Daily Archives: April 9, 2012

Cyprus: Ocean Rig Receives LoA for its UDW Drillship

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Ocean Rig UDW Inc., a global provider of offshore deepwater drilling services, headquartered in Cyprus, today announced that it has received a Letter of Award for its ultra deepwater drillship “Ocean Rig Olympia”, from a major oil company.

The Letter of Award is for a three- year contract for drilling offshore West Africa, with an estimated backlog of approximately $652 million. The Letter of Award is subject to completion of definitive documentation and receipt of regulatory approvals. The  contract is expected to commence in direct continuation of the Ocean Rig Olympia’s  existing contract in West Africa. The customer would have the option to extend the  contract for two periods of one year each, with the first option exercisable within one  year from the commencement date under the drilling contract, and the second option  exercisable within one year after the date of exercise of the first option.

With this latest fixture, Ocean Rig no longer has any rigs available in 2012.

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Why America’s Missing Out on the Billion-Dollar Global LNG Game

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By Keith Schaefer
Sun, 08 April 2012 14:59

The fast-growing Liquid Natural Gas (LNG) market is creating serious wealth around the world.

So who is profiting the most right now – and who will profit most in the coming years?

In short, it’s Australia.

The country is already the #4 exporter of LNG in the world.  Seven new plants are in various stages of planning and development – That translates to roughly $200 billion in capital investment… and an enormous number of jobs.

Now let’s look at the U.S. in the context of LNG.

America as you probably know produces massive amounts of natural gas. Yet is exports a surprisingly small amount of the resource abroad.

Both countries are close to markets – Australia is closer to Asia, which imports vast quantities of LNG, but the U.S. is also relatively close to these markets and closer to Europe, which holds some major LNG consumers, like Spain and France. Both also have robust natural gas production.

And yet Australia is light years ahead of America in sending LNG overseas… specifically by roughly 800 billion cubic feet (bcf) per year.

Here’s a brief primer on LNG before we review that gap…

LNG is created by cooling natural gas to minus 256 degrees Fahrenheit, which transforms the gas into a liquid. This liquid has about 1/600th the volume of natural gas, making its transport over long distances much simpler —and much more economic.

While turning a gas into a liquid may seem to be the stuff of science fiction, it has its roots in the 19th century when Carl Von Linde, an engineer in Munich, built the first practical compressor refrigeration machine. The first LNG plant was built roughly a century ago in West Virginia.

Of course, large-scale users of natural gas prefer to deal with the regular kind–not liquid and frozen. Since gas is easier to move and doesn’t need to be refrigerated, companies had to then develop ways to reverse the process. So you have to liquefy the gas to move it, and then “re-gasify” the natural gas to use it.  That’s a lot of work and means large infrastructure investments are required.

The gas is converted to liquid at liquefaction plants (LNG export terminals.) It is then transported in special ships that use auto-refrigeration. These LNG ocean tankers actually use a small amount of the LNG – 3%-4% during an average voyage—to power the ships. These tankers can carry around 135,000 cubic meters of liquid natural gas, which works out to about 3 billion cubic feet of warm natural gas.

So here’s how much gas that translates to: 

23 ships a day that could feed ALL the US demand for natural gas.  There are now roughly 375 ships in service worldwide.

The ships then go to an LNG import, or regasification, terminal where the LNG is converted back to a gaseous state and then either stored in tanks or sent through pipelines.

The Asian market is a major destination for LNG exporters. Japan is by far the world’s largest importer of LNG, bringing in nearly 71 million tons (8.52 bcf/d)—or almost 31 percent of all global LNG imports, according to Unit Economics.

South Korea is #2 at 34.5 million tons (4.14 bcf/d), or roughly 15 percent of global imports. Taiwan (11.3 million tons/1.36 bcf/d) and China (9.7 million tons/1.16 bcf/d) also account for a significant portion of LNG imports.

Asia isn’t the only major LNG import market, though. Europe brings in large amounts as well.  Spain is the third largest importer of LNG with 27.3 million tons (3.28 bcf/d) coming in during 2010. The United Kingdom and France are also major importers, bringing in 13.4 million tons (1.60 bcf/d) and 10.2 million tons (1.22 bcf/d) in 2010, respectively.

According to the U.S. Energy Information Administration (EIA), the U.K. received 55 percent of its LNG exports from Qatar in 2009. That same year significant quantities of the hydrocarbon entered the U.K. from Trindad and Tobago (a surprisingly robust LNG exporter with 15.4 million tons (1.85 bcf/d) sent abroad in 2010), Algeria, Egypt and Australia.

