Oil and LNG

Much has been said about the price of oil and its relationship to the price of our LNG.

I posted a while back what my theory was in that regard and I'll recount that again because I think it's on the money.

The falling oil price impacts LNG because the logic is that at these prices the cost of extracting oil by fracking becomes marginal. Cost of production figures of around $60 per barrel were nominally quoted 12months ago as break even for the fracking industry. With prices low for longer, the industry seems to have tightened its belt considerably, and now much lower cost figures are being quoted. What they are exactly depends on how you play with the numbers, but we seem to hovering around the pivot point now.

The point is that if frackers can't make money then they will cease fracking. Whilst production numbers are up due to efficiency in the extraction progress, rigs numbers are down. The flow on, of a cessation to fraction, would be that much of the gas production comes from the fracking operation. In essence, if there is no fracking, there is less gas, and our LNG may have nothing to freeze.

Having said that, I believe that fracking in the U.S. is here to stay. Energy independence has had a very positive influence on the U.S. economy. Irrespective of the price anomalies that may arise from time to time, I think the Americans will ensure the rigs keep drilling, I can't see them going back to importing two thirds of their oil needs.

What you might see, I believe is a severe rationalisation of the industry, whereby many of the small fields and operations are gobbled up by the bigger players, further streamlining the industry. Either way, I don't see it as being a big issue for our Ant. The U.S. loves energy and not having to rely on imports is something they are growing very used to.