Weekly Overview: Dismal Results, Mixed Bag for LNG; and Russia-Turkey Ties Improve
The reporting season is underway with plenty of discouraging signs thanks to stubbornly low oil prices. Even the standard hedge for the integrated majors, the refining and petrochemicals sector, was dismal, with the Anglo-Dutch major Shell reporting a more than 40% drop on Q2 2015, French Total a 25% drop and the UK major BP down a fifth, all blaming shrinking margins as there just isn’t the demand for refined products there used to be.
Further oil price weakness sends more gloom across the industry, jeopardising not just immediate plans to develop new resources to head off that promised supply-demand gap later this decade, but also the sluggish mergers and acquisitions market as buyer and seller disagree on the market’s direction of travel. “Lower for longer” is perhaps giving ground to “lower forever.”
Solar panels, once set up, mean less need for other sources of energy, while in the face of high prices, human ingenuity can always find ways of raising efficiencies – as the US shale gale testifies. As it is, UK statistics published July 28 showed that 24.6% of UK electricity came from renewable sources last year, up 5.5 percentage points on 2014. That is a lot of gas that won't be needed.
On the other hand, gas for power is rising in the UK as low prices and the higher carbon price that the UK imposed unilaterally combined to raise power output, while conveniently cutting carbon emissions on a per-unit basis.
So Shell’s plans to raise $30bn from sales in the coming few years might only be achievable if it sells more assets than it wanted to in order to make the numbers work. Its first buyer, Idemitsu with an agreed $1.4bn bid for the stake in Showa-Shell, is already reportedly having cold feet but Shell is assuming all will go ahead later this year following anti-trust approval from Japan.
Meanwhile its deferral of a plan to invest in Lake Charles liquefaction capacity in Louisiana reflects even more acutely the overhang: LNG Canada, the wrong side of the Rockies and miles from any gas reserves, was always going to be a harder project to bring to a final investment decision, so no surprises there; but the other, a brownfield development, is more worrying as it would have had to clear a much lower hurdle to satisfy the company’s rate of return demands. And as the company said at the press conference July 28, LNG projects that are functioning sooner will be better placed to take advantage of the hoped-for LNG demand pick-up later next decade.
Cuts in output in the Netherlands over the past few years have meant a few hundred million dollars less for Shell and its US partner ExxonMobil, owners of the Nam operating company and also part-owners of the 50%-state-owned marketer GasTerra; however the lack of some 28bn m³/yr from Groningen do not spell disaster: Shell’s CFO Simon Henry said that there were gas supplies available; so there would be no financial hit from having to source the replacement gas on the market to meet GasTerra’s supply obligations.
Shell told NGW that the low gas prices in Europe may attract some small number of cargoes from the US, as a spot price could just about cover cash costs (Henry Hub + liquefaction margin + transport + regas), particularly if the supplier has a take or pay commitment on the LNG liquefaction or upstream supply, which Shell does, with Cheniere Energy, now that it owns BG.
“But US LNG suppliers or marketers would not enter into structural, multi cargo deals, and certainly not make any new investments, at current prices and without more certainty on gas demand development in Europe,” Shell's statement said.
No such doubts beset ExxonMobil, which bought the InterOil company (headed by ex-BG boss Chris Finlayson) for a price tag between $2.4bn and $3.5bn, depending on how much gas the licences in Papua New Guinea turn out to hold. French Total, the partner of Oil Search which bid first but lower, decided to retain value in the asset by keeping the price down, so it did not fight back. Oil Search is also planning an LNG project with its own acreage near PNG LNG.
ExxonMobil is on its own in that one; but it is partnering Qatar Petroleum with other gassy bids, including assets offshore Mozambique, part of a major LNG project; and the pair also put in a bid for rights to explore for oil and gas in the third round offshore Cyprus, thereby showing willing to enter what looks like a tricky set of problems: political, economic – and geological, as the truncated Aphrodite gas field shows.
Further east, the abortive attempt to unseat the president of Turkey, Recep Tayyip Erdogan, gave him the opportunity to rule by decree, sidelining parliament and allowing for swifter decision-making on such controversial matters as major energy projects. With the arrest of the soldier who downed the Russian fighter last November, the restoration of Erdogan’s popularity in Russia – and inevitably his bogey-man status in the west – seems assured.
Following this week’s plane flights to Moscow, more bilateral visits will take place between Russian and Turkish government officials over the coming months, with Turkish Stream pipeline from Russia to Turkey already the topic of several discussions at a senior level.
Russia must move fast to tie up agreements on gas supply and infrastructure, as this route to southern Europe – a section could extend into Greece and Bulgaria – would isolate Ukraine completely; or, less controversially, would give Russia direct access to its customers in the region and so reduce contract performance risk and therefore make the gas more valuable. It would also allow Russian gas to compete more directly with gas from the Southern Gas Corridor.
Gazprom has said it will close down compressor stations along the central export route – dubbed Direct Stream by Ukraine – later this decade as Nord Stream 2 ramps up and they become redundant. The reduction in flows to 15-20bn m³/yr will mark the end of an era. Capable in its day of moving over 120bn m³/yr of gas westwards, and built by Soviet engineers, the system has also been a by-word for contractual non-performance, the transit system and the domestic gas system all being the same physical entity. Defending its importance as a strategic asset, parliament has never consented even to lease it out to foreign concession-holders.
Ukraine's gas industry though is already planning for a Russia-free future, and pipeline operator UkrTransGaz has offered transit capacity so that shippers in any two of the four EU member states with which it shares a border – Poland, Slovakia, Hungary and Romania – can send gas across its territory to each other in either direction.