With a volatile 2014 consigned to the history books we have a look at 12 things to look out for in the coming year in the energy industry.
1 - The Oil Price
Almost everybody involved in the energy industry or associated with it
will be watching the oil price with businesses, projects and even
industries ultimately living and dying by the cost of oil. It has
undoubtedly been the energy story of 2014 and has continued to dominate
the broadsheets in 2015 with headline after headline declaring a new
low. In late June Brent Crude traded at over $110/bbl, it spent early
September above $100, just days before OPEC’s meeting it had hit $80.
However, 2015 has already seen it briefly dip below $50.
Figure 1 - End of day Commodity Futures Price Quotes for Crude Oil Brent (Source: Nasdaq)
The market will be searching for the price floor and a price stabilisation. Oil's propensity to be affected by global events as well as controlled by OPEC has often ensured that its value is more complex than simply the result of supply and demand. Nonetheless, the recent decline in price can mainly be attributed to weakened demand being unable to meet the current glut of supplies. OPEC, which usually curbs supplies to prop up the price, decided in late November to maintain production at current levels. Commentators have suggested this decision is the beginning of a Saudi-led trend that will see OPEC become increasingly less decisive in controlling the price. With the next meeting not until June this year, the current supply glut is likely to continue, and if the commentators are correct about OPEC, that meeting will not see any significant change. However, a lot can happen in 6 months.
2 - Producing Countries
The famous quotation proclaims that taxes are one of only two certainties in life. 2015 could well see some producing countries challenge this assertion as they struggle to balance their budgets. Many oil producers are heavily reliant on the revenues that production brings in and now will have to choose between running a fiscal deficit or reducing spending. Analysis does vary on the exact price oil needs to be for each country to fiscally break-even. Nonetheless, it is fair to suggest that countries like Iran, Russia and Venezuela will feel the pinch more than Norway, Qatar, Kuwait and Saudi Arabia. Therefore, the low oil price could certainly cause tension. Nationally, there is a chance of increased political instability should public dissatisfaction spread as social spending is cut. This is also likely to lead to increased unrest within OPEC as the producing countries under most pressure look to Saudi Arabia to cut their own production – a move some suggest is unlikely to happen. In the Middle East there will be also be a greater pressure on finding the funds for the conflicts there.
3 - Projects
With the oil price over $100/bbl there was a series of extravagant projects in the pipeline. With the price low, oil majors will struggle to take a long-term view on expensive projects. Additionally, a low price will hit profits and with large oil companies often reluctant to reduce dividends it is likely that capital spending will be hit. Therefore, 2015 could see a significant number of projects where investment is cancelled or postponed. Most interesting to track will be those projects or investments that fall in the middle ground – and which companies choose to stick, twist or fold.
A project in the notoriously risky Arctic has already fallen by the wayside with Chevron withdrawing its application to drill for oil in the Beaufort Sea. This was a long-term project that may not have seen results until the 2030s but perhaps shows an increased level of indifference to such risky, expensive projects. In the UK, a maturing North Sea is struggling to secure investment and could be facing an irreversible shrinking of the market. Mr. Allan, a director of Premier Oil, stated that "It's almost impossible to make money at these oil prices."
The continuing viability of US shale will be interesting to track. It is not the
first time the economic viability of shale has been questioned with some previously
suggesting the bubble will burst at some time. In fact, given the high yield nature
of the bonds that helped finance the shale boom, and losses investors are facing
as a result of the low oil prices, there are mutterings that it could be the next
sub-prime. If independent drillers begin to default on their loans, fear could
certainly spread. Nonetheless, the industry has tried to remain firm, particularly
in a perceived battle between US shale and Saudi oil. Therefore, how it responds
to low oil prices will be interesting.
Figure 2 - Gazprom's Prirazlomnaya platform in the Pechora Sea (Source: Gazprom)
4 - Mergers and Acquisitions
The recent drop in oil price has caused many to point towards similar circumstances in the 1990s. One of the consequences of that slump was an increased amount of M&A activity which included the formation of ExxonMobil. As companies’ balance sheets take on different characteristics they are forced to seek ways to cut costs. In the simplest of terms, a bird in the hand is worth two in the bush. Instead of spending vast amounts of money on exploration and production of new fields only to receive small profits due to low prices it is easier and cheaper to purchase companies with established assets and low share prices. Alternatively, a merger of two large companies could see serious cost savings via a reduction of expenses and an expansion of margins. The possibility of a merger between two giants such as BP and Shell has been mooted but largely dismissed. However, BG Group or Anadarko represent the sort of company that could well prove to be a strong target for acquisition.
5 - US and Canadian LNG Projects
Various factors have recently conspired to an oversupply of LNG, causing spot prices in the usually lucrative Asia to drop. Additionally, the low oil price undoubtedly helps the many buyers in Asia whose LNG is oil-indexed. This puts LNG from the US and Canada in a less attractive light. When Japan was paying over $18/mmbtu for LNG, the US, which was boasting about its ability to sell at almost half that price, was hailed as the saviour of Asian LNG. That advantage is now currently erased. However, at current prices the advantage of LNG from the US is minimal. In spite of this, the US currently has four projects under construction, Cheniere’s Sabine Pass, Cameron LNG, Dominion Cove Point and Freeport LNG. Tracking Canada and the US’ ability to add to that number will certainly be interesting, and may well be partially dependent on the success of Japan's plans to restart its nuclear plants.
