The news coming out of Chinese shipyards regarding deliveries of the 87 jackups they still have under construction is that there is precious little news. All is silent with the occasional revelation that individual rigs remain under construction or have been launched.
Currently there are seventy (70) jackups under construction as various Chinese yards. Of these there are twenty-five (25) that have been ordered by bona-fide drilling contractors such as Seadrill, Northern Offshore, COSL, Dynamic, KS Drilling, Shengli and Apexindo. The remaining forty-five (45) have all been ordered on pure speculation with the intention of flipping them for a profit.
Deliveries on some of the seventy (70) have already been officially pushed back into late 2016 or later or were naturally behind schedule anyway. Twenty-seven (27) units were to have been delivered in 2015 and first quarter of 2016 according to their original construction schedule but have not appeared in the market. A high percentage of these are probably ready for delivery but are yet to be accepted by their owners. Not much information is being made available on these units.
Even for the twenty-five (25) rigs ordered by drilling companies there is no certainty that the drillers will accept delivery of the rigs they have ordered, although Shengli and Northern Offshore appear set to accept their rigs when ready. Seadrill have announced that they will not take delivery of any of their eight jackups in 2016 and then further announced that they consider the eight (8) rigs under construction at DSIC to be “an option to buy” which sounds ominous for DSIC. It would be a surprise if Dynamic, Apexindo and KS Drilling took delivery of their rigs without a contract in place, a remote event at this juncture. Paragon has continually stated that accepting delivery of the three Prospector rigs still under construction is unlikely. Some of the threats are probably posturing as the rigs are likely to be accepted once the market improves. Its just that the owners do not want to pay for them until then.
But the real question is what will happen to the other forty-five (45) jackups whose chances of being flipped for a profit are currently absolutely zero and whose chances of making any sale at all would depend on how much of a hit they are prepared to take on the original shipyard price. As most have only made a down payment of 5% they have relatively little to lose by walking away as compared to paying the $180-200m to the shipyard, taking delivery, and then perhaps only being able to sell on for $140m. This though is a moot point as the owners would not be able to get financing from the banks without a contract for the rig and in such a cut throat market as this one it is highly unlikely that they would win any contracts when competing against bone-fide drillers, themselves desperate for work.
Of course we have John Fredriksen sniffing around with his Sandbox venture with the stated intention of buying up distressed assets. Maersk Drilling has indicated they are in a position to move in on any opportunities but they will only aim for high spec harsh environment unit of which there are very few under construction. There are also rumours of a certain offshoot US drilling company in talks with CMIC to examine the possibility of taking over operatorship of their unsold jackup inventory on some sort of a lease purchase deal, presumably they would then be able to start a fleet replenishment exercise and condemn their old jackups to the scrapyard. There is no doubt there are other clever deals being thought through at present.
The emergence of Iran, allowed back into the international market, is seen by many of the speculators as The Opportunity, but it has been so since the building boom started and very few units were actually picked up by Iran, mostly 300ft rated smaller units. The National Iranian Drilling Company is said to be in negotiations with domestic and international investors from Asia and Europe with a view to acquiring five (5) jackups with a budget at $200 million for each and is said to have signed a memorandum of understanding with Chinese companies apparently based on a lease purchase scenario. Owners may be salivating but five (5) out of forty-five (45) is hardly encouraging. The other great hope was Mexico but that market has collapsed completely.
However, it is known that most of the Chinese yards are being very lenient with the owners, allowing completed units to remain in the yard at no cost and offering to help find buyers for the rigs at which point they would refund the down payment to the original owners, But this is certainly not a seller’s market. Patently this shows the yards are taking a very patient and long term view, albeit knowing they have government guarantees in their back pocket in case things don’t go as planned.
Although there are twelve (12) shipyards in China currently constructing jackups, three (3), namely CMHI, SWS and DSIC, have the most exposure and account for forty (40) of the seventy (70)) units under construction with CMHI most exposed with eighteen (18). With little prospects of sales in the near future it is not surprising there is little news nor that they are showing leniency to owners when the alternative is dumping them on the market at fire sale prices.
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Headline crude prices for the week beginning 9 September 2019 – Brent: US$61/b; WTI: US$56/b
Headlines of the week
Detailed market research and continuous tracking of market developments—as well as deep, on-the-ground expertise across the globe—informs our outlook on global gas and liquefied natural gas (LNG). We forecast gas demand and then use our infrastructure and contract models to forecast supply-and-demand balances, corresponding gas flows, and pricing implications to 2035.Executive summary
The past year saw the natural-gas market grow at its fastest rate in almost a decade, supported by booming domestic markets in China and the United States and an expanding global gas trade to serve Asian markets. While the pace of growth is set to slow, gas remains the fastest-growing fossil fuel and the only fossil fuel expected to grow beyond 2035.Global gas: Demand expected to grow 0.9 percent per annum to 2035
While we expect coal demand to peak before 2025 and oil demand to peak around 2033, gas demand will continue to grow until 2035, albeit at a slower rate than seen previously. The power-generation and industrial sectors in Asia and North America and the residential and commercial sectors in Southeast Asia, including China, will drive the expected gas-demand growth. Strong growth from these regions will more than offset the demand declines from the mature gas markets of Europe and Northeast Asia.
