industry or, at best neutral.” “At no point has the administration signaled to the energy industry that its stance might be moving from outright hostility to accommodation,” the investors also note, and indeed, for all the calls, pleas, and outright threats to the industry to start drilling or face the consequences, the administration has never indicated this much-desired increase in production could be anything but a temporary way of fixing oil prices. This is certainly not enough to motivate increased spending on more production, either for the companies’ management or their shareholders, many of whom do indeed hail from Wall Street. Neither does the fact that, as Goehring and Rozencwajg point out, most energy companies are currently trading at near-record low valuations despite the stock rally that followed the rally in international oil prices. When the valuation of a company’s stock is so low, there is little incentive to splash money on new production that will have zero effect on the company’s price because of the persistently low valuations. Instead, companies focus on returning cash to shareholders—as shale companies are doing—and on boosting their share price with the buybacks. There is very little in the way of incentives for oil drillers in the shale patch to drill. In fact, one needs to look very hard to find such an incentive, even as global supply of crude oil remains constrained, with the option of a further squeeze as the consequences of the G7 price cap on Russian crude make themselves known.
China announces oil and natural gas trading in Yuan during Saudi visit
Since the United States enforced sanctions against Russia, the dollar is perceived as an unreliable trading currency. Countries are increasingly moving away from the dollar as the global reserve currency. China has delivered another blow to the dollar’s standing as a reserve currency by permitting oil and natural gas to be exchanged in yuan. However, it must be determined whether or not this move to Yuan trading will take place soon. One of the cornerstones of the global financial system over the past four decades has been one that is based on the petrodollar. This has been an essential component in keeping the reserve position of the dollar stable. The money that is gained by oil-producing countries through the export of oil is referred to as petrodollars. These nations frequently invest a sizeable amount of their petrodollars in the bonds issued by the United States Treasury, contributing to the sustained strong demand for US dollars. This, in turn, contributes to the maintenance of the standing of the dollar as a reserve currency. The United States’ position as the uncontested financial superpower of the world would be bolstered as a result of all of these developments. Yuan now challenges this phenomenon. During his trip to Riyadh this week, China’s president Xi Jinping stated that the Shanghai Petroleum and Natural Gas Exchange would be “completely employed in renminbi (RMB) settlement for oil and gas trade.” Most commodities, such as crude oil, are traded in US dollars. The renminbi trade is one of several “key areas” in which China is prepared to collaborate with Gulf nations over the next three to five years.
Reforms in LNG sourcing to help curb fertiliser subsidy
A sharp spike in prices of liquefied natural gas (LNG) amid the Russia-Ukraine conflict has pushed up the cost of production of urea. Higher global prices of soil nutrients are seen to inflate fertiliser subsidy to Rs 2.5 trillion in FY23, up 54% from 2021-22 level. Arun Singhal, secretary, Department of Fertilisers spoke to Sandip Das on critical issues of fertiliser supplies, reforms in LNG pricing mechanism and possibility of cash transfer to farmers, instead of routing the subsidies to the industry. The surge in global prices of fertilisers and feedstock like gas has upset the estimates of subsidy requirements. Any long-term measure being initiated to deal with the volatility of global soil nutrient prices? Fertiliser subsidy has gone up in sync with global prices as we import a substantial volume of fertilisers (30% of domestic consumption is met via imports). However, the prices have started to soften in recent times. For instance, the global prices of DAP (diammonium phosphate) are currently ruling around $720/tonne, down from a high of $920/tonne prevailed a few months back. Even urea prices have softened. In terms of high global fertiliser prices, the worst is over from our perspective. We have broad-based our supplies rather than depending on a few sources. If there are some issues with importing fertiliser from Russia, we can import from African and Arab countries. Our focus is to ensure that farmers get adequate quantities of fertilisers at reasonable prices. What is your latest assessment on the quantum of fertiliser subsidy in the current fiscal? It is difficult to estimate the subsidy as the country’s urea production is dependent on (imported) liquefied natural gas (LNG), which is 80-85% of the cost of production. We really do not know the future movements in the LNG market. We have installed capacity for manufacturing 28.3 million tonne (MT) of urea against an annual requirement of around 35 MT. If (LNG) prices are at a certain level, it makes sense to produce urea in the country. If imported urea prices are higher than imported LNG prices, we will have to import the finished product. We keep a close watch on imported gas and urea prices and take a call accordingly. What measures the government is considering to deal with volatility in the LNG prices? In terms of sourcing of the feedstock, domestic gas is the cheapest, followed by long-term LNG supplies and spot markets. Domestic LNG ranges between $ 8-10 per million metric British thermal unit (mmBtu), while long- term LNG is sourced at the price band of $ 18-20 per mmBtu. The spot gas prices vary very widely between $ 2-67 mmbtu. The Empowered Pool Marketing Committee (EPMC) set up by the petroleum ministry in 2015 is managing these streams of supplies and the pooling of gas for uniform pricing to fertiliser unit The government is considering some reforms in the EPMC process including steps such as reverse auction, aggregation of demand etc. In the last one month, we have saved Rs 32.88 billion by swapping, which allowed us to source cheaper LNG through short-term tender method. While in the EPMC process, there has not been off-take guarantee for LNG, we are now considering to include such guarantee.