The Atwood Osprey, owned by the international drilling contractor Atwood Oceanics, started its first three year drilling services contract with Chevron on May 27, 2011 for operations offshore Australia inclusive of the Greater Gorgon field development project. With this contract extension, the Atwood Osprey is now committed through May 2017.
The operating day rate for the initial three year period remains unchanged. The operating day rate at the start of the extension period is estimated to be approximately $470,000, exclusive of the total cost escalation adjustments which occur during the initial term and will be additive to the operating day rate during the extension period. The contract provisions during the extension period provide for continued annual cost escalation adjustments, enhanced rig equipment maintenance and repair time allowances, and other adjustments to the initial contract’s terms and conditions.
- Atwood Beacon to Drill Offshore Israel (mb50.wordpress.com)
- USA: Statoil Extends Maersk Developer Contract for GoM Work (mb50.wordpress.com)
- USA: Anadarko Contracts ENSCO 8506 Semi (mb50.wordpress.com)
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.
“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
- Will the US Become the World’s Largest Exporter of LNG? (mb50.wordpress.com)
- USA: ETE Units File with FERC for Proposed Lake Charles Liquefaction Project (mb50.wordpress.com)
- Japan: Osaka Gas Eyes U.S. LNG (mb50.wordpress.com)
- USA: Jordan Cove Submits Non-FTA LNG Export Application (mb50.wordpress.com)
- Macquarie Vies To Sell U.S. LNG To India (mb50.wordpress.com)
- Exxon, Conoco and BP Plan Alaska LNG Exports (mb50.wordpress.com)
- USA: Sempra Wins DOE Approval for Cameron LNG Export (mb50.wordpress.com)
- USA: Golden Pass LNG Plans Re-Exports (mb50.wordpress.com)
Octanex has been advised by Shell Development (Australia) Pty Ltd (Shell) that it has completed acquisition of the new Tortilla 2D seismic survey in the WA-385-P permit.
The Tortilla survey is a relatively small 783 km 2D marine seismic survey that fulfils the final work commitment for the WA-385-P permit in the current term. It was acquired off the North West Cape of Western Australia, largely within the area of the WA-385-P permit.
The survey also acquired ‘tie lines’ between the planned location for the Palta-1 well (to be drilled in the WA-384-P permit to the north) and previously drilled wells Herdsman-1 and Pendock-1A to the south and Falcone-1A to the north-east.
The acquisition of the Tortilla 2D survey was timed to avoid the humpback whale migration and took place over the last 10 days of March. As part of a range of management measures, Shell elected that the seismic survey would not come within a 10 km buffer zone to the outer boundary of the Ningaloo World Heritage Area.
Shell has committed to drill the Palta-1 exploration well in the WA-384-P permit and has received environmental approval for the drilling operations. The WA-384-P permit is adjacent to WA-385-P where the Tortilla 2D seismic survey was acquired.
Shell has advised that drilling operations on Palta-1 are being planned for Q3 2012, subject to their receiving all required regulatory approvals. The well is to be drilled in water depths of approximately 1350m and to a total depth of 5325m – 5675m. The Octanex Group originally held 100% of the WA-384-P, WA-385-P and WA-394-P permits that are located in the southern Exmouth Sub-basin.
In 2008, Octanex concluded an agreement with Shell for the disposition of a 100% working interest in each of the three permits. Octanex holds residual rights in each of the permits in the form of discovery payments and a 1% royalty over any production from the permits, as well as rights of re- conveyance.
- Namibia: Spectrum Starts Seismic Survey in Luderitz Basin (mb50.wordpress.com)
- Australia: Exmouth Plateau Brings Joy to Chevron (mb50.wordpress.com)
- French Guiana: Shell to Begin Guyane Drilling in Mid 2012 (mb50.wordpress.com)
The second largest shipbuilder in the world, Daewoo Shipbuilding and Marine Engineering, Co, announces that it has received an order to construct a giant Floating Production Storage and Offloading vessel (FPSO).
Daewoo made the announcement on the Korea Exchange, saying that the estimated worth of the project is $2 billion.
The FPSO will serve for offshore storage and export of condensate from the Ichthys field. The condensate will be transferred from the CPF to the FPSO and, further, it will be exported from the FPSO via a floating loading hose to offtake tankers.
The vessel will also treat and dispose of produced water. It will be located approximately 2 km from the Central Processing Facilitiy and will contain liquid (condensate and water) treatment facilities, living quarters and associated utilities.
South Korea’s shipbuilders have benefited greatly from the INPEX’s Ichthys project. Samsung Heavy Industries Co Ltd has recently received a $2.71 billion order for the construction of an offshore central processing facility (CPF) for the Ichthys project.
