Ominous future for the oil and gas industry

Major oil and gas producing economies will need to diversify and demonstrate a renewed commitment to reform, if they are to cope with the changing dynamics of global energy.

This was the assessment put forward by the International Energy Agency (IEA) in its Outlook for Producer Economies – a special report in the World Energy Outlook series.

It examined six resource-dependent economies: Iraq, Nigeria, Russia, Saudi Arabia, UAE and Venezuela. It assessed how they might fare to 2040 under a variety of price and policy scenarios.

oil and gas the risks of investing. heavy lift. project logistics
The risks of investing in the oil and gas sector are increasing.

The highs and lows seen in terms of oil prices over the past decade have exposed the structural weaknesses in many of the major exporters. Since 2014, the net income available from oil and gas has fallen by between 40 percent (in the case of Iraq) and 70 percent (in the case of Venezuela), with wide-ranging consequences for their respective economies.

Furthermore, the extent to which producer countries negotiate their transformations is likely to have major implications for energy markets, global environmental goals, and energy security.

“More than at any other point in recent history, fundamental changes to the development model of resource-rich countries look unavoidable,” said Dr Fatih Birol, the IEA’s executive director. “Following through with the announced reform initiatives is essential, as failure to take adequate action would compound future risks for producer economies as well as for global markets.”

Some of the world’s largest producers face strong pressures from rising numbers of young people entering the workforce. More than 50 percent of the population living across the Middle East is under the age of 30; the proportion is more than 70 percent in Nigeria. In many major producers, income from the oil and gas industry will not be large enough to provide for these growing populations, even in scenarios where oil demand continues to grow to 2040 and prices remain relatively robust.

Nonetheless, the IEA believes that energy will play a key role in any reform programme. Strategies will include capturing more domestic value from hydrocarbons, for example via petrochemicals; using natural gas as a means to support diversified growth; harnessing the large but under-utilised potential for renewable energy; phasing out subsidies that encourage wasteful consumption; ensuring sufficient investment in upstream developments; and playing a role in deploying new energy technologies, such as carbon capture, utilisation and storage.

Risks of oil and gas investment

An altogether less positive assessment of the health of the oil and gas industry was put forward by Tom Sanzillo, IEEFA’s director of finance, and IEEFA financial analyst Kathy Hipple. A lawsuit filed by New York’s attorney general against ExxonMobil is a clear indication of the risks involved in oil and gas investment.

The lawsuit asserts that the company defrauded shareholders by downplaying the business risk of climate change, and litigation poses obvious financial risk. It may even expose ExxonMobil – and possibly other oil and gas companies – to class-action lawsuits as shareholders develop a long-term damages theory.
According to IEEFA, investors who once considered the energy sector a source of stable returns, best look elsewhere. The lawsuit suggests that ExxonMobil’s reserve calculations, properly accounted for, would show a much smaller company with a significantly diminished long-term outlook.

For decades, fossil-fuel rewards were excellent, and the risks minimal. The oil and gas sector was linked in lock-step with economic growth.

However, today’s risk-reward calculations suggest that the time-honoured investment thesis of ‘drill, drill, drill’ has run its course. Fossil fuel stocks now offer investors a lose-lose proposition, where current finances and economics offer smaller returns, and where future returns predicated on climate policy shifts throw company finances into a long-term lose scenario.

Over the past decade the fossil fuel sector has under performed the broader equity market – a trend all the more apparent over the past five years. According to standard risk-reward calculus of investing, if the rewards are lower, the risks should also be lower. This is not the case in the fossil fuel sector.

The risks of investing in the sector have intensified, even as the rewards have diminished. Fossil fuel stocks are increasingly speculative. Revenues are volatile, growth opportunities are limited, and the outlook is decidedly negative.

The weakness is likely to continue as oil prices remain well below USD100 per barrel, while being affected by short and long-term volatility shocks driven by market and political events.

IEEFA suggests that the New York lawsuit only increases the many risks facing the oil and gas industry as the global economy shifts toward less energy-intensive models of growth. Fracking has driven down commodity and energy costs and prices, and renewable energy and electric vehicles are gaining market share.

Meanwhile, campaigns in opposition to fossil fuels have matured to the point that they are a material risk to the sector.

These multiple risks, taken cumulatively, suggest that the investment thesis that worked for decades has lost its validity, said the IEEFA analysts.
The absence of a industry-wide value proposition that embraces the changes taking place in the global economy puts fossil fuel investors at a disadvantage, said IEEFA. Successful oil and gas investing now requires expertise, a strong appetite for risk, and a deep understanding of how individual companies are positioned with respect to their competitors both inside and outside the industry.

