COLUMN: Good news for Santos, but what caused oil crash?

GREAT news for Santos shareholders that GLNG has despatched its first load of LNG after coming in on time and on budget. They've not been happy of late as a quick review of the share price over the past year or two will tell you. Oil and gas producers worldwide have been scrambling against the collapse in oil prices from around $US115 a barrel a year ago to less than $US49 a barrel now. LNG prices are linked to the North Sea oil price. So what's behind it?

You have to go back to the mid-1970s. Then the Middle-East oil producers led by Saudi Arabia choked the market of oil. This led to the near collapse of economies reliant on oil, most predominantly the US and Eurozone countries. As you've seen me write on numerous occasions before, I'm a believer in human endeavour. To use a cliché: where there's a will, there's a way. The US didn't sneak up on the European super powers in the lead up to the First World War by being uninventive and unmotivated and they weren't going to allow the Saudi tail wag the dog in the future. They developed a technology for extracting oil from shale, searched long and hard for new oil deposits on land and in seas they had access to and worked assiduously towards becoming self-sufficient in oil, then a net exporter. By around 2008, that gave the US the opportunity to give the finger to the Saudis and their mates in OPEC, the cartel of old money oil producers led by Saudi Arabia.

It was the same story with gas. Hydraulic fracturing or "fracking" brought the development of 500,000 active gas wells in the US between 2008 and today. Fracking involves drilling and injecting fluid at high pressure into shale rocks to release natural gas inside. As we know the gas is transported to LNG facilities where extreme cold produces liquid.

The Saudis in the face of these developments decided to act like the petulant kid who takes away his cricket bat and goes home. But it back-fired as they underestimated the extent of the oil and gas reserves available in the US, reserves that had actually had a gradual easing of production with several smaller producers going to the wall. What the Saudi-led OPEC countries did was the opposite of what they'd done in the 1970s and flooded the market with cheap oil, thus the 50 percent drop in the barrel price and the hurtling of Russia towards deep recession. So bad was the Saudi decision that the country is actually being forced to liquidate offshore assets and seek funding in debt markets to enable the continuation of substantial budget deficits rather than cut spending.

OPEC has recently announced that it foresees an improvement in oil prices next year which would be welcome news to Santos, Origin Energy and BG Group operating on Curtis Island. But with the US so oil dependent and so capable of producing the liquid gold, I can't see barrel prices returning to $US115 any time soon. What it would mean though is that Australia's LNG producers will be operating profitably, surely good news for all of us who are not tree-huggers.



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