- Australia: Heerema Wins Subsea Installation Contract for Ichthys Project (mb50.wordpress.com)
- Australia: Technip Wins Wheatstone Platform Design Contract from DSME (mb50.wordpress.com)
- Ichthys: The Largest Subsea Gig for McDermott (Australia) (mb50.wordpress.com)
- European Client Cancels Order, Says DSME (mb50.wordpress.com)
- Australia: Saipem Lands Ichthys LNG Work (mb50.wordpress.com)
- Singapore: Dyna-Mac Receives LOIs from Leading FPSO Operators (mb50.wordpress.com)
- Total and Inpex Launch $34 Billion Ichthys LNG Project Offshore Northwestern Australia (gcaptain.com)
- UK: Largest Contract in Odfjell Drilling’s History (mb50.wordpress.com)
THE threat of an Israeli attack on Iran’s nuclear facilities has pushed world oil prices up by 15 per cent in the past month and raised fears that the fissile geopolitics of the Middle East might once again spell global economic havoc.
Israel believes Iran’s nuclear program is approaching a point of no return beyond which it would be impossible to prevent it developing nuclear weapons.
Facing an election in November and enjoying the first rays of economic sunshine since the 2008 global financial crisis, Obama does not need a Middle East war and soaring oil prices.
However, there is a strong push in Israel for military action.
“If we do not stop Iran now, later on it will be impossible,” Deputy Foreign Minister Danny Ayalon says.
Israel, which is understood to have its own nuclear weapons, sees a nuclear-armed Iran as an existential threat.
Saudi Arabia has indicated it would seek nuclear capability if Iran achieved it, adding further uncertainty to the stability of the world’s richest oil region.
The next three months are the most likely time for an attack as Iranian skies are clearest during the northern spring.
Iran has declared it will close the Strait of Hormuz as a first point of retaliation for any Israeli raid.
The strait is the seaway through which the oil of Saudi Arabia, Iraq, Kuwait, Iran and the United Arab Emirates is shipped.
Giant oil tankers carrying 18 million barrels of oil every day travel down the 10km-wide outbound shipping channel. This represents a quarter of the world’s oil supply and 40 per cent of seaborne oil trade.
If Iran could block the strait, it would represent a greater disruption to the world’s supplies than those that followed the 1973 oil embargo after the Yom Kippur war, the 1978 Iranian revolution, the 1980 Iraq-Iran conflict or the 1990 Iraqi invasion of Kuwait.
The International Monetary Fund has warned that the world is ill-prepared for a new oil crisis. In a paper prepared for last weekend’s G20 finance ministers’ meeting in Mexico and released on Friday, the IMF said developed countries had run down their emergency stocks while spare capacity in the OPEC countries was no more than average.
“A halt of Iran’s exports to OECD economies without offset from other sources could trigger an initial oil price increase of around 20-30 per cent,” the fund said. “A sustained blockade of the Strait of Hormuz would lead to a much stronger and unprecedented disruption of global oil supply.”
The Australian government is expressing confidence that a crisis could be managed; however, the scale of the turmoil that would flow from a Hormuz Strait closure would far exceed the government’s contingency planning.
The shock from soaring oil prices would also undermine the emerging hopes for a global economic recovery, damaging consumer and business confidence and depressing the terms of trade for oil-importing nations.
Resources Minister Martin Ferguson told The Australian that any reduction of oil throughput in the Strait of Hormuz would inevitably affect global supply.
“The possible impact on Australia will depend on a range of factors, including the length of disruption.”
He said the national energy security assessment completed last year had established that the security of Australia’s supplies of liquid fuels was “robust, with resilience enabling the market to adjust to meet demand in the event of temporary global shocks”.
However, the Australian government is as politically exposed to a new oil crisis as is the Obama administration. Already, the rising oil price is feeding the Coalition’s argument that Australia can ill afford to be introducing carbon taxes.
It will put increasing pressure on the cost of living.
If rising prices turn into a full-blown oil crisis over the next few months, the case for abandoning the introduction of the July 1 start-up for the carbon tax would become overwhelming.
Australia is far more vulnerable to an oil crisis than the level of direct imports from the Middle East would suggest.
Australia’s oil refineries, which still supply 70 per cent of domestic petroleum products, depend on the Middle East for barely 15 per cent of their crude oil supplies.
Domestic oil wells, mostly in Bass Strait, supply 20 per cent, while the balance comes from more than 20 nations including Malaysia, Indonesia, Papua New Guinea, Nigeria and New Zealand.
However, Australia also imports 30 per cent of its refined petroleum products, mostly from Singapore, which depends on the Middle East for more than 80 per cent of its supplies.
The Australian government conducted a review of its energy security late last year. The consulting firm ACIL Tasman modelled a supply disruption in which Singapore’s refineries were out of action for 30 days, depriving the region of 1.4 million barrels a day of production.
This would be similar to the effects of Hurricanes Katrina and Rita, which knocked out Gulf of Mexico oil production and US oil refining in 2005.
One of the study’s authors, Alan Smart, says the shortfall pushed up prices but this was sufficient to close the gap, with demand falling and new supplies becoming available.
“When the price spiked, the market responded very quickly with the gap filled within six days.”
