15 Aug What does the 2nd half of 2016 hold for the #LNG industry?
Back in January, I issued a popular (for me) post on my predictions for the LNG industry for 2016. Now that we’re through the first half, I thought it might be amusing to see how I’m doing, and perhaps update my outlook for the balance of the year.
Oil prices – $50
Ok, got this one, more or less. The price of oil has bounced around of course, but it hasn’t poked above $50 for very long. Then again, it hasn’t dropped much below $40 either.
Are we at bottom? It would appear so.
- The investment banks are now in the hunt for production assets. They only buy at the bottom because they don’t really want to be oil companies, they just sense a price move.
- The US upstream is working out the over leveraged shale players. Bankruptcies and restructuring work is the number one biggest service my company is providing in the US these days. Slimming the US industry is key to market rebalancing.
- The more solid US shale players, whose production costs set the floor for oil pricing, are now claiming cash flow positive at $40, and handily profitable at $50. That probably wasn’t what OPEC was hoping to hear, and if the shales can operate at this level, so can conventional resources.
- All the major producing countries (Russia, OPEC, Canada, North Sea) show no signs of relenting on the drive to retain their market share.
- Demand growth is solid enough in the US whose citizens are buying up big gas guzzlers, but it’s stalled out in the new growth markets in China and other parts of Asia. Demand looks like it isn’t going to give uplift to pricing.
When will prices recover? Not for many months, I think, and not in 2016.
- There’s a huge inventory of oil tucked away in storage facilities everywhere and that oil begs for markets. The owners of that oil, unless they are a government and motivated by energy security, should be intent on converting that oil into cash (i.e., by selling it off). We’re talking hundreds of millions of barrels, with some estimates as high as 1.5 billion barrels. Even if demand gets ahead of supply by 1m barrels per day (and that’s a lot), we’re talking 3 years of inventory to consume.
- The Iranians have only this year gained access to global oil markets and they are intent on regaining their lost share (2.5 million barrels per day). That’s 2 years of growth. For that to happen, someone has to cry uncle, and so far, the only ones to cry have been Venezuela and the North Sea.
- The Saudis have announced their strategic shift to reduce their dependency on oil which means they have little reason to want to stockpile their resources, and every reason to keep the rest of us hooked. That means maximum production and low prices to keep the alternatives at bay as long as possible. Other OPEC nations may follow their move.
LNG prices – $6
I’ve been too bullish on LNG pricing, and it’s been softer than I thought.
- The supply of product, which in earlier times would have been entirely contracted, is coming to market with no obvious end customer. That does not automatically mean prices will fall, but it does tee up price volatility.
- The bulk of supply yet to come to market, principally the US project LNG, is more of the same: flexible, meaning it can sail to any market, which also means more price volatility.
- There’s been an unexplained and unexpected softening of demand from the Usual Suspects (China, Korea, Japan). This could be yet another mild winter (it WAS an El Niño year), or it could be a switch from gas to coal for power generation (coal prices are also at their lowest in years).
The players in the market have taken due note, and the contract renegotiations have begun, with the Qataris and the Pakistanis going to the mat over their long contracts. Now Japan’s METI has launched a court challenge to have the destination clauses on their contracted LNG to be declared anti competitive.
As I wrote in an earlier piece, this can have only one short term effect, which is to lower prices further.
Read more: What If Japan Tears Up All Its LNG Contracts
New supply announcements – 1, maybe 2
Again I was a bit too bullish, calling for more supply. Conditions do not support sanctioning new LNG projects to add to the overhang.
- The US projects continue to crawl through their regulatory process at a snails’ pace, and there hasn’t been their usual bravado in the media. Perhaps one to be sanctioned this year.
- No Canadian project has been sanctioned and at least one has formally thrown in the towel. The BC Government, elected on a pro-LNG platform, seems to have stepped back from its agenda to unlock an LNG bonanza. Perhaps one from Canada, for the truly brave, before the end of the year.
- No Australian project has been sanctioned, and the last great hope, the Browse project, has been postponed indefinitely. There’s been no announcements of brownfield development either to add an LNG train to any of the 10 projects. Australia has certainly had a King Tide of projects, but the tide is going out.
Mergers and acquisitions – 2 big ones
Again, I’ve been a bit too bullish, but the year is still young.
- Asset-based transactions are still on a slow boil. It’s been as soft a year as 2015, which is frankly surprisingly given how much pressure the industry is in. Asset moves are not mergers, however.
- It was gratifying to see the Oil Search – Interoil – Exxon auction, but to be honest, that’s not really in the league of Shell BG.
- I’m surprised no one has made a move yet on the other Australian companies. The pain in the industry is real enough, but perhaps the conditions are not quite in place. LNG prices look like they’re under more downward pressure, which suggests a bit more patience needed.
Costs – down 20%
It’s hard to get a solid read on the costs of the industry, but I am certain costs are down significantly.
- Globally the industry has trimmed jobs by hundreds of thousands. Salaries and wages have also been cut.
- Anecdotally, suppliers are adamant that they are now carrying more than their fair share of the burden of the industry.Informally, my supplier contacts point to continued and constant rate negotiations with Contracts and Procurement, and minimal openness to discuss innovation unless it leads to rate reductions. Most have done their share of layoffs and are on skeleton crews. Worries are building that the job losses will impact the sector’s ability to respond to any demand growth.
- Exploration rigs are at minuscule levels compared to the need to find gas for the industry.
- More than a few have questioned if the industry continues to meet their investment targets, which raises long term doubts about the industry’s future should suppliers retrench.
- The really big cost levers in the industry have yet to be actioned (balance sheet restructuring, the creation of a true third party midstream, sector collaboration to extract cost).
Regulatory reform – no progress
I’m spot on. No progress to report, in Australia at least,, despite some very loud warning noises from South Australia’s power industry. The next event could be Just as damaging to the country’s reputation – rolling gas outages, something Australians experience when they travel to the less developed parts of the world, but not in wine country.
People, just a heads up – rolling energy shortages are hard on your brand.
Activism – reverts to scientism
I got this one totally wrong but it was more wishful thinking. The opportunistic activist team is not embracing science.
In fact, Australia’s activist sector has managed to get some of Darwin’s electoral candidates to adopt anti-fracking electoral platforms. How ironic that the capital of the Northern Territory, proudly named after one of the world’s great scientists, could turn its back on science and block its own resource development?
Perhaps the community should go completely frack free, follow the French lead and ban any and all hydrocarbons that have been extracted from resources that have been hydraulically stimulated.
Of course, that is tantamount to banning all oil and gas since most wells are fracked, and would ban all residual products such as plastics, paint, carpeting and toothpaste. FYI, the three LNG projects making their home in Darwin aren’t feeling the love. Off shore wells get fracked too.