Now here’s a closer look at the LNG industry in Australia… (and what the U.S. could learn by it)

Australia only trails Qatar, Indonesia and Malaysia in LNG exports. In 2010, Australia sent 872 billion cubic feet (about 19 million tons) abroad, which was a substantial improvement over the 714 BCF exported in 2009, says the EIA.

That’s just over 8% of the world’s LNG exports. By comparison, Qatar does 25% of all LNG exports. Unit Economics states that Australia could contend with the Middle Eastern country for top spot as early as 2016.

Not surprisingly, most of Australia’s LNG exports go to the Top 4 importing countries—all in the Far East. Japan gets about 70% of Australia’s LNG exports, China gets 21%, South Korea 5% and Taiwan 4%.

There are only two LNG liquefaction plants in Australia right now, but seven additional export facilities are under construction, and four more are planned. Unit Economics reports that if all of these facilities come on line and produce their projected capacities, Australia will send a staggering 95.7 million tons (11.5 bcf/d) of natural gas abroad per year, versus the 19 million tons (2.28 bcf/d) it is exporting now—a five-fold increase!

The capital investments—and the jobs created by it—are enormous.  The Australian major Santos Ltd., along with Petroliam Nasional Bhd., are planning on shelling out $45 billion to create three LNG export facilities that would be able to convert 20.8 million tons of coal seam gas into LNG each year, reports the Wall Street Journal.

Other prominent players in Australian LNG are the BG Group PLC and the Australia Pacific LNG consortium, which is led by ConocoPhillips and Origin Energy Ltd.

“LNG is simply in high demand. and it’s not just the consequence of Fukushima,” Jon Skule Storheill, chief executive officer of Awilco LNG, told Reuters, referencing the nuclear disaster in Japan that has prompted the country to rely more heavily on LNG. “There’s Korea, there’s Taiwan, this market is just strong. Gas is clean, it’s available and it’s cheap.”

America, on the other hand, has only two export terminals.

The terminal in Kenai, Alaska, which was built in the 1960s, was idled in November of last year. (At the time, ConocoPhillips’ spokeswoman Natalie Lowman told The Associated Press the plant will be in preservation mode until spring 2012, at which time the company will re-examine the facility.)

The other is Cheniere Energy’s Sabine Pass LNG Terminal, near the border of Texas and Louisiana. This station has 4 billion cubic feet per day of capacity.

Overall, the US exported 0.2 bcf/d of LNG in 2011, according to the EIA—a total of 71.5 bcf.

Australia almost does that in just one month.  The U.S. sends most of its LNG exports to Brazil, China, Japan and South Korea.

How the U.S. Could Fit into the Global LNG Game

The LNG market is growing, and its future looks bright.

Some industry analysts predict demand for LNG globally will increase 40% in the five-year period from 2010 to 2015. This would make the annual market for LNG roughly 300 million tons.

The U.S. has the fifth-highest amount of natural gas reserves in the world, with the EIA putting the number at 273 trillion cubic feet. By comparison Australia has the 12th-highest natural gas reserves, with “only” 110 trillion cubic feet. But, as  stated above, Australia was able to ship more than 12 times as much LNG overseas in 2010 than the U.S.

The largest obstacle the U.S. faces in the LNG market is its lack of export/liquefaction terminals. With the Kenai facility going idle, the Sabine Pass terminal is the only facility in America even close to being able to regularly send LNG overseas. And even that could still be a few years away.

Now what about building LNG liquefaction plants?  Unit Economics says it can cost $3 billion for each million tons of annual capacity for the entire liquefaction supply chain, which includes production, pipelines, the port and the facility itself.

The Wall Street Journal reports there are seven additional projects seeking approval from the Department of Energy to ship LNG to most foreign nations. If all of these projects gain approval they could handle about 25 percent of U.S. gas production. However, the news source reports that approval for all of the facilities is unlikely.

An additional hurdle to the LNG market in the U.S. is political opposition to sending the energy source overseas. The American Chemistry Council has warned the U.S. government that it “should not undermine the availability of domestic natural gas,” but is not necessarily against exporting the substance.

The Sierra Club is concerned that exporting more natural gas will cause companies to increase their fracking operations. While there has been little to no evidence that fracking itself harms the environment, a groundswell of opposition to the practice has emerged, making investing in greater production difficult for the industry.

Still, for all the hurdles in exporting LNG, the U.S. also many opportunities.

In mid-March Japanese officials planned to meet with a delegation headed by Deputy Energy Secretary Daniel Poneman to reportedly request LNG exports to Japan. This appears to be a major step, as Japan had previously shied away from American LNG due to uncertainty over whether Washington would allow it to be exported.

