FERC has full workload with LNG export projects"

by Larry Persily

​(NGP Photos: Larry Persily (L) and FERC Commissioner Tony Clark)

ConocoPhillips Adds New Oil to the Trans Alaska Pipeline

Yesterday, ConocoPhillips Alaska Inc. announced that Kuparuk Drill Site 2S (DS2S photo) began producing oil, under budget and ahead of schedule. The project was approved for funding in October 2014, and production was originally expected in December.

This is the first new drill site at Kuparuk in more than 12 years. DS2S is expected to add about 8,000 barrels of oil per day (BOD) gross at peak production.

“Drill Site 2S is one of the key projects that we announced after passage of tax reform,” said Joe Marushack (NGP Photo), President, ConocoPhillips Alaska. “The $475 million project created about 250 jobs during construction, with numerous contractor companies and trades involved.

"We thank them for their effort to bring the project in ahead of schedule and for their commitment to working safely," Marushack said.  (See full release here.)

Notes:  

1.  BP's 3rd Quarter results will be published in two weeks, on Tuesday, 27 October.

2.  Today our Aussie O&G analyst friend comments today on Alaska's Kenai LNG plant and on liquidation underway within the O&G industry.

3.  Today our Mid-Atlantic O&G analyst friend discusses the declining borrowing capacity of E&P companies.

4.  Arctic Newswire/ADN by Laurel Andrews.  Royal Dutch Shell’s Noble Discoverer drillship left Dutch Harbor Monday afternoon….

5.  Canadian Oil Sands Boom Dries Up, by Ian Austen, New York Times/ADN.

Alaska Support Industry Alliance Trade Show: get your booth before they are gone!  MEET ALASKA will convene on Friday, January 8, 2016, at the Denai’na Civic and Convention Center. Here are the tradeshow application and the layout with numbered booths. The following booths are available today:  8, 10-13, 16-18, 21, 24-29, 34, 35, 37-39, 42-45, 47-49, 57, 58 and 60-63.  Enjoy!  -dh

FERC has full workload with LNG export projects

By Larry Persily lpersily@kpb.us (NGP Photo)
Oct. 13, 2015
 
(Larry Persily, assistant to the Kenai Peninsula Borough mayor, attended a North American gas forum in Washington, D.C., and prepared this report as part of the borough’s ongoing efforts to share information about LNG market developments. No borough funds were spent on travel.)
 
It’s a busy time for LNG project applications at the Federal Energy Regulatory Commission.
 
FERC has files open for almost two dozen proposed liquefied natural gas export terminals. That’s in addition to the five projects already approved by the agency. It was less than a decade ago that federal regulators had almost twice as many proposals for LNG import terminals — but that was before the U.S. shale gas boom ended any need to bring in gas from overseas suppliers.
 
The proposed export projects are scattered across the country, as far east as Maine, south to Georgia and Florida, all along the Gulf Coast and as far north as Alaska — seemingly anywhere there is a pipeline to move the surplus of U.S. shale gas to the coast for liquefaction and shipment to overseas markets. Or, in the case of Alaska, moving an almost 50-year-old gas discovery to market.
 
The agency is devoting more resources to its Office of Energy Projects to handle the workload, Joseph Kelliher (NGP Photo-R, with Dave Harbour), a former FERC chairman, said at the annual North American Gas Forum in Washington, D.C., Oct. 5-6. The higher the quality and the more complete the application — its environmental reports, data and details —the faster it will move, he said.
 
Less local controversy also helps, Kelliher added.
 
But multiple challenges from fossil fuel and LNG project opponents are slowing down the process, he said, as FERC spends more time on each environmental review.
 
THOROUGH ENVIRONMENTAL REVIEWS
 
FERC Commissioner Tony Clark NGP Photo) delivered the same message. The agency works harder and longer on each project to produce a thorough environmental review and decision that will stand up to the expected challenges in court. Several speakers noted it can take two years, or more, to receive a final environmental impact statement and decision on an LNG terminal from FERC.
 
