LNG  Industry:    Opera2ng  Under  Price  Shock    Environment    

Presented  by:  Abdelrahman  Mohamed                                                      Contracts  Engineer/Supply  Department  

Background  •  LNG  industry  has  witnessed  remarkable  booming  

throughout  the  last  20  years.                

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LNG Industry: Operating Under Shock Environment

Background  •  Prices  were  very  sa2sfactory  to  the  producers.  

 •  Market  situa2on  encouraged  new  players  to  join  

the  LNG  game.  

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LNG Industry: Operating Under Shock Environment

Background  

•  Due  to  this,  cost  of  new  LNG  projects  escalated.    •  At  a  certain  point  ,  prices  dipped  due  to  improved  

technology.    •  But  then,  cost  significantly  increased:    

v  Contractor’s  demand  (i.e.,  profit  margin  and  risk  con8ngencies).  

   v  Rise  in  cost  of  Materials/Equipment.  

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LNG Industry: Operating Under Shock Environment

 Cost  Escala2on    

•  According  to  P&P  (Poten  &  Partners):  v  In  2004,  cost  of  Greenfield  LNG  plant  was  approximately  $210  t/yr    v  In  less  than  2  years,  the  price  jumped  to  $250-­‐$350  t/yr  v  6  years  later,  price  exceeded  the  level  of  $500  t/yr    

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LNG Industry: Operating Under Shock Environment

 Cost  Escala2on    

•  Cost  of  some  LNG  projects:      

Ø  Ras  Gas  III  (early  2009):    $256  t/yr      Ø  Yemen  LNG  (late  2009):    $300  t/yr      Ø  Tangguh  LNG  (Indonesia/BP):  18  month  delay  in  investment  decision  led  to  an  increase  from  $1.4  B  to  $1.8  B.  

 Ø Woodside  Petroleum  (Australia):    $571  t/yr  (total  cost  jumped  from  $2B  to  $2.4B)  

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LNG Industry: Operating Under Shock Environment

 New  LNG  Projects:  Case  Study  

•  According  to  Project  Cost  Analysis  (By  SPE  Founda=on)  

o  Projects  Surveyed:  118  (from  year  2002  and  forward)  o  Project  Cost  Range:  $0.340  billion  to  $6.8  billion  o  Project  Loca=on:  North  America  (5%);  Middle  East  (22%);  Asia  (19%);  West  Africa  (25%);  South  America  (16%);  Europe  (5%);  South  Africa  (5%);  Mexico  (3%).  

o  Type  of  Projects:  LNG  (17%);  Mineral  (17%);  Chemical  (14%);  Oil  Refining  (7%);  Oil  and  Gas  Field  Develop.  (45%)  

o  Contrac=ng  Strategy:  EPC  lump  sum  (71%);  Reimbursable  EPC  (7%);  Reimbursable  EPCM  (17%);  and  Other  (5%)  

o  Contractor  Selec=on:  Bid  (61%);  sole  source  (10%);  preferred  (29%)  

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LNG Industry: Operating Under Shock Environment

 New  LNG  Projects:  Case  Study  

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LNG Industry: Operating Under Shock Environment

 New  LNG  Projects:  Case  Study  

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LNG Industry: Operating Under Shock Environment

 New  LNG  Projects:  Case  Study    

     Reasons  for  sudden  rise  in  prices        §  Increase  in  LNG  projects  Vs  limited  LNG  experienced  

Contractors  (Supply  &  Demand  mechanism).    §  Significant  boost  in  raw  material  prices  (steel,  cement).    §  Most  of  the  LNG  projects  have  been  awarded  as  EPC  Lump  

Sum.  Contractors  have  a  hard  8me  holding  prices,  the  only  way  to  hedge  their  posi8on  is  by  charging  risk  premium.  

 

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 Oilfield  &  Contractor’s  Profit  Margin  

 •  Even  though  Oilfield  services  (construc2on,  drilling,  maintenance,  etc.)  have  become  easier  and  more  efficient,  yet  Oil  produc2on  costs  have  gone  through  the  roof.    

 •   When  oil  service  firms  nego2ate  contracts  with  produc2on  companies,  

they  usually  take  the  oil  price  into  considera2on.    •  Significant  increase  in  Contractor’s  profit  margins  

q  2%  to  5%  from  1990  -­‐2002  q  9%  to  12%  from  2004  and  2005    

•  When  you  add  the  Risk  Premium  (5%  to  7%)  ,  Contractor’s  profit  margin  can  easily  hit  the  level  of  20%.      