As mentioned, Japan’s thirst for LNG is insatiable, and it will only grow stronger as the country scales back on its use of nuclear power following last year’s Fukushima Daiichi nuclear disaster. (Before the disaster, nuclear power accounted for about 30 percent of Japan’s energy production. That’s a large hole Japan will need to fill.)

Other markets that could be exploited by the U.S. are the U.K., France and Spain, all three of which are among the largest importers of LNG in the world. While Australia does send some LNG to these European countries, most of the U.S. competition will come from African countries like Nigeria and Algeria, as well as Qatar.

Another positive sign for U.S. LNG exports is that they appear to have the support of Energy Secretary Steven Chu, who has stated that sending the hydrocarbon overseas would allow America to cut into its trade deficit.

“Exporting natural gas means wealth comes into the United States,” he said, reports The Wall Street Journal.

There is much work to be done in the U.S. LNG industry to help it catch Australia—but the economics are powerful if it can.  The gears appear to be moving in the right direction, as both international markets are opening up, domestic production increases and LNG liquefaction facilities gain approval and come on line.

By. Keith Schaefer and the Oil & Gas Investments Bulletin Research Team

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Oil Is Diving

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Joe Weisenthal

Watch out: Oil could soon break below $100 again.

After a snap fall on the back of that weak jobs report, crude is making another jut lower this morning, to just above $101/barrel.

From FinViz:

Read more: BI

Criminal charges and $22 Billion in Lawsuits Raise Questions About Brazil

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By John Lyons, Wall Street Journal

SAO PAULO, Brazil (Dow Jones)–U.S. President Barack Obama is set to meet with Brazil’s President Dilma Rousseff in Washington on Monday amid optimism for closer ties with South America’s rising economic power.

The issues in play reflect Brazil’s growing economic reach. Brazil’s biggest trade partner these days is China, not the U.S., and U.S. officials want Brazil as an ally in nudging China to let its currency rise. Brazil’s bigger economic presence in regional neighbors such as Venezuela, Ecuador and Cuba could allow Brazil to act as a moderating force in a region that has become more anti-U.S. in recent years.

Mostly, U.S. interests in Brazil are fueled by a growing consensus that the commodity-rich nation has put its history of periodic economic meltdowns behind it and will play a bigger role in world affairs as its economy grows. Brazil passed the U.K. as the world’s sixth-largest economy recently and is seeking a bigger voice in global forums such as the United Nations and the G-20 grouping of big economies.

Indeed, Rousseff’s U.S. trip comes a year after Obama traveled to Brasilia to meet her, a diplomatic overture that, observers say, underscored the Obama administration’s desire to hit the reset button on relations that became strained under Rousseff’s predecessor, Luiz Inacio Lula da Silva.

(This story and related background material will be available on The Wall Street Journal website, WSJ.com.)

Under da Silva, U.S. officials complained, Brazil’s attempts to flex growing economic weight on the global stage often created headaches for U.S. diplomats seeking to resolve regional and global issues. Brazil refused to recognize U.S.-backed elections to resolve a Honduran coup; Brazil opposed U.S.-backed sanctions to prevent Iran from acquiring a nuclear weapon.

Though Rousseff is da Silva’s protege and hails from his left-wing Workers Party, she introduced a more pragmatic foreign-policy agenda tuned to providing direct economic benefits to Brazil, rather than carving out a protagonist role for the nation in the Middle East and elsewhere. The result, observers say, may be fewer distractions as the countries tackle increasingly important economic issues.

Rousseff’s “priority is the domestic economy,” said Tovar Nunes, a senior Brazilian diplomat who acts as a foreign-policy spokesman, in a recent interview.

At their White House meeting, the leaders are expected to discuss a range of issues, from global economics to regional security and the environment.

The U.S. is likely to seek Brazil’s support on regional issues ahead of a summit of hemispheric leaders later this month in Colombia. Some analysts say Brazil will urge Obama to add star power to a major U.N. environmental conference planned for Rio de Janeiro this year. Obama hasn’t yet committed to attend.

All the same, the potential for tense moments remains. Rousseff is expected to criticize an expansive U.S. monetary policy that many in the emerging economies blame for creating imbalances such as overvalued currencies and asset bubbles. Rousseff made a similar complaint to Germany’s Angela Merkel last month. Europe, like the U.S., has interest rates near zero to spur growth.

Not much is expected to be accomplished on long-standing bilateral trade issues. Brazil wants to sell more of its beef, orange juice, steel and sugar to the U.S., but those politically sensitive industries are mostly protected by U.S. policies that are unlikely to budge. The U.S. wants more access to Brazil’s growing economy for manufactured goods, but Brazilian factory owners are already complaining of foreign competition and clamoring for more protections.