Gas supply to meet this demand will come mainly from Africa, China, Russia, and the shale-gas-rich United States. China will double its conventional gas production from 2018 to 2035. Gas production in Europe will decline rapidly.LNG: Demand expected to grow 3.6 percent per annum to 2035, with market rebalancing expected in 2027–28
We expect LNG demand to outpace overall gas demand as Asian markets rely on more distant supplies, Europe increases its gas-import dependence, and US producers seek overseas markets for their gas (both pipe and LNG). China will be a major driver of LNG-demand growth, as its domestic supply and pipeline flows will be insufficient to meet rising demand. Similarly, Bangladesh, Pakistan, and South Asia will rely on LNG to meet the growing demand to replace declining domestic supplies. We also expect Europe to increase LNG imports to help offset declining domestic supply.
Demand growth by the middle of next decade should balance the excess LNG capacity in the current market and planned capacity additions. We expect that further capacity growth of around 250 billion cubic meters will be necessary to meet demand to 2035.
With growing shale-gas production in the United States, the country is in a position to join Australia and Qatar as a top global LNG exporter. A number of competing US projects represent the long-run marginal LNG-supply capacity.Key themes uncovered
Over the course of our analysis, we uncovered five key themes to watch for in the global gas market:
Challenges in a growing market
Gas looks the best bet of fossil fuels through the energy transition. Coal demand has already peaked while oil has a decade or so of slowing growth before electric vehicles start to make real inroads in transportation. Gas, blessed with lower carbon intensity and ample resource, is set for steady growth through 2040 on our base case projections.
LNG is surfing that wave. The LNG market will more than double in size to over 1000 bcm by 2040, a growth rate eclipsed only by renewables. A niche market not long ago, shipped LNG volumes will exceed global pipeline exports within six years.The bullish prospects will buoy spirits as industry leaders meet at Gastech, LNG’s annual gathering – held, appropriately and for the first time, in Houston – September 17-19.
Investors are scrambling to grab a piece of the action. We are witnessing a supply boom the scale of which the industry has never experienced before. Around US$240 billion will be spent between 2019 and 2025 on greenfield and brownfield LNG supply projects, backfill and finishing construction for those already underway.50% to be added to global supply
In total, these projects will bring another 182 mmtpa to market, adding 50% to global supply. Over 100 mmtpa is from the US alone, most of the rest from Qatar, Russia, Canada, and Mozambique. Still, more capital will be needed to meet demand growth beyond the mid-2020s. But the rapid growth also presents major challenges for sellers and buyers to adapt to changes in the market.
There is a risk of bottlenecks as this new supply arrives on the market. The industry will have to balance sizeable waves of fresh sales volumes with demand growing in fits and starts and across an array of disparate marketplaces – some mature, many fledglings, a good few in between.
India has built three new re-gas terminals, but imports are actually down in 2019. The pipeline network to get the gas to regional consumers has yet to be completed. Pakistan has a gas distribution network serving its northern industrial centres. But the main LNG import terminals are in the south of the country, and the commitment to invest in additional transmission lines taking gas north is fraught with political uncertainty.
China is still wrestling with third-party access and regulation of the pipeline business that is PetroChina’s core asset. Any delay could dull the growth rate in Asia’s LNG hotspot. Europe is at the early stages of replacing its rapidly depleting sources of indigenous piped gas with huge volumes of LNG imports delivered to the coast. Will Europe’s gas market adapt seamlessly to a growing reliance on LNG – especially when tested at extreme winter peaks? Time will tell.
The point-to-point business model that has served sellers (and buyers) so well over the last 60 years will be tested by market access and other factors. Buyers facing mounting competition in their domestic market will increasingly demand flexibility on volume and price, and contracts that are diverse in duration and indexation. These traditional suppliers risk leaving value, perhaps a lot of value, on the table.
In the future, sellers need to be more sophisticated. The full toolkit will have a portfolio of LNG, a mixture of equity and third-party contracted gas; a trading capability to optimise on volume and price; and the requisite logistics – access to physical capacity of ships and re-gas terminals to shift LNG to where it’s wanted. Enlightened producers have begun to move to an integrated model, better equipped to meet these demands and capture value through the chain. Pure traders will muscle in too.
Some integrated players will think big picture, LNG becoming central to an energy transition strategy. As Big Oil morphs into Big Energy, LNG will sit alongside a renewables and gas-fired power generation portfolio feeding all the way through to gas and electricity customers.
LNG trumps pipe exports...
...as the big suppliers crank up volumes