[NGW Magazine] Editorial: Raring to go
The significantly stronger year on year financial results reported by oil and gas companies for the second quarter have confirmed the uptick in the cycle, first seen late last year. In brief, they mostly produced more gas and liquids and sold them at higher prices than they could achieve in 2017; while those with refineries had shrinking margins to worry about.
As Schlumberger said, in words with broader application to the industry generally: “The second quarter was both busy and exciting as we completed a number of major milestones in preparation for the broad-based global activity upturn that is now emerging."
Not everyone had such success: German engineering giant Siemens took a hit in the revenues, profits and margin of its power and gas division over the quarter, citing competitive behaviour in a market with overcapacity. On the other hand, it can take satisfaction from its contribution, with Egyptian partners, to the early delivery in July of a record 14.4 GW of combined-cycle gas fired power plants to three sites in Egypt. Displacing coal, the gas from Zohr and other fields might not merely end gas imports but even revive the country’s liquefaction capacity, as Zohr ramps up to 2bn ft³/day this year.
Producers used the higher cash flow to improve shareholder value by buying back shares and paying down debt, with only modest increases in capital expenditure for the rest of the year. Further improvements in results will come later with portfolio rationalisation: Shell is poised to overshoot its disposals goal, with the original goal of $30bn as good as in the bag and another $4bn now highly likely. It is so confident that its free cash flow can only go up in today’s positive environment that it has embarked on a $25bn share buy-back programme while still aiming to reduce its gearing a few more percentage points until it reaches 20%.
And after a considerably longer spell on the sell side of the market, the UK major BP came out with successful double-digit bid for BHP’s US shale gas and liquids assets a few days before results’ time. This bullishness comes with no physical demand to tie the gas into as a hedge — except for an offtake agreement covering 2mn metric tons/year of third-party liquefaction capacity. This enables it to capitalise on higher prices elsewhere in the world without having an expensive asset sitting on its balance sheet.
The assets produce 190,000 barrels of oil equivalent/day of which about 55% is gas, and BP said it was its biggest acquisition since it bought Arco in 1999 – a well-chosen statistic, a reminder of what the industry has gone through since the era of megamergers when oil was in the real doldrums.
There has also been growing confidence in LNG, with both Mozambican projects making progress with sales, despite the ex-ship delivery contracts; in Canada, on the other hand, the legitimacy of the approval of the pipeline that will serve the one liquefaction plant that is close to a final investment decision has been challenged; continued uncertainty could lead to a delayed FID.
Venture Global, the US Gulf Coast counterparty to the BP deal, continues to ratchet up offtakers for its two LNG projects, with its low liquefaction cost, reputed to be $2.00/mn Btu, presumably the attraction. But it is still some way from a final investment decision. Perhaps the financial markets will be more relaxed about the need for projects to pre-sell output, if demand for the commodity both in new and established LNG markets keeps rising.
The second half of the year will see some long-awaited dreams come true, or fail dismally: in the UK, the results of Cuadrilla’s first onshore hydraulic fracturing of shale rock should be known, if not widely, by the end of the year, years after the first well was drilled. In an ideal world, the commerciality of UK shale would by now be a known quantity.
Third Energy has also negotiated another hurdle with the government, filing its financial accounts as part of the pre-fracking paperwork; and petrochemicals giant-turned-gas producer Ineos is also still hoping to produce shale, although the time and effort it is costing in legal work in Scotland may give it pause for thought. And another company, Igas, is also preparing to spud a well in the fourth quarter, albeit a year later than originally planned, having had final consent from the government late July. Fracking is not part of the plan in this case.
The company said the consent “was a significant milestone for the industry and brings us a step closer to determining flow rates that will start to prove up the wider shale gas prospectivity. It also demonstrates continued commitment from government at a time when the UK, and indeed the whole of Europe, is becoming ever more dependent on imports.”
This is a lesson that Romania, with its new hostile upstream tax regime, could pay heed to; or it will risk losing foreign expertise in its offshore, and exporting currency instead.
Offshore UK, producers are hopeful that, after a years'-long battle with the government, late-life asset sales will be simpler to negotiate, with a November 1 change to the tax law that allows buyers to benefit from taxes that sellers have paid the government, when it comes to the decommissioning process. Licence transfers approved by the regulator after that date will benefit from this while the government won’t feel a thing – except more cash flowing into the coffers as the new owners get to work.