This article first appeared in the Capital Projects & Contracts e-newsletter. To learn more about subscribing, click here.

Upstream delivery finally hits the mark

According to industry analyst Wood Mackenzie, upstream oil and gas companies are increasingly delivering major capital projects on time and on budget.

The successful execution of projects is of crucial importance to an upstream industry adapting to lower prices. The downturn forced companies to evaluate and improve how they manage their major capital investments.

The sector has a reputation for missing projected deadlines. The top 15 project overruns of the last decade were a cumulative USD80 bn over budget. “The scale of under-performance was staggering,” said Angus Rodger, research director, Wood Mackenzie. “Surveying the last decade of project delivery, the average development started-up six months later than planned and USD700 mn over budget. That is a huge amount of value destruction.”

However, recent performance indicates that the tide has turned. Wood Mackenzie said there is a growing list of mid to large-scale projects that have been delivered on target over the past 12 months. This includes areas previously notorious for cost blow-outs, such as the Arctic and Caspian. Examples of improved execution include deepwater developments such as BP’s West Nile Delta and Atoll, along with Eni’s Zohr and Cape Three Points projects; LNG (Novatek’s Yamal), shallow-water gas (BP’s Shah Deniz Phase two) and subsea tie-backs such as Woodside’s Persephone and Wintershall’s Maria.

Better upstream execution

Wood Mackenzie said the transition to a simpler, lower-cost business model has aided new project delivery. Most recently, Shell brought its deepwater Kaikias field in the Gulf of Mexico onstream nearly one year ahead of schedule. Wood Mackenzie identified six key factors, that in most recent cases, combined to create better project execution:

1. Spare capacity through the supply chain. This leads to better performance and lower costs. For example, in some basins, such as the Gulf of Mexico and pre-salt Brazil, drilling efficiency has improved dramatically;

2. Service sector collaboration and alignment on contracts, albeit mostly for projects developed in northern Europe;

3. Improved project management. Companies have more people looking at fewer things, while under-utilised service companies can offer their best teams for each major contract;

4. Greater corporate discipline. Tougher pre-final investment decision (FID) screening and more stringent hurdle rates have increased attention on execution and cost control;

5. More pre-FID planning. More contracts are ‘signed and sealed’ pre-sanction, often with preferred partners versus putting everything out to bid;

6. Reduced scope. More tie-backs and brownfield projects are using existing infrastructure.

While there have been a few large-scale oil developments sanctioned in recent years, it is not many by industry standards. It is in the LNG sector where there are clear signs that companies are re-engaging with giant, capital-intensive projects. This includes new developments in Canada, Mozambique, Qatar, Papua New Guinea, Russia and Australia.

“There is a looming wave of big pre-FID LNG developments building on the horizon, all aiming for sanction between 2018 and 2020. After a fallow period in new LNG project sanctions, and megaprojects in general, the next 18 months will likely see a step change. This will be the real test of whether the industry has addressed the issue of poor delivery,” Rodger said.

This article was first published in the CapProCon e-newsletter. To learn more about subscribing, please click here.

BP's West Nile Delta project. Photo credit: BP
BP’s West Nile Delta project. Photo credit: BP

Mexico eyes up major energy projects

A number of major Mexican oil, gas and energy projects have taken shape in the past week. Italian oil major Eni expects to invest USD1.8 bn in three oilfields offshore Mexico by 2040, according to a development plan approved by Mexico’s oil regulator.

The plan covering the Amoca, Mizton and Tecoalli shallow water fields is the second of its kind approved by Mexico’s National Hydrocarbons Commission (CNH). The deal follows the 2013 agreement that has led to more than 100 oil and gas contracts being awarded to international investors in a series of auctions.

Eni forecasts initial crude oil production of 8,000 barrels per day (bpd) in early 2019 from its Amoca and Mizton fields, and ramping up to 90,000 bpd by 2022, according to CNH.

Initial production at the Tecoalli field is expected in 2024. The development plan includes 32 wells, four platforms, plus a gas pipeline connecting to the coast, as well as the acquisition of a floating, production, storage and offloading (FPSO) vessel.

Eni expects to take the final investment decision (FID) in the fourth quarter of 2018, although some initial investments to fund long lead items and to start the construction of the first platform for the early production have already been authorised.

Mexico unveils investment strategy

The Mexican government also unveiled a USD16 bn investment plan to boost the domestic oil production, refinery capacity and hydropower generation. President-elect Lopez Obrador pledged to increase oil production by 600,000 bpd in two years. He said about USD9.5 bn would be invested in refinery modernisation projects. USD8.6 bn of the budget will be allocated to a new refinery in Dos Bocas, Tabasco.

