Energy crisis? The Poms are already fighting at bowsers, and we’re only just getting started
Link copied to
Long lines for fuel, fights breaking out and the army being placed on standby. The situation in the UK is a symptom of the energy crisis that continues to build momentum.
The crisis has been building up for some time now from several factors that have combined into a perfect storm that is likely to stick with us for some time to come.
European natural gas stockpiles are at their lowest level in a decade thanks to an unusually long winter that extended through April.
This coincides with rising demand as economies in the northern hemisphere recover from the COVID-19 pandemic, raising concerns about gas shortages and power blackouts in winter.
Gas production has also been dwindling with underinvestment meaning that new sources of gas are unlikely to emerge in the near-term, while gas piped from Russia is not expected to make up the shortfall.
These factors, along with competition with Asia for limited gas supplies, has sent gas prices soaring to record levels, a fact that liquefied natural gas suppliers have grasped with glee.
This has led to increased used of diesel and petrol as utilities run more oil (and coal)-fired electricity generation, a situation that sent crude prices on an upward trajectory. Especially as it was coupled with the ongoing reduction in US Gulf of Mexico production due to the impact of Hurricane Ida, and declining production from other major sources.
Oil prices jumped to a three-year high with the benchmark Brent crude within spitting distance of the US$80 per barrel mark while the West Texas Intermediate has broken past the US$75/bbl barrier.
Along with a faster recovery in oil demand in the broader market, it is no wonder than that Goldman Sachs has raised its end-2021 oil price forecast from US$80/bbl to US$90/bbl.
“While we have long held a bullish oil view, the current global supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above-consensus forecast and with global supply remaining short of our below consensus forecasts,” Reuters quoted Goldman analysts as saying.
Its previous forecast was based on demand recover and weaker supply response from non-OPEC oil producers with a seemingly prescient warning that a colder winter and soaring natural gas prices could lead to higher-than-expected oil prices at the end of this year.
Goldman Sachs adds that OPEC output increases have been offset by the Hurricane Ida-induced reductions in GoM production while supply growth from producers outside OPEC have been below expectations.
Energy analyst Peter Strachan also questioned OPEC’s ability to lift its production though he noted that Iran could add about 1 million barrels of oil per day if sanctions were lifted.
He told Stockhead that oil demand would be crimped and economic growth threatened if crude prices exceeded US$85/bbl.
US oil producer Hess Corporation also warned that the industry was “massively underinvesting” in supply even as demand continued to rise.
Wood Mackenize noted earlier this year that global upstream investment had fallen from US$600bn before the pandemic to a 15-year low of US$350bn in 2020.
“There’s little evidence yet of upstream investment perking up from a 15-year low, even in the price-sensitive US Lower 48 tight oil plays. The mood will change if prices remain at these higher levels well into 2022 and show signs of sustained recovery,” WoodMac had noted in June.
“So that tells me the industry is massively underinvesting to meet future supply,” Hess Corp’s president Hill told Reuters.
Strachan added that even with US LNG cargoes, gas pricing in the northern hemisphere is likely to remain strong.
“Australian LNG producers will be making out like bandits, selling all the cargoes they can at spot, even all the way into Europe or as swaps with US cargoes,” he noted.
There may be some – admittedly limited – signs that not everything is going the way of demand bulls, with China reportedly imposing restrictions on industrial activity in an attempt to meet energy intensity targets and reduce emissions.
Bell Potter Securities noted that besides reports of electricity supply rationing, some provincial governments have reportedly asked office workers, shopping malls and residents to limit power consumption in a bid to prevent blackouts.
Prolonged restrictions in Asia could also impact on the pace of recovery across oil markets with WoodMac lowering its third quarter Asia Pacific demand outlook by 220,000bpd and fourth quarter outlook by 300,000bpd.
It added while demand could improve next year, the prospect of quarantine-free travel for vaccinated travellers to countries such as China, Japan, Australia and India looked low, which could impact on jet fuel demand.
Swipe or scroll to reveal the full table. Click headings to sort.
In Australia, the energy crisis and the resulting high oil prices are likely to impact Australians in the coming weeks when the price increase filters down to petrol pumps.
Domestic gas prices are currently low thanks to our relative insulation from global markets but fast declining supplies could see east coast prices climb, especially if the next winter is colder than usual.
For oil and gas plays, oil and gas producers are likely to see immediate benefits given the high prices.
Carnarvon is working with Santos to bring its Dorado oil and gas field into production.
The joint venture recently awarded the contract for the design, construction and installation of the wellhead platform that will supply liquids to a floating production, storage and offloading vessel about 2km away while re-injecting gas to enhance oil and condensate recovery.
A final investment decision is expected around mid-2022.
Meanwhile, 3D Oil and operating partner ConocoPhililips are targeting multiple trillion cubic feet of gas at the T/49P permit in the Otway Basin offshore Victoria.
A 3D seismic program is currently underway to help high-grade gas prospects for potential drilling.
Over in the West, prospects are also looking up for explorers and producers.
“The Perth Basin is now becoming linked to the global LNG market so days of sub-A$4/GJ gas in WA will be behind us as we move into 2023 and beyond,” Strachan noted.
“The North LNG producers will be sucking gas from Waitsia and then Scarborough.
Highlighting this, Beach Energy (ASX:BPT) signed a heads of agreement earlier this week with BP Singapore for the supply of all of Beach’s expected 3.75 million tonnes of LNG production from the second stage of the Waitsia gas project from the second half of 2023.
Pricing is linked to both Brent and Japan Korea Marker price with full upside exposure and a downside price protection mechanism.
Other companies that have done well for themselves in the past month or so include Grand Gulf Energy (ASX:GGE), which has oil production from its operations in Louisiana, and Global Oil & Gas (ASX:GLV), which acquired a 25% interest in the Sasonof prospect in Western Australia that targets multi-TCF of gas.
Meanwhile, Doriemus (ASX:DOR) has a small stake in Horse Hill Developments that recently completed a well intervention on the Horse Hill-1 well to optimise oil production.