Commodities outlook improves

Commodity prices are rising and new projects are being approved around the world as energy majors, having driven down costs, begin to invest some of their cash stockpiles, writes David Kershaw.

Commodity prices strengthened in the first quarter of 2018, supported by both demand growth and restricted supply.

The outlook painted by the World Bank’s latest Commodity Markets Outlook sees oil prices rising by 22 percent, from an average of USD53 in 2017 to USD65 per barrel in 2018 through to 2019.

Global demand and continued production restraint by OPEC and non-OPEC producers should serve to prop up prices. Higher oil prices are expected to eventually feed into higher natural gas prices, which the World Bank expects to increase by 8 percent in 2018.

Coal prices will continue to decline to an average USD85 per tonne in 2018, as energy demand shifts towards cleaner energy sources.

Rising oil prices and limited supply are telltale indicators that the energy majors will reach into their pockets and start investing in new exploration and production (E&P) activities. Offshore suppliers have been busy in recent years streamlining operations and reducing their cost base.

The current tailwind in the oil market is likely to propel 100 new offshore projects to be sanctioned in 2018, with a value of approximately USD100 billion, according to Rystad Energy. This compares with only 60 projects in 2017 and below 40 in 2016.

“The offshore suppliers have created their own comeback,” said Audun Martinsen, vice president of oilfield service research at Rystad Energy. “Their constant search for cost reductions and streamlining of operations has enabled them to cut offshore project costs by almost 50 percent compared with the heights of the last cycle.”

Shortening lead times

“Not only are the suppliers charging less for their services, they have also improved the efficiencies of their operations, thus shortening lead times from project sanctioning to first oil. As an example, the time required to drill and complete a well has fallen by 30 percent in the North Sea, the Gulf of Mexico and Brazil over the past four years,” Martinsen added.

Rystad forecasts that about 30 project approvals would come through in Asia this year, including Pegaga in Malaysia and D6 in India. Some 30 projects could come online in Europe, including Neptune Deep in Romania and the already sanctioned Penguins redevelopment in the UK.
Africa should approve nearly 20 projects, including Zinia 2. A similar number is predicted in the Americas, where major schemes like Vito and Mero 2 are maturing.

“E&P companies have more free cashflow at hand in 2018 than they did during the recent peak years of 2008 and 2011. In fact, 60 percent of the companies looking to finance their project development costs can do so through their cash flow. Supported by strong oil
prices, we see a very small risk of these projects not materialising,” Martinsen said.

However, Wood Mackenzie’s second annual State of the Upstream Industry survey, published in April, states that financial health rather than growth remains the priority for upstream oil and gas companies, with low-risk growth still preferred by the sector.

Mergers and acquisitions

Wood Mackenzie did suggest that asset mergers and acquisitions (M&A), as well as frontier exploration, are more attractive options this year than in 2017.

Martin Kelly, Wood Mackenzie’s head of corporate analysis, said: “The industry’s growing confidence is evident in spending expectations, too. More will be spent globally and in each region this year compared with last year. Capital investment, exploration investment and M&A spending will all increase by at least
10 percent year-on-year.”

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The Transocean Spitsbergen drilling rig. (Photo- Kenneth Engelsvold)
The Transocean Spitsbergen drilling rig. (Photo- Kenneth Engelsvold)

Saudi Aramco: Arabiah EPC deal, denies profits

Bloomberg has reported that Saudi Aramco made a net profit of USD33.8 bn in the first six months of 2017, making it the world’s most profitable company.

It is almost totally free of debt and enjoys production costs running at a fraction of the industry standard. The eye-catching numbers, if accurate, mean that the secretive Saudi energy giant is more profitable than Microsoft, JP Morgan and ExxonMobil combined.

Saudi Aramco said in a statement: “This is inaccurate, Saudi Aramco does not comment on speculation regarding its financial performance and fiscal regime.”

Saudi Aramco selects Arabiah contractor

Meanwhile, the Dhahran-based petroleum and natural gas company has selected SNC-Lavalin to install additional facilities for a major gas processing facility in Saudi Arabia’s Eastern Province. SNC-Lavalin will construct the Arabiah condensate handling facility and sour water disposal unit project at the Wasit gas plant. Work is already underway with a target completion date of late 2019.

saudi aramco. SNC lavalin

The Capital Projects and Contracts (CapProCon) e-newsletter, distributed every Monday, includes dozens more updates and developments. To learn more, click here.

