Lng industry operating under price shock environment

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.

6/25/16 2

LNG Industry: Operating Under Shock Environment

Background •  Prices were very sa2sfactory to the producers.

•  Market situa2on encouraged new players to join

the LNG game.

6/25/16 3


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.

6/25/16 4


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

6/25/16 5


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)

6/25/16 6


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%)

6/25/16 7



6/25/16 8



6/25/16 9



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.

6/25/16 10


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)?

6/25/16 11


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

6/25/16 12


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.

6/25/16 13


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.

14 6/25/16 LNG Industry: Operating Under Shock Environment


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.


Will the current oil price affect the oilfield service?


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.


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.

19

6/25/16 LNG Industry: Operating Under Shock Environment

Economy & Finance

Lng industry operating under price shock environment