[NGW Magazine] Editorial: Adapt to survive
There was a spring in the step of the top brass at the oil majors this year as they presented their shareholders with more reasons to be cheerful than they had seen for some time. Dated Brent being stable for months above $60/b – thanks to the self-sacrifice of Opec and Russia – augurs more takeovers and hence value creation, especially in tired provinces such as the North Sea where decommissioning will otherwise gather pace.
This also benefits new entrants with private equity and very low materiality thresholds compared with the majors, and also unencumbered with corporate traditions. This provides a fillip for the service companies.
Second, costs have not risen to catch up, and the majors promise that they will not let them: this means a short to medium term bonanza as ‘advantaged’ barrels plus low costs plus keen demand serve to multiply the rates of return for shareholders.
The oilfield services companies also seemed to be emerging from the trauma of the 2014-2016 with “excitement and enthusiasm,” in the case of Schlumberger, eyeing upstream spend surveys predicting 15–20% growth in North America and 5% increase in spend elsewhere this year – its “first year of growth in all parts of our global operations since 2014.” Halliburton’s CEO was a little more measured but was still “optimistic about what I see in 2018,” as higher commodity prices drive more tenders.
And any investors in oil and gas producers, unsure about the longer-term future and the growing need to decarbonise, can take comfort in their new focus on electrons as well as molecules. From new battery technology to solar panels, digitalisation and blockchain, big oil is getting cleaner and more efficient, even if at a glacial pace.
This is also perhaps the time when greater differentiation is evident: they have moved into ever more specialised roles, quarrying niche areas that play to their different strengths – hacking into difficult geology or ultra-deepwater giants for example – and with less overlap between them.
Some have expertise in marketing and customer-facing operations, so they can move further downstream to capture more profit from retailing their energy; while others, who pride themselves on finding hydrocarbons and bringing them quickly and relatively cheaply to market, have never bothered with developing relationships of that nature but simply sell to the midstreamers who are set up precisely for that kind of work. Even majors are minting drillbit success. Eni CFO Massimo Mondazzi remarked February 16: “Potential divestment in the near term could relate to some recent exploration successes.” The Italian firm discovered 1bn barrels oil equivalent in 2017 and can hardly market all of them.
Others again position themselves as the technology provider to go to for rapid LNG unloading and regasification vessels, a highly specialised role whose growth depends on a steady stream of new markets opening up to gas.
Perhaps the industry’s ability to evolve is the answer to the challenge that the International Energy Agency sees facing the LNG market: banks being unwilling to lend to projects without long-term off-takers, forcing a tightness in the market leading to very high prices and the dreaded bust a few years later. LNG consultancy Poten & Partners said this month that the average LNG offtake contract almost halved to 6.7 years' duration last year, from 11.5 years in 2016.
The demand in aggregate is there for LNG, especially in Asia, as the last few years have shown; but if a particular company does not know – competition being what it is – if it will successfully lay off the risk associated with a long-term purchase contract, it is unlikely to sign one. Securing financing for US LNG projects is getting tough, given so much potential supply on offer. But analysts think established supplier Cheniere will have cash flow enough to fund its Corpus Christi liquefaction train 3, without the need for project financing. Cheniere this month contracted 1.2mn mt/yr to China’s CNPC out to 2043, showing sometimes companies do need certainty.
But these days it is no longer as certain that long-term contracts are needed, as the industry has changed so much. Oil producers plunge into field development without worry about long-term buyers turning up; why should gas be so different?
The old argument that the LNG market can never be compared with the oil market because of the much higher transport and storage costs is losing ground as the long-distance transport of gas as LNG in small containers can demonstrate. LNG has the potential to become a storage opportunity, just like oil, meaning a constant stream of ships servicing a plant and a reception terminal is not necessary, as the LNG can afford to sit around for some time. indeed, the Polish state company PGNiG has been breaking down and selling off just fractions of truckloads. The world is moving on, from on-the-shelf gas to just-in-time gas.
When banks realise that, they can step away from the dreaded oil indexation and 20-year terms as the market for LNG is deep and liquid enough. If they do not, other forms of third-party financing will come along, possibly on terms that the operator will not find attractive.
For others, balance-sheet financing, though yielding poorer rates of return, will speed up delivery times for a project while also reflecting the less glamorous world, more akin to a utility, that LNG trade has to become if gas is to last in the long term and compete with the new technologies.