Capital Projects – news in brief – April 18, 2018

A quick round up of major capital projects and industry developments witnessed this week. To learn more about the CapProCon e-newsletter, click here.

New Zealand’s Prime Minister Jacinda Ardern said her government “has a plan to transition towards a carbon-neutral future, one that looks 30 years in advance”. In a bid to hit this target, New Zealand will grant no new offshore oil and gas exploration permits.

The ban applies only to new permits and will not affect the existing 22 offshore exploration blocks in the energy-rich Taranaki region. The move by New Zealand comes weeks after Shell sold its final oil and gas permits and producing assets to Austrian firm OMV.

Oil capital projects

Also the oil and gas arena, BP said it has approved the development of Ghazeer, the second phase of the giant Khazzan gas field in Oman, in cooperation with Oman Oil Company Exploration & Production. The final investment decision (FID) for Ghazeer follows the successful start-up of Khazzan’s first phase of development in September 2017.

BP also revealed that it has established a strategic alliance with Petrobras committing to exploring potential commercial agreements in upstream, downstream, trading and across low carbon initiatives, inside and outside Brazil.

In the civil infrastructure field Reliance Infrastructure (RInfra) and Tata Projects have won five contract packages for the Mumbai Metro line-4 project. Meanwhile, construction of the 473 km-long four-lane highway between Nairobi and Mombasa, Kenya, will be delayed amid concerns that the country is taking on too much debt.

The Capital Projects and Contracts (CapProCon) e-newsletter, distributed every Monday, includes dozens more updates and developments. To learn more, click here.

New Zealand capital projcts
New Zealand has banned all new offshore oil and gas exploration permits. Source: Wikimedia Commons – Wikikiwiman

Oil project awards in brief

Various oil projects were announced over the past several days. To receive these updates, plus dozens more, directly to your inbox, please subscribe to the CapProCon newsletter.

Last week Total, Borealis, and Nova Chemicals said that affiliates of the three companies will form a joint venture focusing on petrochemicals on the US Gulf Coast.

The joint venture will include the under-construction 1 mn tonne per year ethane steam cracker in Port Arthur, Texas; Total’s existing polyethylene 400 kilotonne per year facility in Bayport, Texas; plus a new 625 kilotonne per year Borstar polyethylene unit at Total’s Bayport site, following a decision on the outcome of an acceptable EPC contract.

LTHE and Saipem deals

Meanwhile, L&T Hydrocarbon Engineering (LTHE) secured a USD341.79 mn EPC contract from Al Dhafra Petroleum Operations Company for field development in Abu Dhabi. The scope of the contract includes EPCC of flow lines, gathering facilities and pipelines to transfer crude oil and gas from Haliba fields to a processing facility at Asab. It also includes the installation of 132 kV and 33 kV overhead electrical transmission lines.

Finally, Saipem won a contract valued at approximately USD750 mn for the EPCC of new facilities at Duqm refinery in Oman.

duqm refinery oil projects

Mexico: as hot as a habanero

Majors, national oil companies (NOC) and independents are all scrabbling to get a slice of Mexico’s burgeoning oil and gas industry, according to analyst Wood Mackenzie.

Simon Flowers, chairman and chief analyst, said Mexico is ”as hot as a habanero, the spiciest of Mexican chillies”. The country is vying alongside the top drawer of proven oil provinces for scarce investment capital, such as Brazil and Iran.

Mexico’s proven reserves of 64 bn barrels of oil equivalent (boe) in fields discovered so far, is similar in scale to global giants like Norway, Brazil and the UK.

In the northern part of the Gulf of Mexico, in the deepwater Sabina Rio Grande play, Pemex has already made a series of discoveries in the Perdido area. Each may hold up to 400 mn barrels of oil. Further south in the Salinas Sureste basin, US independent Talos last year found 500 mn barrels at Zama.

Also in the south of the country in the Tampico Basin, explorers are attracted by structures offshore, similar physically to recent onshore discoveries, which could make for giant light oil or gas finds.