Currently, BG Group's Lake Charles LNG project, Veresen's Jordan Cove LNG project and Oregon LNG have conditional approval, the latter of which is experiencing planning/environmental problems. Whether these projects secure the buyers necessary to reach FID remains to be seen. In fact, Excelerate Energy’s Lavaca Bay project appears to be the first victim of low oil prices as the project has been put on hold. The US' decision to change the regulatory process was already likely to lead to an earlier abandonment of the less serious projects. However, the combination of weaker than expected demand and a low oil price means that US LNG is currently not that competitive with other sources, despite its continued low price.
Canadian LNG projects are likely to suffer the same consequences. There is an argument that they can remain competitive due to their lower shipping costs. However, this benefit is likely minimal compared to some of the US projects due to the increased costs of developing greenfield sites. Despite delaying FID, Petronas' Pacific NorthWest project remains the frontrunner, alongside Kitimat LNG, in which Woodside recently acquired a stake, and Shell's LNG Canada.
6 - UK General Election
Closer to home, the UK will be holding the General Election in May. The polls don't really mean much so far out but they currently show Labour and the Conservatives fairly close together. The result could certainly dictate the direction the market will take. For instance, in the event of a coalition, either party may need to make concessions to smaller coalition partners. With the parties having fairly different views on the direction energy policy could take, it would likely be a key negotiating point. Most notable is Labour's plan to freeze energy prices for two years, a plan that could seem foolish with prices currently falling. Undoubtedly, as the election approaches there will be a fair degree of uncertainty over the direction of policy due to the parties’ differing intentions, including on renewable energy.
7 - Shale Gas in the UK
The UK shale gas sector is still small. 2015 could see the industry take its most meaningful
steps towards production. However, low oil and gas prices could well deter investment.
Chancellor Osborne did use the Autumn Statement to relay a continued commitment to shale
gas announcing a sovereign wealth fund in the North. The government has also committed
funding towards the development of shale gas. More recently, the government has also
included controversial measures in the Infrastructure Bill which would allegedly allow
fracking to occur underneath people’s homes without the courts’ permission. Therefore,
the current government can certainly be seen to be encouraging the development of shale
gas. However, any further development of the shale gas industry is likely to be on a small
scale with growth expected to be fairly slow to begin with.
Figure 3 - Onshore oil and gas licensing in the UK (Source: BBC)
8 - Paris Climate Change Talks
Commentators have suggested that the climate summit in Paris in December 2015 has a greater chance of success following a US-China joint announcement. These summits have often flattered to deceive but nonetheless the potential they have to change the market are fairly clear. It is already being billed as the last chance for global temperature to stay below 2 degrees. IEA's 450 scenario details the steps needed to have a 50% chance of achieving this milestone, and every year that passes it becomes more difficult. The US and China appear to have set out their stall to reach some sort of agreement and undoubtedly the rhetoric and political machinations will reach fever pitch by the end of the year. A storyline to watch out for will be whether President Obama goes out on a limb, potentially disregarding a Senate which the opposition party controls and possibly even alienating the electorate for his successor, to really establish some sort of legacy in what could easily be one of his last acts as President.
9 - Nabucco
Although Nabucco seemed well and truly defeated by Gazprom's South Stream pipeline, the apparent abandonment of the latter may well lead to reopening of talks between EU and Nabucco, a pipeline it always preferred. Europe needs gas supplies, and despite suggestions of US LNG meeting that demand, Nabucco may be a better alternative. In truth, this is somewhat of a long shot. However, 2015 is likely to involve lots of jostling, negotiations and backchanneling as the EU seeks an alternative provider of gas. However, current market conditions mean that there may be less incentive to commit to a long-term delivery of cheap gas. Nonetheless, everyone has his or her price.
10 - Natural Gas Price
The dramatic fall in oil price naturally leads us to examine what the gas price will do in 2015. In many cases, the fall in oil is synonymous with a fall in gas because the price of gas is linked to oil. This is the case for most Asian LNG, and it is also the case for Russian gas, which Gazprom, perhaps somewhat ironically, has insisted should be determined by reference to oil. However, continental Europe, and the US, also have gas-on-gas competition where the gas price is decided mainly by supply and demand. Henry Hub has seen prices tumble since November. At the time of writing the price was $2.85/mmbtu. Hub prices such as NBP, TTF and Zeebrugge have also fallen since late November. For instance, NBP has fallen from around €23.5/MWh to around €20/MWh. For the sake of comparison, this gives you a price of around $7/mmbtu. Interestingly, weakening LNG demand in Asia has led East Asia LNG and NBP to conflate somewhat, a situation that may have seemed unthinkable when Japanese LNG was pricing at over $20/mmbtu on the spot market.
11 - FLNG
This article has so far detailed how many projects are being negatively affected by
the current economic climate. In fact, the Lavaca Bay project that is noted as being
postponed is itself an FLNG project, so is the Browse FLNG project that Woodside
recently postponed. Nonetheless, the first FLNG project is expected to enter the market
in 2015. Shell's Prelude may be the project garnering the most media attention, however,
it is Wison's smaller Caribbean FLNG project that is expected to be the first to market.
Its entry, and Shell and Petronas' progression in their respective facilities, may well
lead to further consideration of the technology by the industry.
Figure 4 - Petronas' FLNG hull launched in April 2014
12 - MJMEnergy's LNG Supply Handbook 2015-2035
2015 will see the publication of MJMEnergy's LNG Supply Handbook – authors Mike Madden and Nick White – something we are very proud of. The book will help equip the reader with an essential insight to the global LNG market and will include an introduction to LNG, an overview of the expanding market and reports from 27 existing and potential exporting countries. It contains detailed analysis, reviewed by associate LNG world experts who are currently working in the industry, on the current and future LNG export situation of each country. It also utilizes accurately drawn maps, clearly laid out tables, and easy to follow graphs to provide the reader with a comprehensive understanding of each country.
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