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Happy new year 2016

11 Jan What does 2016 hold for the LNG industry?

It’s customary at the dawn of a new year to make predictions you have no idea will come true. And true to the season, at a recent meeting I was asked whether I thought the price of oil would get to $20 a barrel in 2016. What other predictions might I propose for the coming year?


Oil prices – $50


At the end of the year, the global price of oil had plumbed depths not seen in a long time. The slide in prices is record setting in its duration and its absolute value decline. Hence the question on what the future price will be, are we at bottom, and when will we see it improve.


I speculate regularly about the future price of oil and what might drive it in one direction or another, and my views haven’t changed$50 for Brent or JCC is a good planning number. However, the price continues to erode, and I can’t really see bottom, s0 $25 isn’t out of the question. The direction of travel for the past 450 days has been in one direction only, and the underlying factors that might cause it to change course have not changed and show few signs of changing:


    • The unrelenting pace of oil production from OPEC and Russia in the mad scramble to maintain market share as the North Sea basins, Canadian oil sands and US shale basins throttle back.


    • The (temporary) collapse of OPEC as a price influencing body. The oil market is now so large and there are so many more players, OPEC’s ability to significantly drive the market is dramatically reduced.


    • The looming expansion of Iran’s oil industry as sanctions are lifted and oil stockpiles are released.


    • Tepid demand growth from the OECD, China and the Middle East, which reduces the potential for demand to overtake supply and move prices up.


Now add in the groundswell of support for enabling the expansion of the US shale sector by overturning the ban on exports of US domestic crude oil, and the supply stage is largely set.


When supply finally falls below demand (and in my view that will not be in 2016), prices should snap back in a big way. All new developments that would bring fresh oil supplies to market in 24-36 months time have stalled, and demand continues to grow, albeit slowly, teeing up a supply shortfall. Maintenance capital for existing production has been curtailed. So many people have left the industry that recruiting them back will take time. The recovery should therefore be swift and vigorous.


LNG prices – $6


Spot LNG prices will continue to be soft. There’s no obvious and looming spike in demand from the big consuming countries that will help take up the excess cargos coming out of Australia’s commissioning activity. The number of new regas plants being built is distressingly small. And a couple of the US LNG projects will come to market this year, adding more commissioning volume. I can’t see the Paris climate accord driving dramatic change in demand this year, except for the launch of planning studies.


Sure, the weather might deliver a bitterly cold winter, or another tragic catastrophe like the tsunami of 2011 could befall Asia, which might drive demand up. But these aren’t strategies so much as they are black swan events.


New supply announcements – 1, maybe 2


With these low spot and contract prices, depressed demand and excess cargos looking for buyers, few boards will have the courage to sanction any new LNG projects this year. My outlook is that perhaps one Canadian LNG project will be finally approved, but the US projects will simply slow down and carry out just enough activity to maintain their licences, approvals and permits, as well as their place in the regulatory queue.


No more Australian greenfield projects will get the nod until construction costs show a material and sustainable reduction. Australia’s LNG projects will not sanction any brownfields this year (specifically adding new LNG trains) because of the overhang of supply and the priority to get the existing capital into production.


Mergers and acquisitions – 2 big ones


While there’s been a huge number of mega mergers announced (DuPont and Dow Chemical, AB  Inbev and SABMiller, Shell and BG, Pfizer and Allergan, Dell and EMC), I’m surprised there hasn’t been more mega merger announcements in the oil and gas sector. Low prices make buying existing assets far cheaper than trying to build the same cash flow organically.


With interest rates showing some signs of life, financing costs are going to start to go up, putting a bit of pressure on the sector to do something. I expect to see at least 2 more very large mergers between oil and gas companies announced this year. Virtually the entirety of the indigenous Australian domestic champions are likely on the radar for someone.


Costs – down 20%


The costs in the upstream sector will continue to come down. They are certainly down 20% from their peak in January 2015, but based on my on-the-ground sight line, I have yet to see the full exploitation of productivity technology on upstream costs. There simply hasn’t been enough time yet to see off the costly legacy decisions of the past. I forecast costs to come down another 20% this year.


Let me provide three illustrative examples from meetings I had in mid December in Australia. One upstream unconventional company has figured out how to cram 8 well heads into a single shipping container, compared to an industry previous best of 2. Another leading supplier to the industry has a strong set of field services, but still hasn’t invested in any modern business management solutions like CRM, ERP, scheduling or supply chain.  A third company, an international off shore upstream E&P, could tangibly point to off shore rig rates down by 70-80%, but near zero movement on almost any other cost.


Regulatory reform – no progress


Despite all the political chatter about being business friendly, one-stop shop embracing, all about jobs growth, prudent budget repair and infrastructure renewal, the fact is I see precious little change in motion to make any material impact on the existing regulatory environments that govern oil and gas development. Governments are very good at tinkering with their regulations, usually in an arms race to add more, but frankly lacking at going in the other direction. And economic conditions in the big highly regulated OECD economies that are reliant on hydrocarbon exports (UK, Canada, US, Australia), are still good enough that there’s no real deeply felt sense of urgency to tackle broad-based regulatory change (the recent announcements of reform in Saudi Arabia demonstrate what urgency will do). 2016 will feel very much like 2015.


