When Shell purchased BG for US$53 billion in 2016 to become the world ’s largest LNG company, it capped off a change in the way the LNG world worked. LNG used to be more of a producer-buyer relationship, with firms like Petronas, Pertamina and Qatargas cutting deals directly with buyers in Japan and South Korea. With a tidal wave of LNG swamping the industry, the opportunity of increased trading arose as LNG trading hubs like Singapore developed. With access to BG ’s vast LNG portfolio and its own, Shell was in prime position to take advantage of a nimbler, more flexible LNG environment.
With the purchase of French power utility Engie’s LNG assets for US$1.5 billion, Total now leaps to second place among the world’s (publicly-traded) LNG sellers. While a small drop compared to the BG purchase, it caps off a string of LNG investments for Total which include the South Pars in Iran and its stake in rising LNG star Papua New Guinea. From Engie, Total will receive interest in the Cameron LNG project in the US, a 5% stake in the Idku LNG project in Egypt, a 10-strong LNG tanker fleet and access to 14 mtpa of regasification capacities in Europe, with Engie keeping its downstream gas activities. It will expand its portfolio of LNG sales-and-purchase agreements, with new output coming from Algeria, Nigeria, Norway, Russia, Qatar and the US. This puts on course for Total to achieve LNG volumes of 40 million tons per year by 2020, from 23 million tons today, making it a more well-rounded and competitive LNG player with access to some 10% of the global market. Total will also become Engie’s priority gas supplier for 10 years, ensuring captive demand for an extended period, given how closely French companies work with each other.
With this deal, Total leapfrogs over Chevron and ExxonMobil in the LNG space, who also have their own ambitious LNG growth plans. It seems that while the supermajors are reducing their focus on integratedness in the oil space, they are replacing it with a full-chain focus on LNG. This makes sense given the capital intensive nature of LNG, where controlling assets from gas fields to pipelines, liquefaction to regasification down to sales contracts, makes for a more powerful position to bargain, trade and secure financing. It also helps keep upstart trading companies at bay. Players like Glencore and Trafigura have been moving in on the LNG space recently, with Trafigura building LNG import terminals in Pakistan and Gunvor sealing a deal to buy the entirety of an Euqatorial Guinea LNG project. These are bits and pieces of a (profitable) puzzle, but supermajors like Shell and now Total have access to the whole board.
Total’s investment also comes with canny timing. While Shell undoubtedly overpaid for BG – the LNG industry was riding high at the time – Total’s acquisition of Engie’s assets come at a time when LNG prices are depressed. While Shell had to go on a selling spree to pay for its costly purchase of BG, Total has paid a relative bargain at US$1.5 billion. “We are seizing the opportunity to grow at a time when prices are low,” said Philippe Sauquet, head of Total’s gas, renewables and power business. When LNG prices start to rise again, which looks like post-2020 once the current glut is cleared, Total will be in a great position to capitalise. More LNG acquisition are likely underway, with Total aiming for the number 1 spot.
Estimated Top LNG Producers 2017/2018
Qatar Petroleum: 15%
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It has been 21 years since Japanese upstream firm Inpex signed on to explore the Masela block in Indonesia in 1998 and 19 years since the discovery of the giant Abadi natural gas field in 2000. In that time, Inpex’s Ichthys field in Australia was discovered, exploited and started LNG production last year, delivering its first commercial cargo just a few months ago. Meanwhile, the abundant gas in the Abadi field close to the Australia-Indonesia border has remained under the waves. Until recently, that is, when Inpex had finally reached a new deal with the Indonesian government to revive the stalled project and move ahead with a development plan.
This could have come much earlier. Much, much earlier. Inpex had submitted its first development plan for Abadi in 2010, encompassing a Floating LNG project with an initial capacity of 2.5 million tons per annum. As the size of recoverable reserves at Abadi increased, the development plan was revised upwards – tripling the planned capacity of the FLNG project to be located in the Arafura Sea to 7.5 million tons per annum. But at that point, Indonesia had just undergone a crucial election and moods had changed. In April 2016, the Indonesian government essentially told Inpex to go back to the drawing board to develop Abadi, directing them to shift from a floating processing solution to an onshore one, which would provide more employment opportunities. The onshore option had been rejected initially by Inpex in 2010, given that the nearest Indonesian land is almost 100km north of the field. But with Indonesia keen to boost activity in its upstream sector, the onshore mandate arrived firmly. And now, after 3 years of extended evaluation, Inpex has delivered its new development plan.
