GEOJE, South Korea (Reuters) - Geoje Island, off the southeastern tip of the Korean peninsula, appears as prosperous as ever: foreign cars cruise the streets, young mothers pushing strollers converge on coffee shops, and workers on motorcycles pour into bustling shipyards.
It is what comes next that worries people in Geoje, the world's largest producer of ships by tonnage.
South Korean shipbuilders are facing their biggest ever crisis, with mass layoffs expected later this year as finished vessels leave the shipyards and few new orders come in.
"We've never had a serious downturn - ever," Kim Hyeon-gyu, director of Geoje's main industrial park, said on the sidelines of a public hearing to discuss looming layoffs.
Because it takes about two years to build a ship, Geoje's docks are still busy. But without a major uptick in orders by September, which looks unlikely, 20,000 shipbuilding jobs in Geoje will be lost by March, city officials say.
Some 70 percent of Geoje residents rely for a living on shipbuilding, an industry that for four decades was a key engine of South Korea's export-driven growth and still employs about 200,000 across the country.
Now, a global slump in trade and commodities, plus rising competition from China, is forcing Geoje to find ways to ease its dependence on the shipyards.
"Past strong shipbuilding growth made us lax in finding ways for the tourists to spend money here instead of driving through," said Kwon Min-ho, the mayor of Geoje, which is building a 424-room resort as part of a plan to expand its tourist infrastructure.
But the shift is painful.
Subcontractors at the massive Daewoo Shipbuilding & Marine Engineering and Samsung Heavy Industries Co Ltd yards in Geoje and at Hyundai Heavy Industries Co Ltd in nearby Ulsan are especially hard-hit.
"The number of subcontractors going out of business has exploded this year," said Kim Dong-sung, an official with a lobby group representing them. "Unpaid wages and bonuses plus 20-30 percent pay cuts are now seen as the norm."
In the first quarter of this year, South Korea's total shipbuilding industry landed just eight orders totalling 171,188 CGT (compensated gross tonnage).
That compares with 68 ships totalling 2,886,589 CGT in the same period last year and roughly 100 per quarter during a 2003-2008 industry boom that saw massive capacity expansion.
The legacy of those boom days is still apparent, even as activity slows.
Geoje's gross regional domestic product exceeded $50,000 (£34,504) per person in 2013, nearly double the $27,214 national average in 2015, according to the Bank of Korea.
A short drive from traditional fishing villages and the massive shipyards stand smart apartment blocks resembling those of Seoul's well-to-do suburbs. The island's 270,000 residents include 14,800 foreigners mainly working in the shipyards as shipowner representatives or workers, giving Geoje's city centre a cosmopolitan feel.
"Business is alright near tourist spots, but it has slowed down in downtown stores," said Lee Mi-eun, owner of a large beef rib soup restaurant near one of Samsung's shipyards. "People ask for lower-priced menus, come in smaller groups."
Shipbuilding here was largely spared the state-driven restructuring many other South Korean industries went through during the 1997-98 Asian financial crisis as it earned valuable dollars and had years of orders in place.
While in the aftermath, some shipbuilders were bankrupted or sold, and Daewoo Shipbuilding was bailed out by a state-run bank, industry heavyweights built a dominant position against European and Japanese rivals.
More recently, as orders for traditional ships dried up or moved to China, Daewoo, Samsung and Hyundai - the world's three largest shipbuilders - bid aggressively to build complex, expensive offshore oil and gas facilities.
That kept the yards humming but cost overruns and delays led to combined net losses of $4.9 billion for the three giants in 2015.
Under prodding by Seoul, shipbuilders have been shedding assets and cutting staff and wages in hopes of riding out the downturn.
Clarksons Research previously said it expects global commercial ship orders to begin resuming some time around late 2017, with a full recovery only emerging in 2020.
Seen as "too-big-to-fail", the government is looking for ways to shore up the solvency of state-run creditor banks in the event that they need to step in to save one of the giant shipbuilders before then.
Cho Hyun-woo, planning manager at the Daewoo Shipbuilding workers' union, said restructuring should not cut so deeply that the industry loses expertise it has developed for high-end structures, which it should bid on once demand returns.
"If you kill the technology that can make these ships when they are ordered en masse starting 2018, it's painfully obvious the technology will go to China or Japan," he said.
By Joyce Lee
(Editing by Tony Munroe and Lincoln Feast)
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Headline crude prices for the week beginning 12 August 2019 – Brent: US$58/b; WTI: US$54/b
Headlines of the week
The momentum for crude prices abated in the second quarter of 2019, providing less cushion for the financial results of the world’s oil companies. But while still profitable, the less-than-ideal crude prices led to mixed results across the boards – exposing gaps and pressure points for individual firms masked by stronger prices in Q119.
In a preview of general performance in the industry, Total – traditionally the first of the supermajors to release its earnings – announced results that fell short of expectations. Net profits for the French firm fell to US$2.89 billion from US$3.55 billion, below analyst predictions. This was despite a 9% increase in oil and gas production – in particularly increases in LNG sales – and a softer 2.5% drop in revenue. Total also announced that it would be selling off US$5 billion in assets through 2020 to keep a lid on debt after agreeing to purchase Anadarko Petroleum’s African assets for US$8.8 billion through Occidental.
