Sun, Sea and Aussie LNG

The Oilholic finds himself 10,600 miles away from London in Sydney, Australia via stopovers in Singapore and Melbourne, for a much needed vacation in the sun. Away from vacationing, one finds oil and gas analysts here in a dour mood given the state of affairs in the market. 

The crude price continues to tumble, and for the record, few here have faith in OPEC’s ability to change that bar a short-term reprieve of some description in tandem with Russia. However, more of an immediate concern to the Aussies is the incremental volume of US natural gas entering the global supply pool to compete with both its and Qatar’s exports to Asia Pacific. Simply put most expect the global natural gas glut to escalate. Long-term contracts seem to be the order of the day, as the Oilholic noted in his comments via a column for Flame conference blog last month.

While pricing arrangements attract a premium to Henry Hub prices stateside, it is prudent to flag up the sub-$3 Mmbtu prices currently being noted. Sources suggest prices for LNG delivery for Asia from Australia aren’t that far off, but a mere $1.20 above Henry Hub, down almost 40% in year-over-year terms from what the country’s exporters were charging Asian importers in 2015.

Problem for Australia is that project sponsors have pumped as much as AUD$200 billion (US$150 billion) to AUD$ 250 billion, over the last decade, towards LNG projects depending on which local industry gauging parameter one uses as a benchmark. Analysts are more inclined to agree with the upper end of the range.

Many of the project commitments and investments were made during the boom times. Some are hard to retreat from in leaner climes. Australian Petroleum Production & Exploration Association (APPEA) says nearly AUD$80 billion worth of LNG projects – namely Prelude, Wheatstone and Ichthys – are under currently under construction.

When in March just as Chevron’s Gorgon LNG project shipped its first cargo, Woodside Petroleum and its consortium partners Royal Dutch Shell, BP, and PetroChina, cancelled the Browse LNG project, having pumped billions into it. Local opponents and environmentalist cheered the decision. However, what ultimately killed the project was the unworkable economics of it all in the current climate.

The decision also came as no surprise to analysts in Australia. There is a natural gas glut, and with the Qataris, Russians and Americans also vying for contracts in the no-longer so lucrative Asian market, most here expect more pain and fewer monetary gains for LNG proponents.

That’s all from Australia for the moment folks! The Oilholic leaves you with a view of the imposing Loch Ard Gorge, part of Port Campbell National Park, Victoria, Australia; a few hours drive from Melbourne, which one had the pleasure of visiting earlier in the week before leaving for Sydney.

The gorge is named after the ship Loch Ard, which ran aground in the region's perilous waters on 1 June, 1878 approaching the end of a three-month journey from the UK to Melbourne. Only two - Tom Pearce and Eva Carmichael - of the 52 passengers and crew onboard survived, creating a local legend. Courtesy of the global gas glut, the Aussie LNG industry faces similar metaphorical perils. Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2016. Photo 1: Bondi Beach, Sydney, Australia. Photo 2: Lock Ard Gorge, Victoria, Australia © Gaurav Sharma, 2016.

On a Libyan farce, refining capacity & Kentz

Atop its contribution to geopolitical spikes and dives in the price of the crude stuff, an episode that unfolded over the past four weeks in Libya was nothing short of a farce. However, pay heed to a crucial figure mentioned in a precis of events detailed here. On March 11, Libyan armed rebels, who have been blockading the country's key ports on the pretext of demanding a greater share of oil export revenue since last July, decided to ratchet things up a notch.

The so called Cyrenaica Political Bureau loaded up 234,000 barrels of the finest Libyan Light Sweet on to a North Korea-flagged oil tanker Morning Glory at the port of Sidra, defying orders from Tripoli. The then (but not anymore) Prime Minister Ali Zeidan threatened action calling the move an act of piracy.

Going one step further, Zeidan said he'd bomb the tanker if it left Sidra! Thankfully while a bombing didn't take place, a naval blockade did. Yet, a brief tussle aside, the tanker escaped Libyan waters intact. Then rather dramatically North Korea said the tanker was "no longer" under its flag.

No sooner had it departed Libyan shores, the egregious Zeidan saw himself scurrying to seek sanctuary in Germany, after being charged with "mishandling of the situation and embezzlement" by his peers in the General National Congress; the country's acting parliament. No claimant came forward for the cargo in international waters. Finally, a US Navy Seals squad boarded the tanker south of Cyprus and commandeered it back to Libya putting an end to the sorry tale!

Farcical the episode might well have been, but it did flag up one crucial figure – 234,000 barrels. That's roughly what Libyan daily output is currently averaging down from a pre-July 2013 figure of 1.4 million barrels per day (bpd). The latter itself is well below levels seen prior to the uprising.