Regardless of increased opposition to energy projects, the applicants — and the public — deserve timely decisions and certainty of law, Clark said. He cited the seven-year wait by TransCanada for a State Department decision on the proposed Keystone XL Alberta-to-U.S. oil sands pipeline as a “debacle.” The State Department, not FERC, decides on cross-border pipelines.
 
Most of the U.S. shale gas bonanza, however, is staying at home. This past spring, for the first time ever, natural gas produced more electricity in the United States than coal-fired power plants. “It was just an absolute sea change that no one could have predicted,” Clark said.
 
Moving all that gas from shale formations to domestic customers and to the coasts for export requires a lot of pipeline capacity, much of which used to move in different directions from traditional gas-producing areas. “We’re changing the piping of the United States,” said Octavio Simoes, president of Sempra LNG, which is building an export terminal at Hackberry, La.
 
For example, instead of moving Gulf Coast gas to the mid-Atlantic and Northeast, pipelines will need to transport Marcellus Shale gas from Pennsylvania and Ohio to the Gulf Coast for export as LNG.
 
The boom in shale gas production has made the United States a must-see for foreign buyers of LNG, looking for new supply sources to diversify their portfolio. And looking for lower prices.
 
Most U.S. gas is quoted as “Henry Hub,” the name given to the pricing point for natural gas futures contracts. The trading benchmark is a distribution hub where several major gas pipelines connect in Erath, La. Simoes told the story of a group of overseas buyers who wanted to tour the “Henry Hub,” mistakenly thinking there might be something to see. But Henry Hub is merely an aboveground metering station. “There were 40 of them and they took a lot of photos,” Simoes said.
 
Sempra’s project, called Cameron LNG, is adding liquefaction and export capability to an underutilized import terminal. Commercial operations are set to start in 2018, Simoes said, and already Sempra is thinking about expanding the plant’s capacity.
 
Until global LNG markets settle down and develop a new pricing structure, Sempra expects to see more short-term contracts rather than the traditional long-deal deals.
 
INVESTMENT DECISIONS GET TOUGHER
 
Too much new supply going after weak demand, coupled with the lowest prices in years, is making it tough on developers thinking about investing in new projects. Several speakers said that reluctance could mean tight global supplies in the 2020s.
 
“We think there is substantial risk of supply the end of the decade and into the next,” said Anatol Feygin, a senior vice president at Cheniere Energy, which is scheduled to open in Sabine Pass, La., the first LNG export terminal in the Lower 48 states by the end of the year.
 
There have been a lot of big changes in global LNG markets in just the past few years with new, lower pricing options, more flexible contract terms, and multiple new supply options from Papua New Guinea, Australia, the United States, as well as hopefuls from Canada to Israel to East African nations. “The world has not yet recalibrated to this new normal,” Feygin said.
 
Until that adjustment, low prices and fears of a long price recovery add uncertainty to investment decisions. “The economics on projects are quite stressed,” said Don Lemoine, vice president for gas monetization at global construction contractor Kiewit Energy Group.
 
Despite the turmoil, some fundamentals remain important. Buyers want known, reliable suppliers with a strong balance sheet, Simoes said. And suppliers still need long-term sales contracts to underpin the billions of dollars in financing needed to build an LNG project. Without that matchmaking, companies will not make final investment decisions and the market could be short of gas in the 2020s — and buyers will complain about high prices as they did in the past few years.
 
In addition to the Sempra and Cheniere projects, three other LNG export terminals are under construction in the United States — two in Texas and one on Chesapeake Bay in Maryland. And though U.S. LNG export promoters talk a lot about selling into the large Asian market, Europe and several emerging markets look good, too, Feygin and Simoes said.
 
MORE OPPORTUNITIES TO SELL LNG
 
“We’re not putting as many eggs … into the Asian basket as we did two or three years ago,” Feygin said of Chienere’s marketing efforts. Asian demand will depend in great part on how many nuclear power plants are restarted in Japan, and whether China’s economy and energy demand returns to strong growth. European demand will build over time, Feygin said, as will the Middle East which is increasingly looking at LNG to fuel its electrical generating plants.
 