The new plan encompasses an onshore LNG plant with a total production capacity of 9.5 million tons per annum. With an estimated cost of US$18-20 billion, it will be the single largest investment in Indonesia and one of the largest LNG plants operated by a Japanese firm. FID is expected within 3 years, with a tentative target operational timeline of the late 2020s. LNG output will be targeted at Japan’s massive market, but also growing demand centres such as China. But Abadi will be entering into a far more crowded field that it would have if initial plans had gone ahead in 2010; with US Gulf Coast LNG producers furiously constructing at the moment and mega-LNG projects in Australia, Canada and Russia beating Abadi’s current timeline, Abadi will have a tougher fight for market share when it starts operations. The demand will be there, but the huge rise in the level of supplies will dilute potential profits.
It is a risk worth taking, at least according to Inpex and its partner Shell, which owns the remaining 35% of the Abadi gas field. But development of Abadi will be more important to Indonesia. Faced with a challenging natural gas environment – output from the Bontang, Tangguh and Badak LNG plants will soon begin their decline phase, while the huge potential of the East Natuna gas field is complicated by its composition of sour gas – Indonesia sees Abadi as a way of getting its gas ship back on track. Abadi is one of Indonesia’s few remaining large natural gas discoveries with a high potential commercialisation opportunities. The new agreement with Inpex extends the firm’s licence to operate the Masela field by 27 years to 2055 with the 150 mscf pipeline and the onshore plant expected to be completed by 2027. It might be too late by then to reverse Indonesia’s chronic natural gas and LNG production decline, but to Indonesia, at least some progress is better than none.
The Abadi LNG Project:
Headline crude prices for the week beginning 10 June 2019 – Brent: US$62/b; WTI: US$53/b
Headlines of the week
Midstream & Downstream
A month ago, crude oil prices were riding a wave, comfortably trading in the mid-US$70/b range and trending towards the US$80 mark as the oil world fretted about the expiration of US waivers on Iranian crude exports. Talk among OPEC members ahead of the crucial June 25 meeting of OPEC and its OPEC+ allies in Vienna turned to winding down its own supply deal.
That narrative has now changed. With Russian Finance Minister Anton Siluanov suggesting that there was a risk that oil prices could fall as low as US$30/b and the Saudi Arabia-Russia alliance preparing for a US$40/b oil scenario, it looks more and more likely that the production deal will be extended to the end of 2019. This was already discussed in a pre-conference meeting in April where Saudi Arabia appeared to have swayed a recalcitrant Russia into provisionally extending the deal, even if Russia itself wasn’t in adherence.
That the suggestion that oil prices were heading for a drastic drop was coming from Russia is an eye-opener. The major oil producer has been dragging its feet over meeting its commitments on the current supply deal; it was seen as capitalising on Saudi Arabia and its close allies’ pullback over February and March. That Russia eventually reached adherence in May was not through intention but accident – contamination of crude at the major Druzhba pipeline which caused a high ripple effect across European refineries surrounding the Baltic. Russia also is shielded from low crude prices due its diversified economy – the Russian budget uses US$40/b oil prices as a baseline, while Saudi Arabia needs a far higher US$85/b to balance its books. It is quite evident why Saudi Arabia has already seemingly whipped OPEC into extending the production deal beyond June. Russia has been far more reserved – perhaps worried about US crude encroaching on its market share – but Energy Minister Alexander Novak and the government is now seemingly onboard.
Part of this has to do with the macroeconomic environment. With the US extending its trade fracas with China and opening up several new fronts (with Mexico, India and Turkey, even if the Mexican tariff standoff blew over), the global economy is jittery. A recession or at least, a slowdown seems likely. And when the world economy slows down, the demand for oil slows down too. With the US pumping as much oil as it can, a return to wanton production risks oil prices crashing once again as they have done twice in the last decade. All the bluster Russia can muster fades if demand collapses – which is a zero sum game that benefits no one.
Also on the menu in Vienna is the thorny issue of Iran. Besieged by American sanctions and at odds with fellow OPEC members, Iran is crucial to any decision that will be made at the bi-annual meeting. Iranian Oil Minister Bijan Zanganeh, has stated that Iran has no intention of departing the group despite ‘being treated like an enemy (by some members)’. No names were mentioned, but the targets were evident – Iran’s bitter rival Saudi Arabia, and its sidekicks the UAE and Kuwait. Saudi King Salman bin Abulaziz has recently accused Iran of being the ‘greatest threat’ to global oil supplies after suspected Iranian-backed attacks in infrastructure in the Persian Gulf. With such tensions in the air, the Iranian issue is one that cannot be avoided in Vienna and could scupper any potential deal if politics trumps economics within the group. In the meantime, global crude prices continue to fall; OPEC and OPEC+ have to capability to change this trend, but the question is: will it happen on June 25?
Expectations at the 176th OPEC Conference