Now on to the prologue – this week, as a "goodwill gesture", the Cyrenaica Political Bureau allowed two ports – Zueitina (south of Benghazi) and Hariga (East) to revert back to Tripoli's control. Ras Lanuf and Sidra would also reopen soon, according to the Libyan National Oil Corporation. So tension may well be easing as is reflected in the Brent price over the past few days. However, one thing is for sure, this 'post-Gaddafi democracy' Western governments have created, surely has no fans in the importers brigade!

From upstream unpredictability in Libya to the predictable and rather mundane global downstream world, as BP announced it would cease production at its Bulwer Island refinery on the outskirts of Brisbane, Australia by the second quarter of 2015.

The reason for closure is similar to reasons outlined for closures and refining & marketing divestment on the other side on the planet in Europe – i.e. lower consumption in developed markets coupled with the opposite being true in emerging markets. Economies of scale provided by mega-refineries from China to India that are cheaper to operate, make the likes of Bulwer Island, with a relatively tiny capacity of 102,000 bpd, uncompetitive.

Or to quote Andy Holmes, president of BP Australasia: "Market reality is that global refining capacity is shifting to service the energy growth areas of the globe and is doing so with very large port-based refineries. We have concluded that the best option for strengthening BP's long-term supply position in the east coast retail and commercial fuels markets is to purchase product from other refineries."

And in line with that sentiment, Holmes said Bulwer Island refinery, which has been refining since the 1960s, would become a multi-product import terminal. That's not a new concept either as Caltex is about to do something similar with its Sydney refinery. Additionally, Shell has exited the Aussie refining business altogether shuttering its Sydney refinery and selling the rest of the portfolio to Vitol.

As of now, BP is still holding on to its 146,000 bpd Kwinana refinery on the Aussie west coast. But one wonders for how long? The news does not surprise this blogger. The Oilholic and several supply-side analysts have been harping on for a while that capacity additions will be necessity led in pockets of the globe where there is a need, and even these won't be very profitable enterprises.

According to Moody's, only a modest rise in global demand for refined products of 1.2 million bpd is expected over 2014-15. Most of it would be met by net capacity additions in the Middle East and Asia. In fact, if projected Chinese capacity additions alone are taken into account, we're looking at a figure of above 1.2 million bpd through to 2015. A Middle Eastern guesstimate would be similar and we haven't even taken India into the equation. These additions would dilute earnings growth for the whole sector.

Moody's says the end result could mean flat growth over the next 12 to 18 months in Europe, with a pressing need for meaningful capacity rationalisation to prevent margin erosion in 2015 and beyond. Asian refiners would see a 2% EBITDA growth this year, while their North American counterparts could retain their advantage over competitors elsewhere, with cheaper feedstock, natural gas prices, and lower costs contributing to 10% or higher EBITDA growth through mid to late 2015.

However, Moody's reckons refiners with a big presence in California, including Valero and Tesoro, would face tougher days in 2015, when the state's environmental rules become stricter (Read The Oilholic's March 2012 note from San Francisco for more, follow-up to follow soon)

Finally, Latin American growth for refined products will remain strong through mid to late 2015, with few capacity additions, but the region's reliance on costly refined product imports will hold back EBITDA growth to no more than 2%. Colombia's Ecopetrol is the only player likely to add regional capacity, however modestly, by 2015. Ironically, it's the one region that could do with additional capacity. Anyone from Pemex or Petrobras reading this blog?

Just before one takes your leave, a news snippet worth flagging-up – engineering services provider Kentz will see its chief financial officer Ed Power retire in May following 24 years of service. His cool hand at the till along with that of former CEO Dr Hugh O'Donnell (whom this blogger had the pleasure of meeting at the 20th World Petroleum Congress in 2011) was crucial in guiding the company out of troubled times and into the FTSE 250.

While wishing Power a happy retirement, Kentz has also played an absolute blinder in naming Meg Lassarat, the current CFO of Houston-based UniversalPegasus International, as his very worthy successor. Lassarat is widely credited for driving a five-fold increase in the revenue of UniversalPegasus to over US$1 billion (£603 million). So you can see why Kentz have headhunted her.

Meanwhile, Ichthys LNG project in Australia continues to provide the company with good news. Kentz has bagged a $570 million contract for electrical and instrumentation construction packages at the project.

The latest contract is atop a 50% stake in the structural, mechanical and pipeline construction contract for Ichthys with a headline valuation of $640 million. Put it all together and we're getting close to the $1 billion mark or to quote analysts at Investec – "an addition of 14% to Kentz's order book that underpins visibility into 2017". That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo: Refinery, Baton Rouge, Louisiana, USA © Michael Melford / National Geographic