One chance for goodwill: The U.S. let its tariffs on ethanol, an important Brazilian industry, expire last year.

But other economic issues have become tricky. Vast new Brazilian oil finds mean the country may become an important source of regional crude as production in Mexico and Venezuela declines. But criminal charges and some $22 billion in lawsuits against Chevron Corp. following a deep-water oil leak last year raise questions about Brazil as an operating environment for U.S. firms.

Meantime, Boeing Co. is competing with manufacturers in France and Sweden for a contract to sell some $30 billion in fighter jets to the Brazilian military. A recent U.S. decision to cancel an order of Brazilian-made military training planes is a strike against the American effort in deeply nationalistic Brazil.

Rousseff’s economic focus may foster deeper ties in unexpected ways. Consider one program, called Science Without Borders, which provides scholarships for thousands of Brazilians a year at top U.S. graduate schools. The immediate goal is to make Brazil more productive. But such exchange programs also pay diplomatic dividends as top-educated Brazilians forge bonds in the U.S.

On Tuesday, Rousseff travels to Boston, where she will visit Massachusetts Institute of Technology and meet with Brazilian scholarship students already studying at Harvard University.

More than any single agreement, Rousseff may be seeking something that was a scarce commodity for the volatile nation in past decades: Respect. The country’s leaders have sought to be treated as a partner with the U.S. to be consulted on important regional issues since U.S. President Dwight Eisenhower visited Brazil in 1960. Brazil has sought a permanent seat on the U.N. Security Council essentially since the council came into existence.

Such demands used to draw mostly laughs. But that has begun to change amid Brazil’s economic growth. Obama is speeding up Brazilian travel-visa applications, in part because Brazilians are starting to outspend Europeans in key U.S. tourist destinations such as New York and Florida.

Dow Jones & Company, Inc.

By gCaptain Staff On April 8, 2012

Will the US Become the World’s Largest Exporter of LNG?

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By John R. Siegel

(Barrons) By 2017 the U.S. could be the largest exporter of liquefied natural gas in the world, surpassing leading LNG exporters Qatar and Australia. There is one big “if,” however. America can produce more gas, export a surplus, improve the trade deficit, create jobs, generate taxable profits and reduce its dependence on foreign energy if the marketplace is allowed to work and politics doesn’t get in the way.

In May 2011 Cheniere Energy received an Energy Department license to export LNG from its Sabine Pass LNG import terminal in Louisiana. Cheniere subsequently reached long-term deals with the U.K.’s BG Group, Spain’s Gas Natural and India’s GAIL. Cheniere is targeting operation in 2016 and plans to export up to 730 billion cubic feet of LNG annually, roughly 3% of current U.S. gas production.

Sabine Pass originally was built as an import facility to alleviate projected U.S. gas shortages. Shale-gas technology changed that assumption radically. Now Sabine Pass is attractive because it already possesses much of the infrastructure for an export plant: LNG storage tanks, gas-handling facilities and docking terminals. Only a liquefaction plant is needed to convert natural gas into LNG. Overall, Cheniere can create its export terminal for half the investment required for a new one.

With world oil over $100 per barrel, equivalent to $17 per million BTUs of gas, versus domestic natural gas at $2.10 per million BTUs, the opportunity is obvious: Cheniere can deliver its gas to Asia or European customers well below current market prices.

Six developers with existing import terminals are following the Sabine Pass model. And Cheniere has another project in Corpus Christi. With the expansion of the Panama Canal, Gulf LNG projects can economically target the lucrative Asia market. By 2017, the U.S. could be exporting upwards of 13 billion cubic feet of LNG per day.

But exporters must overcome growing opposition to LNG exports by environmentalists and industrial users of natural gas. Exporters must also get multiple permits from environmentally conscious federal officials. And Rep. Ed Markey (D.-Mass.) has proposed legislation to bar federal approval of any LNG export terminals until 2025. Those who most fear global warming don’t want anyone anywhere to use more fossil fuel, even “cleaner” natural gas.

It is uphill for the anti-gas crowd. High oil prices are driving a transition to natural gas, even as fuel for trucks and cars. In the U.S., the T. Boone Pickens Plan would displace gasoline and diesel fuel for compressed natural gas in large trucks. Pickens estimates savings of two million barrels per day of oil imports if the nation’s fleet of 18-wheelers converts to CNG. The Pickens Plan might fail legislatively because it calls for subsidies to fuel the transition. But if CNG’s nearly $2-per-gallon price advantage over gasoline continues, the concept will evolve via natural market forces, as it should.