“Investment in recent decades has been comparatively modest, barely scratching the surface of many plays. There may be much more oil and gas yet to be found,” said Flowers.

Mexico attracts FDI

Mexico has recognised that it needs external investment capital for its oil and gas industry to flourish. Flowers said oil exports’ contribution to Mexico’s GDP has halved from 6 percent in 2004 when production peaked at 3.8 mn bpd to just three percent today. Oil production this year will be 2.1 mn bpd and will still be in decline into the early 2020s. NOC Pemex was not in shape to turn things around on its own.

The Mexican government has taken bold steps to create a favourable regulatory and fiscal environment, in bid to draw investments. The 2013 Energy Reform was a critical step, opening up Pemex’s monopoly to private investment. One measure of success is the number, quality and range of companies now active in the country’s upstream space.

“Over 80 E&Ps, including all the majors, numerous NOCs, independents, and a growing cadre of domestic small-caps have entered the sector in successive licence rounds. The integrated players see opportunities beyond upstream, in the gas value chain and downstream.”

Wood Mackenzie suggests that domestic political stability under President Pena Nieto has also been a key factor in the progress achieved.

This article was first published in CapProCon. To subscribe, click here.

habanero Mexico
The Mexican oil and gas market was described “as hot a habanero”.

Encouraging signs following oil price rise

Having started 2017 facing a lack of investment and high volumes in storage, the international oil and gas business saw a steady improvement over the course of the year, with the oil price gradually climbing and now approaching USD65 per barrel.

Some cite the production cut agreement worked out by the Organization of Petroleum Exporting Countries (OPEC) and Russia as being behind this recovery, but underlying factors supporting a continuing price rally are also apparent.

Price rally

Some commodity investors suggest that oil prices could surge as high as USD110 per barrel this year. Bullish investors point to the fact that inventories continue to fall, with demand forecast to increase this year. OPEC is expected to restrict oil production output until at least the end of 2018.

The US Energy Industry Association (EIA) reported another strong drawdown in crude stocks for the week ending on January 5, 2018. At 419 mn barrels and falling, US crude inventories have not been this low since early 2015.

On the demand side of the equation, OPEC sees demand growing at a brisk 1.5 mn barrels per day in 2018; the International Energy Agency (IEA) expects a softer 1.3 mn barrel per day growth this year.

Encouraged by the rising oil price, there has been talk of restarting previously postponed projects, which would be good news for the project logistics companies that serve this sector.

But there has also been the suggestion that price increases could slowly undermine the willingness of Middle Eastern producers to comply with agreements made with OPEC, which would create further uncertainty in the sector and could negatively impact oil prices.

This story was first published in the CapProCon e-newsletter.

oil and gas. Capital Projects and Contracts.

OPEC: striving for balance

One year ago the Organization of the Petroleum Exporting Countries (OPEC), plus ten other producers, forged an alliance to reduce their output in a bid to bolster prices.

The fall in oil prices, from a peak of USD115 per barrel in June 2014 to under USD35 at the end of February 2016, had a profound impact on the oil sector and its wider supply chain. The drastic measures adopted in 2016 to address a global stock glut have contributed to oil’s recovery to around USD60 per barrel today.

Ahead of OPEC’s meeting in Vienna later this week, industry analysts suggest that further producers could join the alliance. Currently, the group is removing 1.8 mn bpd of crude oil out of the markets, compared to 2016 levels.

OPEC production cut

The scheduled end of the production curb is currently March 2018. This date, however, could be extended to the end of 2019, following statements made by the Saudi Arabian and Iranian oil ministers – OPEC’s two largest producers.

The effect that any extension will have on oil prices is debatable. In late May 2017, the group decided to prolong the output curb from June 2017 to March 2018. Oil prices fell 20 percent over the next month.

In recent weeks, European and US oil prices have climbed to between USD60 and USD65 per barrel, a year-on-year increase of between 20 and 30 percent. Tensions in the Middle East, triggered by Saudi Arabia’s assertive foreign policy towards Lebanon and Iran, have also supported the oil price in recent weeks.

If oil prices were to continue on their upward trajectory, it’s likely that North American producers would increase their output, contrary to the interest of OPEC and its allies.