The study concluded that the same could be expected were Australia to lose access to Singapore supplies, with spare capacity elsewhere in Asia quickly brought onstream.
The study found that although prices would rise by 18 per cent, there would be no interruption to economic activity in Australia.
Smart cautions, however, that a localised or regional supply problem such as a refinery shutdown, may be very different from the results of a war in the Middle East.
Singapore analyst with the oil research company Wood Mackenzie Sushant Gupta says that scenarios for a closure of the strait show a major impact on oil supplies throughout the Asian region.
“There is a high dependency on Middle East crude, not just in Singapore, with some economies taking more than 90 per cent of their crude from there.”
Gupta says the spare capacity in the Asian refining industry would be of no use to Australia if the refineries could not get access to crude supplies.
Moreover, countries throughout the region would be principally concerned to secure their own domestic supplies. Countries such as South Korea, which import petroleum but export refined products would divert more of their output to their own market.
Exports from countries such as Malaysia and Indonesia could also fall, at least as a short-term response.
Gupta says that in the event of shortages, Australia would suffer from being at the greatest distance from the regional refineries.
“All the Asian countries will be competing for the same barrels of produce from Singapore. The premium on the products will increase and the countries closest physically to Singapore will have the advantage due to freight.”
Gupta said there would be no additional supplies coming forward to meet shortfalls from Singapore, so it would be up to the market, with a spike in prices, to reduce demand.
So, although Australia currently draws the bulk of its supplies from non-Middle East supplies, the reality is that it is self-sufficient for only 20 per cent of supplies, and the market’s ability to supply the rest would be tested by an extended blockade in the Gulf.
An immediate response would be the drawdown of emergency supplies kept by all nations that are members of the International Energy Agency.
The IEA was established among oil importing countries in the wake of the 1973 OPEC oil embargo and requires all members to keep a minimum of 90 days’ supplies.
In Australia’s case, the reserves are held by the major oil companies as part of their normal commercial operations. The steady slide in Australia’s domestic oil supply has meant that Australia’s reserves are falling short of the requirement, currently standing at 88 days.
ACIL-Tasman warns that the shortfall is likely to increase over coming years; however, it is not enough to make a meaningful difference to Australia’s ability to withstand a crisis.
Ferguson retains sweeping powers under the Liquid Fuels Emergency Act to order the oil companies to give priority to essential fuel users in the event that the nation were confronted with physical fuel shortages.
It is not certain that Iran would succeed in an effort to block the strait, despite the total width of the waterway narrowing to 40km.
Many tankers were sunk during the Iran-Iraq war in the early 1980s; however, shipping technology has greatly advanced since then.
Although modern ships ostensibly make a much larger target, carrying as much as two million barrels of oil each, they are divided into sealed compartments with double-hulls and are much harder to stop or sink, even than warships.
US analysis finds that an attack on one of these vessels by three anti-ship cruise missiles would have only a 12 per cent chance of stopping it.
The same research project found Iran would have to sow a minefield with more than 1000 advanced mines, a task that would take several months, to disrupt shipping, and that would succeed in disabling only half a dozen ships.
The head of the US joint chiefs of staff, General Martin Dempsey, has said Iran would have the capacity to block the strait, but only for a short period.
“We’ve invested in capabilities to ensure that if that happens, we can defeat that.”
The US Fifth Fleet, stationed on the other side of the Persian Gulf in Bahrain, including more than 20 ships including aircraft carriers, could overwhelm the sort of “small suicide boat” attacks which the US believes Iran is planning and provides a credible support to tanker fleet.
American oil researcher Amy Myers Jaffe says it would be difficult for Iran to stop the flow of oil from the Arabian Gulf for long, if at all.
What is beyond doubt, however, is that the moment Israeli aircraft start bombing Iran, the oil price will jump. It has already risen from about $US105 a barrel to $US125 since the start of the year.
The impact on Australia has been diluted by the strength of our currency, which means wholesale petrol prices have risen by only 5.5 per cent this year, but further rises are in prospect.
An analysis by Barclays Capital suggests the oil price would rise to $US150 to $US200 a barrel in the event of an attack; however, estimates are imprecise.
As well as the loss of supply, there would be additional demand from buyers seeking precautionary stocks.
Westpac’s head of international economics, Huw McKay says the world economy remains vulnerable to oil price spikes and adds this was shown in the first half of last year when the Arab Spring pushed oil prices higher.
“That put a spanner in the works for the United States economy at a time when it had finished calendar 2010 with a bit of an upswing. When it ran into the high oil prices and then the Japanese tsunami, the US had a very underwhelming first half year.”
Mr McKay says the situation is similar, with consumers beginning to show a revival in demand. “What the US consumer doesn’t need is a fuel tax hitting them.”
The jump in petrol prices both damages consumer spending and causes an exodus from US motor vehicle industry.
Higher oil prices will also damage the economies of Asia. In several Asian economies, including India and Indonesia, government subsidies to petrol means that rising fuel prices results in a loss of control over the budget.