Add to the list Pakistan, Thailand, the Philippines, South Africa, Argentina, Brazil and Chile, Simoes said. All are buying more LNG or starting to import the fuel. “I could go on and on with the list.”
 
How much European LNG demand grows will depend on the price of oil as a competing fuel, whether countries impose or raise carbon taxes, if local gas production continues to decline, and how much Russia fights — and lowers its prices — to protect its prime market.
 
“Russia has learned its lesson,” and is offering better contract terms, said Svetlana Ikonnikova, an energy economist at the University of Texas at Austin. Russia’s big exporter, Gazprom, makes most of its profits from gas sales to Europe and has taken note that many of its customers can take LNG as an option.
 
Some, like Lithuania, opted for a floating import terminal, rather than building a much more expensive and time-consuming onshore project. The floating storage and regasification unit (FSRU) takes delivery from an LNG carrier, stores it onboard until it is needed, then regasifies the fuel and pipes it to shore.
 
Egypt just tied up its second FSRU, and Jordan and Pakistan are also turning to floating terminals, along with several South American countries. At least nine older LNG carriers have been sold this year, likely targeted for eventual conversion to FSRU vessels. Global FSRU import capacity jumped five-fold between 2008 and 2015, and could reach 130 million metric tons of LNG per year by 2021, Feygin said.