OPEC oil and gas

Oil majors evolve and emerge stronger

Tom Ellacott, head of corporate research at Wood Mackenzie, highlights how oil majors have repositioned themselves since the 2014 oil price crash, and how they will emerge stronger from the market downturn.

He said that despite severe pressure on finances and low oil prices, majors have seized the moment during the downturn to adjust their business models. Today, their prospects are markedly improved with high-graded portfolios, improved production profiles, and more resilient future cashflows.

Oil majors adapt

First, the majors reacted to the industry downturn by selling non-core assets – some USD27 bn worth, such as Shell’s disposal of Canadian oil sands assets. The assets divested were typically low margin or peripheral upstream assets.

Secondly, the majors have dominated investment decisions approved since 2014 and account for two thirds of reserves sanctioned for extraction. “Final investment decisions (FID) are happening because of lower costs, much of it cyclical but with structural elements; project re-scoping and re-engineering are showing the way forward,” said Ellacott. However, more work is needed to create a pipeline of big, commercial deepwater projects.

Chevron, Shell and ExxonMobil also have exposure to US tight oil and are all ramping up spending, said Ellacott. Tight oil and unconventional gas will become increasingly important to these three companies – contributing at least a quarter of ExxonMobil’s total output by the mid-2020s.

Acquisition trail

Mergers and acquisitions (M&A) seen in the sector have shared traits. The deals have been made to bolster existing portfolio strengths, and include low breakeven/long life assets.

Shell’s acquisition of BG Group in 2016 was the standout transaction, which closed at approximately USD82 bn. The deal positioned Shell in prime Brazil oil projects while expanding its liquefied natural gas (LNG) business.

ExxonMobil’s acquisition of BOPCO, in a deal estimated to be as much as USD6.6 bn, elevated its modest Permian exposure to a leading growth platform. Papua New Guinea and Mozambique are long-life developments and broaden the company’s options for medium-term LNG development.

In terms of exploration, Ellacott says  ExxonMobil is the standout performer notching up five discoveries in Guyana, holding over 2.5 bn barrels. The wider industry’s lack of appetite for conventional exploration leaves the door wide open for the majors to reload portfolios.

ExxonMobil, Total, Statoil and Eni acquired vast positions in under-explored basins during the downturn – much of it with low commitments, providing options for medium-term resource renewal.

DRO opportunities

Finally, the majors have all been active in accessing discovered resource opportunities (DRO). Oil companies bid to develop and produce existing, large oil or gas fields, negotiating terms with the host government. Total (Abu Dhabi, Iran), BP (Abu Dhabi, Azerbaijan), Chevron, ExxonMobil and Statoil (Azerbaijan) have all signed concessions in the last three years.

Wood Mackenzie research suggests returns from DROs awarded since 2014 are attractive, and in some cases better than can be achieved through mergers and acquisitions. This may indicate the industry downturn has shifted negotiating power towards the operator.

“We are witnessing the early stages of the industry preparing for the long haul – the challenges of the energy transition and the attendant risks of peak oil demand, disruption from renewables and electric vehicles, and perhaps sustained pressure on oil and gas prices,” Ellacott said.

Wood Mackenzie's Tom Ellacott discusses how oil majors have adapated to their new environment.
Wood Mackenzie’s Tom Ellacott discusses how oil majors have adapted to their new environment.

Commodity and energy markets face disruption

A new report from Wood Mackenzie discusses the unprecedented wave of disruption affecting the mining commodity and energy markets.

Governments around the world are increasingly reinforcing their focus on hitting greenhouse gas (GHG) emission targets. Concurrently, slower demand for hydrocarbons and several base metals has come at a time when demand growth has slowed. Recovery from this supply glut is dependent on a number of factors.

Meanwhile, the cost of developing renewable energy projects has plummeted. For example, the cost of building large-scale solar projects has fallen by as much as 80 percent over the last ten years. As battery storage develops, renewable power supply will become more reliable, displacing demand for oil, coal and gas in the power generation sector.

Peak oil

Therefore, peak oil demand is imminent. Thereafter, the role of oil in the world economy will decline. The pace, nature and implications of this transition are not easy to predict.

