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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According to the Nigeria National Petroleum Corporation (NNPC), Nigeria has the world’s 9th largest natural gas reserves (192 TCF of gas reserves). As at 2018, Nigeria exported over 1tcf of gas as Liquefied Natural Gas (LNG) to several countries. However domestically, we produce less than 4,000MW of power for over 180million people.
Think about this – imagine every Nigerian holding a 20W light bulb, that’s how much power we generate in Nigeria. In comparison, South Africa generates 42,000MW of power for a population of 57 million. We have the capacity to produce over 2 million Metric Tonnes of fertilizer (primarily urea) per year but we still import fertilizer. The Federal Government’s initiative to rejuvenate the agriculture sector is definitely the right thing to do for our economy, but fertilizer must be readily available to support the industry. Why do we import fertilizer when we have so much gas?
I could go on and on with these statistics, but you can see where I’m going with this so I won’t belabor the point. I will leave you with this mental image: imagine a man that lives with his family on the banks of a river that has fresh, clean water. Rather than collect and use this water directly from the river, he treks over 20km each day to buy bottled water from a company that collects the same water, bottles it and sells to him at a profit. This is the tragedy on Nigeria and it should make us all very sad.
Several indigenous companies like Nestoil were born and grown by the opportunities created by the local and international oil majors – NNPC and its subsidiaries – NGC, NAPIMS, Shell, Mobil, Agip, NDPHC. Nestoil’s main focus is the Engineering Procurement Construction and Commissioning of oil and gas pipelines and flowstations, essentially, infrastructure that supports upstream companies to produce and transport oil and natural gas, as well as and downstream companies to store and move their product. In our 28 years of doing business, we have built over 300km of pipelines of various sizes through the harshest terrain, ranging from dry land to seasonal swamp, to pure swamps, as well as some of the toughest and most volatile and hostile communities in Nigeria. I would be remiss if I do not use this opportunity to say a big thank you to those companies that gave us the opportunity to serve you. The over 2,000 direct staff and over 50,000 indirect staff we employ thank you. We are very grateful for the past opportunities given to us, and look forward to future opportunities that we can get.
Headline crude prices for the week beginning 15 July 2019 – Brent: US$66/b; WTI: US$59/b
Headlines of the week
Unplanned crude oil production outages for the Organization of the Petroleum Exporting Countries (OPEC) averaged 2.5 million barrels per day (b/d) in the first half of 2019, the highest six-month average since the end of 2015. EIA estimates that in June, Iran alone accounted for more than 60% (1.7 million b/d) of all OPEC unplanned outages.
EIA differentiates among declines in production resulting from unplanned production outages, permanent losses of production capacity, and voluntary production cutbacks for OPEC members. Only the first of those categories is included in the historical unplanned production outage estimates that EIA publishes in its monthly Short-Term Energy Outlook (STEO).
Unplanned production outages include, but are not limited to, sanctions, armed conflicts, political disputes, labor actions, natural disasters, and unplanned maintenance. Unplanned outages can be short-lived or last for a number of years, but as long as the production capacity is not lost, EIA tracks these disruptions as outages rather than lost capacity.
Loss of production capacity includes natural capacity declines and declines resulting from irreparable damage that are unlikely to return within one year. This lost capacity cannot contribute to global supply without significant investment and lead time.
Voluntary cutbacks are associated with OPEC production agreements and only apply to OPEC members. Voluntary cutbacks count toward the country’s spare capacity but are not counted as unplanned production outages.
EIA defines spare crude oil production capacity—which only applies to OPEC members adhering to OPEC production agreements—as potential oil production that could be brought online within 30 days and sustained for at least 90 days, consistent with sound business practices. EIA does not include unplanned crude oil production outages in its assessment of spare production capacity.
As an example, EIA considers Iranian production declines that result from U.S. sanctions to be unplanned production outages, making Iran a significant contributor to the total OPEC unplanned crude oil production outages. During the fourth quarter of 2015, before the Joint Comprehensive Plan of Action became effective in January 2016, EIA estimated that an average 800,000 b/d of Iranian production was disrupted. In the first quarter of 2019, the first full quarter since U.S. sanctions on Iran were re-imposed in November 2018, Iranian disruptions averaged 1.2 million b/d.
Another long-term contributor to EIA’s estimate of OPEC unplanned crude oil production outages is the Partitioned Neutral Zone (PNZ) between Kuwait and Saudi Arabia. Production halted there in 2014 because of a political dispute between the two countries. EIA attributes half of the PNZ’s estimated 500,000 b/d production capacity to each country.
In the July 2019 STEO, EIA only considered about 100,000 b/d of Venezuela’s 130,000 b/d production decline from January to February as an unplanned crude oil production outage. After a series of ongoing nationwide power outages in Venezuela that began on March 7 and cut electricity to the country's oil-producing areas, EIA estimates that PdVSA, Venezuela’s national oil company, could not restart the disrupted production because of deteriorating infrastructure, and the previously disrupted 100,000 b/d became lost capacity.