THE ENERGY DEPARTMENT SAYS natural gas has grown its market share in the U.S. in the past three years from 28% to 30%. Globally, the trend is similar, and LNG is integral to the global supply chain.

Despite the recession, global LNG demand has been growing at a 6% to 8% annual clip for the past 10 years. When demand collapsed in 2009, prices in Asian markets fell 50% to about $5 per million BTUs. But the price drop was also driven by the rapid growth in U.S. shale gas. U.S. natural-gas supply — flatlined for a decade at 19 trillion to 20 trillion cubic feet annually — increased 15% in the past three years due to the shale-gas revolution. Technology advances created a supply perturbation. As U.S. gas prices plunged, LNG cargoes bound for the U.S. had no market.

Global LNG markets are growing again. By late 2010, the main Asian consumers — Japan, Korea and Taiwan — were seeking more LNG, while new customers such as Thailand were entering the market. The Japan tsunami put a call on LNG imports to supplant Japan’s nuclear shutdowns, and with increasing demand, Asian markets rebounded to the $15-per-million-BTU range. After the tsunami, Germany plans to close its nuclear plants. Most of Germany’s (and all of Europe’s) new supply will be gas-fired. Given the choices, would Europe rather grow its gas supply from Russia, North Africa or the U.S.? The policy implications should be obvious, even to the U.S.

Estimates of the job benefits from U.S. LNG projects depend on a variety of assumptions. Roughly 25,000 direct construction jobs would be created if all the projects are built. Increasing the U.S. natural-gas production base by another 13 billion cubic feet might translate to 450,000 direct and indirect jobs and $16 billion in annual tax revenue for federal and state coffers.

It’s easier to forecast improved trade balances. Exporting 13 BCF per day of LNG could generate about $45 billion annually. Reaching Pickens’ goals could offset another $70 billion annually of oil imports.

Exporting energy, however, rubs a lot of people the wrong way. Pickens wants cheap natural gas for his 18-wheelers and opposes LNG exports. Industrial gas users argue that a vibrant LNG industry would propel domestic gas prices higher. A study by Deloitte said that exporting six 6 BCF per day of LNG would raise wellhead gas prices by 12 cents per million BTU (about 1% on a retail basis). Advocates of “energy independence” argue that exporting LNG would tie U.S. natural gas prices to global markets.

The Energy Department’s Office of Fossil Energy is considering whether exporting LNG is in the public interest. In the meantime — shades of Keystone XL — the department has effectively put a moratorium on new LNG export licenses.

Energy’s decision-making process balances the extent to which exporting LNG drives up prices with the economic benefits of increased production and energy exports. The price assessment comes at a time when U.S. gas fetches the same price in constant dollars as it did in 1975. Producers are now shutting down production and lowering exploration budgets. The shale-gas “job machine” is now in reverse.

Energy’s price study, released in January, found that exporting six BCF per day would increase wellhead prices by 50 to 60 cents per million BTU by 2026. The study has a myriad of assumptions and scenarios, the most fundamental of which is future gas production. In 2007, Energy predicted the U.S. would be importing 12.3 BCF a day of LNG by 2030 due to falling gas production. But primarily because of the shale-technology phenomenon, wellhead prices have tumbled from $6.25 six years ago, even as demand increased by eight BCF per day. That demand figure is larger than the six BCF assumption of the Energy study. The Energy Department is not particularly to blame, as most forecasters got it just as wrong on gas production.

Ideally, the Energy Department should move quickly and recognize free-market principles. And the administration could send a clear policy signal that natural gas is integral to the country’s energy future and that exporting LNG is good economics and consistent with its 2010 State of the Union address to double U.S. exports over five years and create two million new jobs. But Energy is moving slowly, and administration signals on natural gas are mostly lip service. The economic-benefits study should have been done by the end of March. But last week, Energy delayed its release until late summer, and said there is no timeline to review results and develop policy recommendations. Translation: after the election.

While we are fantasizing, the government could stop singling out the job-creating energy industry for higher taxes, emphasize cost/benefit analysis before adding further regulation to energy production, and get out of the business of regulating LNG exports altogether, which smacks of protectionism. To that end, should we also give veto authority to the Agriculture Department over grain exports (to lower corn prices) and the Commerce Department over auto, airplane and smartphone exports?

JOHN R. SIEGEL is the president of J.J. Richardson, a registered investment advisor that manages a hedge fund in Bethesda, Md.

Dow Jones & Company, Inc.

By gCaptain Staff On April 8, 2012

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