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Green shoots of optimism are poking through the parched ground of the oil patch lately as industry focuses on the aftermath of a downturn they hope has troughed. But the US E&P sector that emerges from the latest carnage will be different as business models will be forced to change.

With crude oil hanging just shy of $40/b, industry-watchers say capital is still available to survivors of the downturn that are in relatively good financial shape. But lending criteria will be stricter as more will be asked of borrowers and production hedges may be more prevalent, they say.

Nearly $39 billion of private equity funds were raised in 2015, and on top of that there was a “substantial” amount of dry powder remaining from funds raised in 2014, Doug Reynolds, managing director and head of US business for Scotiabank, said at the Hart Energy Capital Conference last week.

“The majority of US production is owned by companies that are financially strong and there is new equity [raised] that will make them more so,” Reynolds said.

US E&P companies have recapitalized to the tune of nearly $11 billion in equity so far this year, compared to $8.6 billion in Q1 2015, he and others noted.

While many oil companies will likely disappear, victims of liquidations and takeovers, “we think for the guys that make it through, it will be somewhat of a golden era for them,” Reynolds said.

But they will have to be fiscally lean and efficient. For one thing, lenders may be skeptical of companies whose acreage is not top-tier or industry-proven as they have seen many bankruptcies in the current downturn

A recent count by law firm Haynes and Boone put oil industry bankruptcies north of 50.

Focus to stay onshore for faster returns

During the downturn, oil companies produced from their best, highest-return wells. They have also concentrated on land plays since the returns are quicker, unlike offshore projects, which can take as long as 10 years to come onstream.

The shift to onshore production is expected to continue due to the lower costs and speedier returns available.

And while well costs have come down both onshore and offshore due to concessions from oilfield service companies, offshore wells have not experienced the astounding efficiency leaps that have been such a large part of the shale revolution onshore and allowed those operators to survive sub-$50/b oil.

Costly or lengthy projects in the US will be “challenged” going forward, Wil VanLoh, CEO of private equity firm Quantum Energy Partners, said at the Hart gathering.

The downturn will refocus public oil companies on making money more quickly rather than growing production and reserves. This will “materially” alter or even eliminate certain business models, such as long-cycle projects in deepwater and international arenas, or high-cost projects in the Gulf of Mexico, oil sands, upstream master limited partnerships and the bottom 50% of resource plays, VanLoh said.

Only the exceptional of these projects will be moved forward.

In addition, the private equity model of funding may be changed post-recovery, VanLoh said.

“The model where you lease land, drill a few wells and flip [the developed assets] to a public company is likely a thing of the past,” he said.

“Public companies have much less money to buy this stuff now, and they have a lot of acreage of their own,” he added. “PE-backed companies will have to more fully develop their assets, requiring more money and more time, so quick flips won’t be as prevalent.”

Going forward, debt capital will be harder to get and cost more, while acquisitions will require more equity and that should drive down the prices of assets.

“Expect more erratic prices, capital markets, and [mergers, acquisitions and divestiture] activity,” VanLoh added.

Also, hedging production to protect revenues will likely figure more into the equation. “Public and private companies will have to hedge more for a period of time to get deals done,” he said.

Lenders may also be under more stringent requirements to determine what a given company’s borrowing base should be with everything from interest coverage to debt asset ratios getting a fresh look, analysts said.

Borrowers will also have more responsibility. They will need to prove their price forecasts, and the viability of their budgets, and how they will achieve positive cash flow, Deborah Byers, US oil and gas leader for EY, formerly known as Ernst & Young, said.

“There will be a lot more rigor around forecasts that are presented to support borrowing bases,” Byers said.

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BP & The Expansion of the Caspian

The vast Shah Deniz field in Azerbaijan’s portion of the South Caspian Sea marked several milestones in 2018. It has now produced a cumulative total of 100 billion cubic metres of natural gas since the field started up in 2006, with daily output reaching a new peak, growing by 12.5% y-o-y. At a cost of US$28 billion, Shah Deniz – with its estimated 1.2 trillion cubic metres of gas resources – has proven to be an unparalleled success, being a founding link of Europe’s Southern Gas Corridor and coming in relatively on budget and on time. And now BP, along with its partners, is hoping to replicate that success with an ambitious exploration schedule over the next two years.