Wood Mackenzie has identified a number key themes that will affect commodity markets as they adapt to the transforming environment:

-The strong growth in hydrocarbon and base metal supply is not being matched on the demand side due to major transitions and structural changes

-Transitions to alternative technology in power and transport raise questions about the imminence of peak oil demand, as well as demand growth for other fossil fuels

-Adapting to transitions in energy, the investment landscape presents new challenges and opportunities, requiring innovative strategies to access new markets or strengthen positions in traditional markets.

Looking at the potential of the oil market, Wood Mackenzie says that as tight oil steps in to replace the decline from onstream conventional production, the question becomes how much of this new resource is recoverable, at what rate, and at what cost? This will be a key determinant of price into the 2020s. The market is restructuring to make room for tight oil and the impact can be seen throughout the value chain and around the world. For upstream, the question is one of cost of extraction, crude quality and proximity of the resource to refining hubs, as well as the competitiveness of tight oil to conventional projects.

Cost deflation in conventional projects has strengthened project economics — especially in deepwater fields. Project costs are down more than 20 percent since their 2014 peak, and breakevens for all pre-FID conventional projects are down closer to 30 percent, said Wood Mackenzie.

Meanwhile, the break even point for tight oil projects have risen due to higher costs and slower productivity gains. Should this trend persist, the market will reach a new equilibrium as investment dollars target more conventional and less tight oil development. However, as tight oil becomes a permanent feature of the global oil market, it could switch from being a ‘disrupter’ of price to a ‘stabiliser’ as it responds relatively quickly to price moves.

China’s metal consumption, together with demand associated with the Belt and Road Initiative (BRI) will continue to be crucial for global metals markets for the foreseeable future. However, demand growth is forecast to slow in the coming years with the restructuring of the economy. Also, as the economy matures over the next decade, more domestic scrap metal will become available for recycling, reducing the dependence on imported primary material.

Wood Mackenzie says that miners will look to India, the ASEAN region, and countries such as Indonesia and Vietnam, to bridge the gap. Demographics and trends in urbanisation, industrialisation and electricity consumption are expected to support metal demand over the next decade in these regions.

The full report can be seen here.

Mining commodity and energy markets. unprecenedtave wave of disruption

Saudi Aramco megaprojects approved

Oil and gas major Saudi Aramco has signed agreements with several oil and gas service contractors for projects in Saudi Arabia. The eight deals are worth a combined USD4.5 bn.

Three agreements were signed with Técnicas Reunidas as part of Aramco’s gas compression programme. The project will improve and sustain gas production from Haradh and Hawiyah fields for the next 20 years and will bring an additional 1 bn standard cu ft per day online.

A deal was signed with Saipem for the Hawiyah Gas Plant (HGP) expansion project. This involves the construction of additional gas processing facilities to process raw sweet gas.

Deals

Aramco also signed a deal with China Petroleum Pipelines covering the free flow pipeline contract for Haradh and Hawiyah; an engineering and project management services deal was signed with Jacobs Engineering for the Zuluf field development plan; Abu Dhabi-based National Petroleum Construction Company (NPCC) will execute the pipeline and trunk line project at the Safaniyah field; and the slipover platforms and electrical distribution platform project at the Safaniyah field will be performed by McDermott Middle East.

Saudi Aramco president and ceo, Amin H. Nasser, said: “Investments like these help secure Saudi Aramco’s preeminent position as a reliable supplier of energy domestically and to the world. They also reflect our concerted effort, as stated in Saudi Vision 2030, to diversify our economy, promote local manufacturing, support a sustainable environment, and strengthen our business and investment climate with the domestic private sector through fruitful international partnerships.”

Saudi Aramco megaprojets

CapProCon reported in July that Nasser, speaking at the World Petroleum Congress in Istanbul, said the role of oil as a vital source of energy is expected to continue in the long term, despite the growth of alternatives.

Nasser predicted a doubling in size of the world economy over the next 25 years, plus an additional two billion energy consumers. This will result in a lengthy energy transition that alternative sources such as renewables cannot adequately support.

“Saudi Aramco plans to invest more than USD300 bn over the coming decade to reinforce our preeminent position in oil, maintain our spare oil production capacity and pursue a large exploration and production programme centered on conventional and unconventional gas resources,” he stated at the time.