In retrospect, it will be seen as a good decision. Petronas is pulling out of the US$29 billion Pacific Northwest LNG project in British Columbia, Canada. The Malaysian state oil company cited ‘prolonged depressed prices and shifts in the energy industry’ as the reasons for exiting the long-gestating project. The former refers to the current slump in LNG prices, which shows no sign of improving, and the latter refers to America’s LNG renaissance, founded not on mammoth expensive projects but nimble, dynamic plays. The decision to admit defeat has not been an easy one, but it is the right one.
The initially announced cancellation of Pacific Northwest LNG in the press, is the fifth major LNG export casualty in the last 18 months, joining Fisherman’s Landing and Browse in Australia, Oregon LNG in the USA, and Prince Rupert, also in British Columbia, to be shelved. The projects that would have joined Wheatstone, Gorgon, Ichthys and Prelude are now victims of the painful rebalancing the LNG industry has to undergo, as suppliers yield power to buyers, who for the first time in LNG history have a luxury of choice and are exerting their rights.
It might have been different, but Pacific Northwest also came under much pressure of local politics. Located in an environmentally sensitive area of British Columbia, environmentalists have railed against the project from the start, even as the Canadian federal government and the BC state government gave their approvals after extensive environment impact studies. Then in May, the ruling NDP lost their majority in BC state elections, forcing them to form a support coalition with the Green Party, vehemently opposed to the project. When that happened, the writing was always on the wall for PNW.
It is for the best. The nature of the geography at the PNW site required high costs to build the necessary infrastructure and pipelines, far higher than those smaller, more deft producers along the more established US Gulf. High costs require high prices to recoup. In the past, this would be solved by locking buyers into long-term contracts at fixed prices. That is no longer a popular option; not with US producers like Cheniere offering short, flexible contracts that countries like Japan, South Korea and China find extremely enticing. Then, battling hostile neighbours, Qatar lifted its moratorium on the vast North Field – planning to double production at the source of some of the cheapest gas in the world. You also have to consider all the African LNG projects being developed, many with stakes held by major Asian buyers, cutting off routes for Canadian supplies.
This is not the end of LNG in Canada. But it is a refocusing. The other partners in Pacific Northwest are looking at re-purposing the project, or parts of it, into a more cost-effective solution. Indian Oil has already said it will talk with the other partners – Sinopec, Japan’s Japex Montney and Petroleum Brunei - to scout for an alternative and cheaper site. Even Petronas reiterates that this is not the end of its presence in Canada, aiming to continue to develop natural gas assets and possibly even participate in Shell’s Kitimat LNG project, also in British Columbia. All players will be careful and approach new opportunities with caution. Expect more of this over the next five years, which will be a period of consolidation and recalibration of major LNG projects into a few golden eggs rather than a whole basket. It is better that a few projects stay on hold for now, then obstinately push ahead and cause a collapse of the industry.
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Headline crude prices for the week beginning 11 February 2019 – Brent: US$61/b; WTI: US$52/b
Headlines of the week
Midstream & Downstream
Global liquid fuels
Electricity, coal, renewables, and emissions
2018 was a year that started with crude prices at US$62/b and ended at US$46/b. In between those two points, prices had gently risen up to peak of US$80/b as the oil world worried about the impact of new American sanctions on Iran in September before crashing down in the last two months on a rising tide of American production. What did that mean for the financial health of the industry over the last quarter and last year?
Nothing negative, it appears. With the last of the financial results from supermajors released, the world’s largest oil firms reported strong profits for Q418 and blockbuster profits for the full year 2018. Despite the blip in prices, the efforts of the supermajors – along with the rest of the industry – to keep costs in check after being burnt by the 2015 crash has paid off.
ExxonMobil, for example, may have missed analyst expectations for 4Q18 revenue at US$71.9 billion, but reported a better-than-expected net profit of US$6 billion. The latter was down 28% y-o-y, but the Q417 figure included a one-off benefit related to then-implemented US tax reform. Full year net profit was even better – up 5.7% to US$20.8 billion as upstream production rose to 4.01 mmboe/d – allowing ExxonMobil to come close to reclaiming its title of the world’s most profitable oil company.
But for now, that title is still held by Shell, which managed to eclipse ExxonMobil with full year net profits of US$21.4 billion. That’s the best annual results for the Anglo-Dutch firm since 2014; product of the deep and painful cost-cutting measures implemented after. Shell’s gamble in purchasing the BG Group for US$53 billion – which sparked a spat of asset sales to pare down debt – has paid off, with contributions from LNG trading named as a strong contributor to financial performance. Shell’s upstream output for 2018 came in at 3.78 mmb/d and the company is also looking to follow in the footsteps of ExxonMobil, Chevron and BP in the Permian, where it admits its footprint is currently ‘a bit small’.
Shell’s fellow British firm BP also reported its highest profits since 2014, doubling its net profits for the full year 2018 on a 65% jump in 4Q18 profits. It completes a long recovery for the firm, which has struggled since the Deepwater Horizon disaster in 2010, allowing it to focus on the future – specifically US shale through the recent US$10.5 billion purchase of BHP’s Permian assets. Chevron, too, is focusing on onshore shale, as surging Permian output drove full year net profit up by 60.8% and 4Q18 net profit up by 19.9%. Chevron is also increasingly focusing on vertical integration again – to capture the full value of surging Texas crude by expanding its refining facilities in Texas, just as ExxonMobil is doing in Beaumont. French major Total’s figures may have been less impressive in percentage terms – but that it is coming from a higher 2017 base, when it outperformed its bigger supermajor cousins.
So, despite the year ending with crude prices in the doldrums, 2018 seems to be proof of Big Oil’s ability to better weather price downturns after years of discipline. Some of the control is loosening – major upstream investments have either been sanctioned or planned since 2018 – but there is still enough restraint left over to keep the oil industry in the black when trends turn sour.
Supermajor Net Profits for 4Q18 and 2018
- 4Q18 – Net profit US$6 billion (-28%);
- 2018 – Net profit US$20.8 (+5.7%)
- 4Q18 – Net profit US$5.69 billion (+32.3%);
- 2018 – Net profit US$21.4 billion (+36%)
- 4Q18 – Net profit US$3.73 billion (+19.9%);
- 2018 – Net profit US$14.8 billion (+60.8%)
- 4Q18 – Net profit US$3.48 billion (+65%);
- 2018 - Net profit US$12.7 billion (+105%)
- 4Q18 – Net profit US$3.88 billion (+16%);
- 2018 - Net profit US$13.6 billion (+28%)