As with Total, weaker crude prices were the common factor in Q219 results in the industry, though the exact extent differed. Russia’s Gazprom posted higher revenue and higher net profits, while Norway’s Equinor reported falls in both revenue and net profits – leading it to slash investment plans for the year. American producer ConocoPhillips’ quarterly profits and revenue were flat year-on-year, while Italy’s Eni – which has seen major success in Africa – reported flat revenue but lower profits.
After several quarters of disappointing analysts, ExxonMobil managed to beat expectations in Q219 – recording better-than-expected net profits of US$3.1 billion. In comparison, Shell – which has outperformed ExxonMobil over the past few reporting periods – disappointed the market with net profits halving to US$3 billion from US$6 billion in Q218. The weak performance was attributed (once again) to lower crude prices, as well as lower refining margins. BP, however, managed to beat expectations with net profits of US$2.8 billion, on par with its performance in Q218. But the supermajor king of the quarter was Chevron, with net profits of US$4.3 billion from gains in Permian production, as well as the termination fee from Anadarko after the latter walked away from a buyout deal in favour of Occidental.
And then, there was a surprise. In a rare move, Saudi Aramco – long reputed to be the world’s largest and most profitable energy firm – published its earnings report for 1H19, which is its first ever. The results confirmed what the industry had long accepted as fact: net profit was US$46.9 billion. If split evenly, Aramco’s net profits would be more than the five supermajors combined in Q219. Interestingly, Aramco also divulged that it had paid out US$46.4 billion in dividends, or 99% of its net profit. US$20 billion of that dividend was paid to its principle shareholder – the government of Saudi Arabia – up from US$6 billion in 1H18, which makes for interesting reading to potential investors as Aramco makes a second push for an IPO. With Saudi Aramco CFO Khalid al-Dabbagh announcing that the company was ‘ready for the IPO’ during its first ever earnings call, this reporting paves the way to the behemoth opening up its shares to the public. But all the deep reservoirs in the world did not shield Aramco from market forces. As it led the way in adhering to the OPEC+ club’s current supply restrictions, weaker crude prices saw net profit fall by 11.5% from US$53 billion a year earlier.
So, it’s been a mixed bunch of results this quarter – which perhaps showcases the differences in operational strategies of the world’s oil and gas companies. There is no danger of financials heading into the red any time soon, but without a rising tide of crude prices, Q219 simply shows that though the challenges facing the industry are the same, their approaches to the solutions still differ.
Supermajor Financials: Q2 2019
Source: U.S. Energy Information Administration, CEDIGAZ, Global Trade Tracker
Australia is on track to surpass Qatar as the world’s largest liquefied natural gas (LNG) exporter, according to Australia’s Department of Industry, Innovation, and Science (DIIS). Australia already surpasses Qatar in LNG export capacity and exported more LNG than Qatar in November 2018 and April 2019. Within the next year, as Australia’s newly commissioned projects ramp up and operate at full capacity, EIA expects Australia to consistently export more LNG than Qatar.
Australia’s LNG export capacity increased from 2.6 billion cubic feet per day (Bcf/d) in 2011 to more than 11.4 Bcf/d in 2019. Australia’s DIIS forecasts that Australian LNG exports will grow to 10.8 Bcf/d by 2020–21 once the recently commissioned Wheatstone, Ichthys, and Prelude floating LNG (FLNG) projects ramp up to full production. Prelude FLNG, a barge located offshore in northwestern Australia, was the last of the eight new LNG export projects that came online in Australia in 2012 through 2018 as part of a major LNG capacity buildout.
Source: U.S. Energy Information Administration, based on International Group of Liquefied Natural Gas Importers (GIIGNL), trade press
Note: Project’s online date reflects shipment of the first LNG cargo. North West Shelf Trains 1–2 have been in operation since 1989, Train 3 since 1992, Train 4 since 2004, and Train 5 since 2008.
Starting in 2012, five LNG export projects were developed in northwestern Australia: onshore projects Pluto, Gorgon, Wheatstone, and Ichthys, and the offshore Prelude FLNG. The total LNG export capacity in northwestern Australia is now 8.1 Bcf/d. In eastern Australia, three LNG export projects were completed in 2015 and 2016 on Curtis Island in Queensland—Queensland Curtis, Gladstone, and Australia Pacific—with a combined nameplate capacity of 3.4 Bcf/d. All three projects in eastern Australia use natural gas from coalbed methane as a feedstock to produce LNG.
Source: U.S. Energy Information Administration
Most of Australia’s LNG is exported under long-term contracts to three countries: Japan, China, and South Korea. An increasing share of Australia’s LNG exports in recent years has been sent to China to serve its growing natural gas demand. The remaining volumes were almost entirely exported to other countries in Asia, with occasional small volumes exported to destinations outside of Asia.
Source: U.S. Energy Information Administration, based on International Group of Liquefied Natural Gas Importers (GIIGNL)
For several years, Australia’s natural gas markets in eastern states have been experiencing natural gas shortages and increasing prices because coal-bed methane production at some LNG export facilities in Queensland has not been meeting LNG export commitments. During these shortfalls, project developers have been supplementing their own production with natural gas purchased from the domestic market. The Australian government implemented several initiatives to address domestic natural gas production shortages in eastern states.
Several private companies proposed to develop LNG import terminals in southeastern Australia. Of the five proposed LNG import projects, Port Kembla LNG (proposed import capacity of 0.3 Bcf/d) is in the most advanced stage, having secured the necessary siting permits and an offtake contract with Australian customers. If built, the Port Kembla project will use the floating storage and regasification unit (FSRU) Höegh Galleon starting in January 2021.