Today’s Blog – Tuesday 13th October 2015 by AO&GOblogster Please pass on this blog to others you think may like to read it Introduction Data from two separate sources confirms what many industry observers currently consider to be the case: the oil patch is currently in liquidation mode. The first data point is in respect to exploration expenditure.  Without exploration, reserves cannot be replaced, let alone expanded, but expenditure on this critical input has been slashed in the last couple of years.  Recent data from energy specialists, Tudor Pickering Holt (TPH) expects the exploration spend in 2016 (for the companies it covers) to be around half what is was in 2013. And 2013 expenditure fell dramatically short of delivering discoveries that would cover consumption. Furthermore, TPH's coverage universe is basically the larger companies in the global private sector – who are the drivers of exploration much more than the NOCs. The second data point covers that other source of new reserves for the larger oil companies – acquiring their smaller brethren.  However this sector has also seen a dramatic decline in expenditure.  Dollars spent on acquisitions in the last quarter only totalled US$18B – 60% less than the quarterly norm in the preceding six years. As Shell's CEO Ben Van Beurden noted last week, this lack of current investment creates the material risk of an oil shortfall and associated price spike in years to come. Commodity prices Crude oil prices fell ~5% over-night, with Brent closing at US$50.22 and WTI at US$47.38. This fall feels like a not unexpected natural re-tracement and profit-taking following last week's large rise.  Goldman Sachs is currently a vocal bear and its influence on markets can be material. The particular "numbers" that catalysed the bears on the day was the release of OPEC's monthly report, which showed that its production had increased by 100,000 bopd to 31.57mm bopd (somewhat larger than the official quota of 30mm bopd).  Saudi exports have been increasing as its own demand (summer related – for air conditioning) has relaxed in recent months. In addition to pumping as hard as they can for revenue raising reasons, the Sunni world is also grabbing as much market share as it can prior to more Iranian oil coming back to market. Over at Henry Hub, last night we saw a small rise to US$2.54. LNG The owners of the shiny new liquefaction plants coming on line in Australia have been (rightly) pointing out that, notwithstanding their current travails, these are very long life assets that will generate cash-flows for decades to come. The longevity of liquefaction plants was recently emphasised by Alaska's Kenai plant seeking Federal authorisation to export more gas.  Kenai delivered its first cargo in 1969 and it looks like it will still be selling gas on its 50th anniversary. South of Kenai, in British Columbia, mixed messages continue to emerge in connection with the Province's supposedly most advanced LNG project, the Petronas led Pacific Northwest project.  On the one hand, last week a Petronas spokesman re-assured stakeholders in Canada that the company was still committed to the project.  On the other hand, back home in Malaysia, local analysts have said the project is likely to be deferred to next decade. On this issue, as in many others, one should always "follow the money".  Petronas, and its owner the Malaysian Government, arguably does not have the discretionary funds to invest in an expensive overseas project at this time. Governments  Oklahoma continues to suffer from seismic events that have a potential causal link with oil patch activities.  On Saturday a 4.5 strength earth-quake was felt in the key oil hub of Cushing.   In response, the State Regulator (no enemy of the oil patch) ordered the suspension of local produced water re-injection activities. Meanwhile over in Australia, the South Australian State Government is keen to be seen to "do something" about the closure of the State's only coal mine at Leigh Creek.  To that end it is assisting the promotion of the coal gasification potential of the remaining coal deposits by a small ASX listed company called Leith Creek Energy. Given the history of coal gasification in Queensland, what could possibly go wrong? Company news – Santos (STO) STO yesterday announced an imminent 200 redundancies (on top of around 600 already made earlier this year).  Perhaps your Blogster should postpone his visit to STO's offices asking whether they want to sign a lucrative contract to receive this blog?  Still, the company has the funds to pay for the wages of both of its current CEOs. As has become customary, The Australian Financial Review (AFR) today provided a brief update on the company's asset divestment process. Today the focus seemed to turn away from the Western Australian assets back to PNG. Company news – Central Petroleum (CTP) The AFR also today had a bullish piece on the proposal to link gas resources in the Northern Territory with Eastern Australian though the "NEGI" gas pipeline project. It appears that the AFR was charmed (or bulldozed?) by CTP's well known CEO, Richard Cottee (more commonly known in the media as "the ebullient Richard Cottee") into giving somewhat more weight to the chances of the project going ahead than do the cynics like this blog (once I hear stories about investment grade sellers with reserves signing deals with investment grade buyers, I will instantly change my tune). Company news – CNPC Massive Chinese NOC CNPC (parent of PetroChina) is hardly an Australian company, but overnight news from it has implications in every country in which it invests.  This was the handing out of a 16 year jail sentence to its previous leader Jiang Jiemin for corruption. This followed the conviction earlier this year of another previous company chief, Zhou Yongkang. Managers across the Chinese NOCs will be increasingly cautious about taking any business risks, even entirely legitimate ones, in case they could be tarred with a corrupt brush. Quote of the day Speaking of the ebullient Richard Cottee, a confidential source of this blog told the tale of Richard's analysis of his time at ill-fated Nexus Energy (more sensitive readers should turn away): "Before I joined I knew I was going to be fed a sh*t sandwich.  What I didn't know was there would be no bread!"   From our Mid-Atlantic O&G analyst friend (COMMENT: Please read carefully and apply this trend to the importance of state and provincial governments supporting and not opposing LNG other O&G projects.  That is, if they want the jobs, reasonable (i.e. and not confiscatory) revenue from such projects in an era of low prices and heightened, worldwide competition.  -dh) One of the largest open questions this fall affecting NA shale operators has been the extent to which banks will lower the borrowing capacity of E&Ps. There is a confluence of negative factors weighing on this evaluation that were not present in the past. Among them: ·        Lower natural gas prices than the prior three years ·        A whole year of depressed crude oil prices, and lower at this time of the year than last year ·        A major decrease in hedged future production ·        The likelihood that many E&Ps will reduce their previously booked reserves, especially PUDS In effect, the banks are not going to have much to work with in giving the E&Ps any kind of break. A recent report from RJR describes the process the banks will go through in the current round of redeterminations, and their estimate of the results. This should have a major impact on production going into 2016, and may directly affect the viability of a number of the producers. The next step: How do larger E&Ps approach the distressed? How do the Private Equity firms approach the distressef? RJR speculates that the redeterminations may get even tougher next year, going into 2017. On the “bad activity begets bad activity” theme, it may be possible, but we are not on board with that yet.  There are too many variables and inputs. In coming months, E&P borrowing could be down 20-25%.