Activism – reverts to scientism


Activism is such a localised phenomenon that it’s nearly impossible to make any broad forecast about the movement, other than it’s not plausible to anticipate any letup in activity or pressure. Certainly that’s the case in Australia where the governments of the populated southeastern states seem content to wean themselves from their own domestic gas supply in favour of interruptible gas to placate a noisy green movement.


But then along comes the occasional and pleasant reminder that activism can backfire. A small town in the US has cancelled a new solar power project on the grounds that solar panels may cause cancer (they haven’t been adequately proven not to cause cancer, which is arguably true), and they may suck up all the sunlight, leaving not enough left over for plants (a challenge to disprove, since solar panels have not been in wide use for long).


It will be interesting (at least for me) to learn whether the environmental movement has the cojones to step in to correct these misunderstandings, using science and logic. That would be a first.




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  • Alexis Garay
    Posted at 07:25h, 11 January Reply

    Hi Geoffrey,

    Happy New Year
    May 2016 bring to you Good Health, Happiness and Success with all your projects
    Thank you for this analysis, really interesting

    Air Energi will focus on diversification within other sectors Infrastructure, Construction, Aerospace or Finance as we anticipate 2016 oil and gas business the same as in 2015.

    I’ll try again to make progress with your colleagues. Did not try in December.

    Enjoy the day
    Kind regards


    • Geoffrey Cann
      Posted at 07:27h, 11 January Reply

      Alex – happy new year to you as well. 2016 is going to be a tough year for oil and gas, I think. Your moves on diversification are sound. Safe travels!

  • Michael Smit
    Posted at 23:15h, 11 January Reply

    Hi Geoffrey,

    I really like this write up. I think your sentiment on the ‘swift and vigorous’ recovery in that 24-36 month window will be spot on. I think the really interesting component of that will be the impact it has on inflation globally – given O&G is directly or indirectly linked to nearly the whole basket of good, as well as the basket, if it’s plastic. When this happens, I imagine the oil price will remain resilient, as it is generally sticky upwards, but we may see other parts of the global economy do some odd things.

    I also agree with your M&A points but I think keeping a watchful eye on leading indicators of price stability/supply and demand balance will be the tinder for the kindling pile. I think there are a number of players poised, simply waiting, for one or two risk factors to clear, e.g. Iran. The window between now and the swift and vigorous recovery (and the associated interest rate increases) is absolutely the M&A sweet spot to take advantage of depressed asset valuations ahead of rising borrowing costs. Time appears to be the best risk mitigation strategy at this point although Shell’s bold reliance on pure fundamentals will likely win out in the long or longer run.

    Same goes for LNG project sanctions. The emergence of plans reflective of Paris, some price stability and a more attractive forward price curve may tip one or two projects this year but I think LNG is slightly less robust that oil, for now.

    The only other factor is the ‘something’s got to give’. Too many powerful people/countries with too much red ink on their balance sheets and things find a way to change that can not be predicted by traditional economics. Call me a conspiracy theorist….


    • Geoffrey Cann
      Posted at 05:14h, 12 January Reply

      Michael – thanks for the comments. I’m not that much into conspiracy theory, personally, as I’m mostly exposed to the OECD oil and gas producing players. OPEC is another animal entirely.

      In any event, be prepared for a sharp snap at some stage, once enough time has passed.

    • Geoffrey Cann
      Posted at 19:11h, 01 February Reply

      Michael – so, we’re one month into the year and still no big M&A deals. The opportunity is now, particularly if the Russians and OPEC figure out how to manage production.

  • Greg Elliott
    Posted at 01:23h, 12 January Reply

    I recently worked on the ENI FEED Phase for the Coral South Project Mozambique. I understand the EPCI phase may not go ahead what are your thoughts?

    • Geoffrey Cann
      Posted at 05:11h, 12 January Reply

      Greg – thanks for the comment. To be honest I’m not that familiar with the African project slate. Assuming the players are rational and economic, low oil prices (and linked LNG prices) will slow them down. Another consideration is the quality of the investor’s project pipeline – if they have a poor quality pipeline, they may be tempted to continue just to keep the pipeline moving. If they have low debt levels and share price has not suffered too badly, they may be able to access capital cheaply enough and that might also give courage to proceed.

    • Geoffrey Cann
      Posted at 19:15h, 01 February Reply

      Greg – Tanzania was in the news this week – they’ve finally agreed a land contract with the project proponents. Nothing on other projects, however.

  • Andrew Freeman
    Posted at 06:12h, 14 January Reply

    Geoffrey great synopsis. have you had anymore thoughts on the position of Queensland or Australia on fuel security?

    • Geoffrey Cann
      Posted at 20:24h, 14 January Reply

      Andrew – to be honest, I haven’t put more thought into this question, although I’ve heard that there’s been some interest in building tankage to help provide additional reserve capacity.

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