BHP leaps for more Hydrocarbons; While CLP Group’s Australian Energy Sector Margins Sank

BHP Billiton seems to be determined to extend its oil and gas portfolio, post the Australian behemoth decided to jettison coal and cobalt from its product bucket. BHP’s Board approved US$283 million to fund the development of the Ruby Project, which aims to supply the domestic market of the Republic of Trinidad and Tobago in the Caribbean.

On the 100 per cent basis (BHP’s 68 per cent) the total investment for the Ruby oil and gas project, which includes a pre-commitment capital, stands around US$500 million. During its strategy briefing presentation in May 2019, BHP mentioned that on a 100 per cent basis, the production volume of the prospect stands at 16,000 barrels of oil per day along with 80 million standard cubic feet of gas per day.

As per the company, the first production from the project is expected in the financial year 2022, and it would deliver an internal rate of return of over 15 per cent.

The Ruby oil and gas project, which is in the Block 3(a) development area of the Republic of Trinidad and Tobago, provides the company with five production wells, which in turn, would allow the company to safely deliver value to the domestic market by producing resources in the Ruby and Delaware reservoirs.

The project hosts an estimated Recoverable C categorised resources of  13.2 million barrels of oil and 274 billion cubic feet of natural on a 100 per cent basis. The earliest first production by the company is expected to be in CY2021.

BHP, the operator of the prospect, holds 68.46 per cent interest in the project and as per the BHP’s President of Operations Petroleum- Geraldine Slattery, the decision from the Board underpin significant milestone for BHP as the Ruby oil and gas project aligns well with the company’s strategy of maximising the value of existing assets.

While BHP controls 68.46 per cent, Heritage Petroleum along with the National Gas Company of Trinidad and Tobago holds the remaining 20.13 and 11.41 per cent of the prospect respectively.

Under the investment terms of the Block 3(a) Joint Operating Agreement, at least two parties along with 65 per cent of the working interest are required to approve the investment.

While BHP is trying to increase the footprints in the hydrocarbon segment, the energy industry is in a conundrum over the trade tensions, which is dragging the hydrocarbons price down in the international market.

Hydrocarbons Scenario:

Oil Market:

The second quarter of the year 2019 has not been a bright quarter for the black gold; the Brent Spot prices have crashed from its April 2019 high of US$75.52 to the present month low of US$55.96 (Day’s low on 7 August 2019).  Which, in turn, denotes a decline of approx. 26 per cent.

The global uncertainties along with the week global demand exerted pressure on crude oil prices, and while the crude oil is feeling the heat of global pessimism, other hydrocarbons such as coal and natural gas are also trading lower.

Coal Market:

The coal market is currently facing issues over the decline in utilisation of coal for the energy generation, which in turn, is exerting pressure on coal prices. The global economies are rapidly adopting measures to curb the environmental emission in line with the Paris accord.

Apart from the increased stance to control emissions, the events across the global levels are also responsible for dragging coal down in the market. China recently imposed higher restrictions on coal imports to support the domestic coal market, which, in turn, impacted the coal prices in the international market.

While China imposed restrictions on coal imports, other nations such as Russia and Germany permanently shut down their coal-powered energy generation plants, which further exerted pressure on coal prices.

Natural Gas and LNG:

Natural gas prices have seen a steep decline in the international market amid oversupplied conditions and reduced demand from the United States due to lower than estimated temperature.

Australia Energy sector:

While the timings of the BHP Group decisions seem to be colliding with the hydrocarbons prices, the Hongkong-based CLP Group is facing some tough time in Australia as the Energy Australia- owned by the CLP Group is in shackles over the massive write-down due to the federal government’s re-regulation of electricity prices, which in turn, is dragging the profit of the CLP Group.

The new Default market offer (or DMO) by the Australian Competition & Consumers Commission (or ACCC) seems to have distorted the group more towards the losses, and recently the group’s wholly-owned- EnergyAustralia retailing arm lost  $HK6.38 billion amid the new DMO.

In February, the federal government announced about the implementation of the new DMO for residential and small business customers in New South Wales, Queensland and South Australia.

Later, the Victorian State Government also planned to introduce its own electricity default offer for residential and small business customers, which went effective from 1 July 2019, which in turn, had their negative impact on the group, as these changes mandate lower regulated “safety net” retail tariffs for the markets in which the wholly-owned subsidiary of the CLP Group-EnergyAustralia operates.

Dodo and CovaU Penalties:

The privately held M2 Energy Pty Ltd (Dodo) and CovaU Pty Ltd paid hefty penalties of A$37,800 and A$12,600 post-ACCC issued an infringement notice to both the energy retailers. The Australian Competition & Consumer Commission commented after levying the penalties that the Retail Electricity Code caps the standing offer prices that are charged to consumers in New South Wales, South Australia and South-east Queensland using DMO.

As per the ACCC Chair- Rod Sims mentioned that the new DMO mandated a standard base rate, which in turn, would allow the consumers to understand the discount claims with greater transparency.

Ryan Stokes Suggestion:

The owner of the Seven Group Holdings- an Australia-based diversified operating and investment group, Ryan Stokes, mentioned to a media house that the federal government should intervene over the high energy prices in Australia, which is exerting pressure on the households and small businesses.

However, the boss of Seven Group Holdings also suggested that the federal government should allow coal-powered electricity generation and it’s time for the government to keep at bay as the coal situation might not be as bad as it sounds.

Ryan Stocks suggestions are not without real-life example as Japan is still running its coal-powered energy generation. The running of the coal-powered station could save foreign investors from feeling the pressure of tighter regulations in Australia.

Japan coal-powered stations run on high-grade coal imported from Australia, and the Australian government should see the high-efficiency of the coal fire powered stations to prevent the capital drainage of foreign companies operating in Australia.


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