   But  as  the  oil  price  drops,  do  we  expect  reduc2on  in  service  costs    (bringing  the  “break-­‐even”  price  down)?  

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 The  Slump  in  Global  Oil  &  Gas  Prices  

   

•  World  Bank:  “In  2015,  crude  oil  will  average  around  $96/bbl”.  •  In  January  2015  oil  traded  around  $49/bbl.  (lowest  price  since  2009).  •  Asian  LNG  spot  price  dropped  from  $20  to  $10/  mBtu  

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The  Slump  in  Global  Oil  &  Gas  Price  

•  With  this  low  price,  many  producer/countries  can’t  survive.    •  Although  the  produc2on  price  is  extremely  important,  but  for  some  countries  Budgetary  Price  is  equally  important.  

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What  is  Driving  the  Oil/LNG  Price  Plunge?  

•  Cocktail  of  supply,  demand,  and  geopoli2cal  condi2ons  have  created  a  surplus  of  crude  oil  which  has  driven  down  the  price.  o  Significant  increase  of  US  crude  oil  due  to  shale  oil  boom.      

•  Demand  slowdown  in  Europe,  Japan,  and  China.      •  Decision  of  Saudi  Arabia  to  protect  market  share  rather  than  act  as  a  

swing  producer  of  oil.      •  LNG  price  is  well  correlated  with  Oil  price.  

o  On  average,  price  of  one  million  Btu  is  16%  of  a  barrel  of  oil.  o  $50  to  $60  of  Oil    pushes  LNG  price  down  to  around  $8  to  $9.6  (on  

contract).  o  Spot  prices  might  even  be  lower.  

 

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Will  the  current  oil  price  affect  the  oilfield  service?    •  E&P  companies  have  been  under  large  pressure  due  to  massive  reduc8on  in  revenues.  

 •  They  reacted  by  :  delay/cancel  projects,  downsize  their  capacity,  and  reduce  their  investment  commitments.  

 •  In  a  recent  study  prepared  by  Rystad  Energy  Corpora=on      

Ø  The  combined  OFS  purchases  are  expected  to  grow  with  an  average  annual  rate  of  4.5%  towards  2020  (at  $110  oil  price).  

Ø  The  expected  annual  growth  rate  is  3.5%  (at  $80  oil  price).  But  the  current  oil  price  is  lower  than  $80!    

Ø  In  total,  there  is  about  $400  billion  of  OFS  purchases  that  can  be  shaved  from  the  2014-­‐2020  market,  70%  of  which  in  offshore.  

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Will  the  current  oil  price  affect  the  oilfield  service?  

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Will  the  current  oil  price  affect  the  oilfield  service?  

•  Petroleum  Services  Associa8on  of  Canada  (PSAC)  expects  a  drop  in  oilfield  service  ac8vity  including:    drilling,  construc8on,  fracking  services,  and  manufacturing.  

 •  According  to  PSAC,  new  wells  that  will  be  drilled  in  2015  might  drop  by  32%.  

 •  “There  is  enormous  pressure  on  service  companies  to  cut  costs  even  in  the  face  of  slim  margins.”  

 •  Major  Oil  &  Gas  Companies  have  been  approaching  oilfield  companies  asking  for  breaks  on  service  prices.  

 

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CONCLUSION  •  As  oil  price  drops,  Opex/Capex  of  E&P  Companies  should  also  drop  in  

order  to  bring  the  “break-­‐even”  price  down.    •  E&P  Companies  will  probably  renego8ate  the  service  cost  in  different  

ways  (like  bargaining  at  a  Turkish  Bazaar).    

•  The  Service  Cost  reduc8on  rate  probably  won’t  match  the  drop  in  Oil/LNG  price  ,  but  “something  is  be`er  than  nothing”.      

•  In  Qatargas,  we  managed  to  reduce  the  margin  of  Manpower  Service  Companies  from  15%  to  10%.  

 •  Other  companies  (QP  &  Rasgas)  are  trying  to  apply  our  model.  

•  Awarding  contracts  in  Euro,  GBP,  or  Yen  will  probably  be  of  benefit.  

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