Meanwhile, McDermott also won a contract award from Pemex for subsea pipeline flowline installation in support of its Ayatsil field. It is located 50 miles (80.5 km) northwest of Ciudad del Carmen in the Bay of Campeche offshore Mexico.

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CapProCon a weekly e-newsletter detailing contract awards and developments in the oil and gas, power generation, mining, civil and industrial infrastructure sectors. To learn more, click here.

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The newsletter, published in association with Heavy Lift and Project Forwarding International (HLPFI) magazine, is designed for those looking to identify project logistics opportunities relating to major industrial projects around the world, while aiding decision making and planning processes.

amcoa. eni. mexico. offshore oil and gas fields.

Recruitment required in oil and gas sector

Industry analyst Rystad Energy believes there is a massive need for recruitment in the offshore oil and gas sector. New projects are being sanctioned and activity levels in the sphere are starting to increase.

It says that the negative trend in employment in the oilfield service industry is levelling out. While there was a 35 percent reduction of the workforce between 2014 and 2016, the overall headcount at the top 50 oilfield service companies remained stable from 2016 to 2017.

Companies involved in the North American shale industry faced especially large cuts from 2014 to 2016, however these companies were the ones adding to their workforce last year.

Recruitment drive

Since the end of 2017, hiring has also been picking up within the offshore sector as rising prices encourage more offshore projects to be sanctioned. In 2018, Rystad Energy expects almost 100 projects worth about USD95 bn to be sanctioned. This compares to only 45 projects in 2016. An additional 100 projects are expected to be sanctioned in 2019, says Rystad.

Together with the expected growth in shale market, Rystad expects the oil service sector’s labour market to grow by 20 percent by 2020 – a level last seen in 2010.

About CapProCon

CapProCon a weekly e-newsletter detailing contract awards and developments in the oil and gas, power generation, mining, civil and industrial infrastructure sectors. To learn more, click here.

This website provides just a snapshot of what’s on offer in the CapProCon e-newsletter.

The newsletter, published in association with Heavy Lift and Project Forwarding International (HLPFI) magazine, is designed for those looking to identify project logistics opportunities relating to major industrial projects around the world, while aiding decision making and planning processes.

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

Renewable energy projects take off

This renewable energy project news was first reported in the CapProCon e-newsletter. To learn more, click here.

Vattenfall has been awarded the permit for the first non-subsidised wind farm in the Netherlands, the 700-750 MW Hollandse Kust Zuid project.

This is the company’s second offshore wind project in the Netherlands. Vattenfall previously announced that it intends to invest EUR 1.5 bn in growth investments in the wind power sector between 2017 and 2018.

vattenfall renewable energy ofshore netherlands

Bayerische Warenvermittlung (BayWa) will enter the Dutch solar market and acquire a 70 percent stake in a project pipeline of around 2,000 MW of solar plants from a consortium of GroenLeven Group, which will retain a 30 percent stake.

In the Middle East, Dubai Electricity and Water Authority (DEWA) has broken ground at the 700 MW fourth phase of the Mohammed bin Rashid Al Maktoum solar power plant.

The project, which features the world’s tallest solar tower measuring 260 m-tall and the world’s largest thermal energy storage capacity, will reduce 1.4 million tonnes of carbon emissions a year, says DEWA.

This development will use two technologies for the production of clean energy: the 600 MW parabolic basin complex and the 100 MW solar tower over a total area of 43 sq km. Approximately AED14.2 billion (USD3.86 bn) will be invested in the project.


CapProCon – update

A couple of updates from the latest CapProCon e-newsletter can be seen here.

ExxonMobil has outlined an aggressive growth strategy to more than double earnings and cash flow from operations by 2025 at today’s oil prices. In the upstream sector, ExxonMobil expects to significantly increase earnings through a number of growth initiatives and investments in US tight oil, deepwater and LNG projects.

Meanwhile, Engie, in its latest annual report, highlighted the renewable energy projects it has invested in. They include the acquisition of a wind energy portfolio of more than 400 MW with the takeover of La Compagnie du Vent in France. The company also launched a joint venture with Abraaj Group to develop a 1 GW-plus portfolio of wind energy projects in India.

Clean TeQ

In the mining arena, Clean TeQ completed an underwritten institutional placement which has raised AUD150 mn (USD118.1 mn). Proceeds raised will be used to fund early works and long lead items to accelerate the development of its Sunrise nickel/cobalt/scandium project, located 350 km west of Sydney.

In Europe, Skanska will invest EUR41 mn in the first phase of a new office development in Gdansk, Poland. The first-phase of the project will be 14 stories high with two levels of underground parking.

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

exxon mobil oil and gas capprocon

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”.