Four new exploration wells in three blocks, along with a seismic survey of a fourth, are planned for 2019 and an additional three wells in 2020. The aggressive programme is aimed at confirming a long-held belief by BP and SOCAR there are more significant pockets of gas swirling around the area. The first exploratory well is targeting the Shafag-Asiman block, where initial seismic surveys suggest natural gas reserves of some 500 billion cubic metres; if confirmed, that would make it the second-largest gas field ever discovered in the Caspian, behind only Shah Deniz. BP also suspects that Shah Deniz itself could be bigger than expected – the company has long predicted the existence of a second, deeper reservoir below the existing field, and a ‘further assessment’ is planned for 2020 to get to the bottom of the case, so to speak.

Two wells are planned to be drilled in the Shallow Water Absheron Peninsula (SWAP) block, some 30km southeast of Baku, where BP operates in equal partnership with SOCAR, with an additional well planned for 2020. The goal at SWAP is light crude oil, as is a seismic survey in the deepwater Caspian Sea Block D230 where a ‘significant amount’ of oil is expected. Exploration in the onshore Gobustan block, an inland field 50km north of Baku, rounds up BP’s upstream programme and the company expects that at least one seven wells of these will yield a bonanza that will take Azerbaijan’s reserves well into the middle of the century.

Developments in the Caspian are key, as it is the starting node of the Southern Gas Corridor – meant to deliver gas to Europe. Shah Deniz gas currently makes its way to Turkey via the South Caucasus Gas pipeline and exports onwards to Europe should begin when the US$8.5 billion, 32 bcm/y Trans-Anatolian Pipeline (TANAP) starts service in 2020. Planned output from Azerbaijan currently only fills half of the TANAP capacity, meaning there is room for plenty more gas, if BP can find it. From Turkey, Azeri gas will link up to the Trans-Adriatic Pipeline in Greece and connect into Turkey, potentially joined by other pipelines projects that are planned to link up with gas production in Israel. This alternate source of natural gas for Europe is crucial, particularly since political will to push through the Nordstream-2 pipeline connecting Russian gas to Germany is slackening. The demand is there and so is the infrastructure. And now BP will be spending the next two years trying to prove that the supply exists underneath Azerbaijan.

BP’s upcoming planned exploration in the Caspian:

  • Shafag-Asiman, late 2019, targeting natural gas
  • SWAP, 3 sites, late 2019/2020, targeting oil
  • ‘Onshore gas project’, end 2019, targeting natural gas’
  • Block D230, 2019 (seismic assessment)/2020 (drilling), targeting oil
  • Shah Deniz ‘further assessment’, 2020, targeting natural gas
January, 22 2019
RAPID Rises

When it was first announced in 2012, there was scepticism about whether or not Petronas’ RAPID refinery in Johor was destined for reality or cancellation. It came at a time when the refining industry saw multiple ambitious, sometimes unpractical, projects announced. At that point, Petronas – though one of the most respected state oil firms – was still seen as more of an upstream player internationally. Its downstream forays were largely confined to its home base Malaysia and specialty chemicals, as well as a surprising venture into South African through Engen. Its refineries, too, were relatively small. So the announcement that Petronas was planning essentially, its own Jamnagar, promoted some pessimism. Could it succeed?

It has. The RAPID refinery – part of a larger plan to turn the Pengerang district in southern Johor into an oil refining and storage hub capitalising on linkages with Singapore – received its first cargo of crude oil for testing in September 2018. Mechanical completion was achieved on November 29 and all critical units have begun commissioning ahead of the expected firing up of RAPID’s 300 kb/d CDU later this month. A second cargo of 2 million barrels of Saudi crude arrived at RAPID last week. It seems like it’s all systems go for RAPID. But it wasn’t always so clear cut. Financing difficulties – and the 2015 crude oil price crash – put the US$27 billion project on shaky ground for a while, and it was only when Saudi Aramco swooped in to purchase a US$7 billion stake in the project that it started coalescing. Petronas had been courting Aramco since the start of the project, mainly as a crude provider, but having the Saudi giant on board was the final step towards FID. It guaranteed a stable supply of crude for Petronas; and for Aramco, RAPID gave it a foothold in a major global refining hub area as part of its strategy to expand downstream.

