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Will Low Oil Prices Kill the LNG Party?

created: 17 Dec 2014 09:37
tags: apache australia canada lng

rating: +2+x

One of the biggest pieces of news in the last few days is the sale by Apache of stakes in Kitimat LNG Terminal and Wheatstone LNG Terminal to Woodside.

Apache's net proceeds upon closing are expected to be approximately $3.7 billion for the transaction, a major cash infusion. Its a big turn around in strategy though, as these are important projects, at very different stages of development.

For Woodside, it represents a big punt on the LNG sector at a time when they have had to postpone their Browse LNG Terminal Project over cost concerns.

My question is does this herald the start of a trend? With low oil prices, LNG projects begin to look less attractive, especially those with a high investment cost.

Back in 2009, trains 6 & 7 of the Rasgas LNG Terminals, Yemen LNG Terminal & Tangguh LNG Terminal came on stream, followed in 2010 by Qatargas 3 Ras Laffan LNG Terminal, at a time when demand had slumped due to macroeconomic problems and growing US gas supplies. Prices slumped.

The low prices of that period generated renewed interest in LNG usage, and led to a number of import project announcements. This is especially true of China, whose state owned companies have invested heavily in supply projects as well as import terminals. (for more details see LNG Terminals And Trade In China )

Now some of this activity seems a little bubble like.

So what happens next?

I think we will see a number of more projects postponed, or even abandoned. However, for those who go ahead, the costs are going to be lower. Engineering, construction and equipment companies are not going to have the full order books of recent times, and will have to be more competitive. Their costs will also be lower.

So in a few years time, when another bull market is upon us, those companies whose project economics were good enough to go ahead, will gain twice, once from higher prices and secondly from less competition.

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How America can Turn Low Oil Prices to Long Term Advantage

created: 10 Dec 2014 10:07
tags: price usa

rating: +2+x

A low oil price is a wonderful opportunity in the short term, as it releases money to be spent on other things and improves the current accounts of importing countries. In my opinion, it can also be turned into a long term opportunity.

Firstly the lack of production growth in the short term is actually a blessing. Infrastructure that was not sufficient can be developed. Quality of life issues that impact production regions, such as housing and public services, can be dealt with. Issues over the environment and regulation can also be straightened out. Oil companies will focus on improving cost efficiency and will no doubt develop better technologies, when under cost pressure. When production growth resumes again, it will be much more sustainable.

Only the oil companies are losers from the current situation, not society as a whole. This is why this idea stinks. Throwing free trade out the window, to help a small number of companies is a really bad idea

If the USA wants to wean itself off imported oil, it need to increase production AND reduce consumption. The best way to reduce consumption is to tax fuel at the pump. Given that pump prices have fallen so much, this is a very opportune time to make such a move. As it will reduce consumption in the medium term, and because the USA is the world's largest consumer, oil prices will be marginally lower in the long term, meaning that some of the tax will be paid for by oil producers.

Meanwhile, giving permission to Keystone XL, would improve the supply situation in the medium term, and a government that increases taxes on fuel, can tell the environmentalist to butt out on Keystone, which is in America's interests.

So you reduce CO2 emissions and increase energy security at the same time. A perfect win. It will not happen of course, but that doesn't mean that it shouldn't.

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Low Oil Prices are a Boon for European Refiners

created: 08 Dec 2014 13:02
tags: price refinery

rating: +2+x

Since oil prices have started falling, European Refiners have been extremely happy, as product prices have not fallen in step, and this has led to refinery margins that they haven't enjoyed for years. This effect is however, undoubtedly temporary. As Crude settles into a new normal, the product prices will eventually catch up and margins will fall to lower levels.

There are a number of reasons, however, why I think that the new price environment will be helpful for Europe's beleaguered refiners.

  1. Rapid rising crude production in the USA, gave us a huge Brent/WTI spread, and American refiners a massive advantage. The spread is now miniscule
  2. Europe's natural gas is largely sold at Crude Oil indexed prices. These will come tumbling next year, reducing energy costs. Relative to US competitors, the disadvantage will be much less.
  3. US gas producers rely a great deal on good prices for liquids. With lower liquids prices, gas production will decrease, increasing prices
  4. Russian refinery upgrades are creating stronger competitors, as the capability of producing Euro V compliant fuels increases. The combination of sanctions & low prices will slow this trend to a crawl
  5. Working capital needs will be less, particularly important for heavily indebted companies.
  6. Europe suffers from cyclical demand destruction, especially in the South. Low oil prices will spur demand
  7. Oil producers headlong rush into refinery investments will slow down as they need to preserve their cash

All in all, Europe's refiners will enjoy a much better 2015 than most of the recent years, whilst US refiners will see most their advantages reduce or disappear.

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