But RAPID will be entering into a market quite different than when it was first announced. In 2012, demand for fuel products was concentrated on light distillates; in 2019, that focus has changed. Impending new International Maritime Organisation (IMO) regulations are requiring shippers to switch from burning cheap (and dirty) fuel oil to using cleaner middle distillate gasoils. This plays well into complex refineries like RAPID, specialising in cracking heavy and medium Arabian crude into valuable products. But the issue is that Asia and the rest of the world is currently swamped with gasoline. A whole host of new Asian refineries – the latest being the 200 kb/d Nghi Son in Vietnam – have contributed to growing volumes of gasoline with no home in Asia. Gasoline refining margins in Singapore have taken a hit, falling into negative territory for the first time in seven years. Adding RAPID to the equation places more pressure on gasoline margins, even though margins for middle distillates are still very healthy. And with three other large Asian refinery projects scheduled to come online in 2019 – one in Brunei and two in China – that glut will only grow.

The safety valve for RAPID (and indeed the other refineries due this year) is that they have been planned with deep petrochemicals integration, using naphtha produced from the refinery portion. RAPID itself is planned to have capacity of 3 million tpa of ethylene, propylene and other olefins – still a lucrative market that justifies the mega-investment. But it will be at least two years before RAPID’s petrochemicals portion will be ready to start up, and when it does, it’ll face the same set of challenging circumstances as refineries like Hengli’s 400 kb/d Dalian Changxing plant also bring online their petchem operations. But that is a problem for the future and for now, RAPID is first out of the gate into reality. It won’t be entering in a bonanza fuels market as predicted in 2012, but there is still space in the market for RAPID – and a few other like in – at least for now.

 

RAPID Refinery Factsheet:

  • Ownership: Petronas (50%), Saudi Aramco (50%)
  • Capacity: 300 kb/d CDU/3 mtpa olefins plant
  • Other facilities: 1.22 Gigawatt congeneration plant, 3.5 mtpa regasification terminal
  • Expected commissioning: March 2019
January, 21 2019
Forecasting Bangladesh Tyre Market | Zulker Naeen

Tyre market in Bangladesh is forecasted to grow at over 9% until 2020 on the back of growth in automobile sales, advancements in public infrastructure, and development-seeking government policies.

The government has emphasized on the road infrastructure of the country, which has been instrumental in driving vehicle sales in the country.

The tyre market reached Tk 4,750 crore last year, up from about Tk 4,000 crore in 2017, according to market insiders.

The commercial vehicle tyre segment dominates this industry with around 80% of the market share. At least 1.5 lakh pieces of tyres in the segment were sold in 2018.

In the commercial vehicle tyre segment, the MRF's market share is 30%. Apollo controls 5% of the segment, Birla 10%, CEAT 3%, and Hankook 1%. The rest 51% is controlled by non-branded Chinese tyres.

However, Bangladesh mostly lacks in tyre manufacturing setups, which leads to tyre imports from other countries as the only feasible option to meet the demand. The company largely imports tyre from China, India, Indonesia, Thailand and Japan.

Automobile and tyre sales in Bangladesh are expected to grow with the rising in purchasing power of people as well as growing investments and joint ventures of foreign market players. The country might become the exporting destination for global tyre manufacturers.

Several global tyre giants have also expressed interest in making significant investments by setting up their manufacturing units in the country.

This reflects an opportunity for local companies to set up an indigenous manufacturing base in Bangladesh and also enables foreign players to set up their localized production facilities to capture a significant market.

It can be said that, the rise in automobile sales, improvement in public infrastructure, and growth in purchasing power to drive the tyre market over the next five years.

January, 18 2019