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Britain approves airstrikes, Sanctions impact Russia, The Fed Reviews measures...
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LNG Trade Surge Through Panama Canal Upgrade |
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Greetings from London.
Five Oil & Gas Trends you should be following. We have just updated our 5 energy trends report and for those of you interested in seeing where the smart money will be flowing over the coming years and who are looking to position themselves ahead of other investors the report is a must read. Click here to read it now.
US, French and “Arab coalition” airstrikes over Islamic State (IS) positions in Iraq and Syria this week took out black market oil production facilities inside Syria, intending to prevent the militant group’s use of illicit oil sales for funding.
Twelve oil-refining targets were hit overnight on 24-25 September in remote areas of eastern Syria in air strikes conducted by the US and “Arab partner forces”, according to a Pentagon spokesman.
Nearly 20 people were killed in the raids, which the Pentagon said targeted refineries that produced between 300 and 500 barrels of petroleum per day and was used by IS to power vehicles and raise up to $2 million daily on the black market.
In Syria, hard-line rebels aligned with a faction fighting to oust President Bashar Assad—and previously supported on some level by the US, fled their bases in fear of air strikes as this complicated war zone makes everyone a target.
Air strikes on Syria are now entering their fourth day. On 23 September, some 200 air strikes were launched against two dozen targets in Syria.
Washington has described Syria as an unreliable partner in the fight against IS, although media notes the skepticism of some of the strategy here as the Assad regime could benefit from the air strikes.
In Iraq, raids and air strikes have been ongoing for over a month.
The fallout will be as extensive as the militants are diverse. Algerian extremists aligned with IS claimed on 24 September to have beheaded a fourth hostage, a Frenchmen taken captive last weekend in Algeria—in retaliation for France’s involvement in the airstrikes.
British Prime Minister David Cameron has won parliamentary approval to join US-led airstrikes on IS in Iraq as the House of Commons voted 524-43 in favor of action after being recalled from a recess. Belgium and Denmark have also voted in favor of joining the coalition.
The Dutch government has also announced it would send six F-16 fighter jets and 250 pilots to join the strike force.
On another conflict front, fighting in eastern Ukraine appears to be waning as attention—at least for the oil and gas industry—is focused more on US and European Union sanctions against Russia on another frontline in this battlefield.
New US sanctions against Russia--"designed to effectively shut down this type of oil exploration and production activity by depriving these Russian companies of the goods, technology, and services that they need to do this work"—are now taking their toll on massive oil and gas projects.
The sanctions target Rosneft, Lukoil, Gazprom, Gazprom Neft and Surgutneftegas, and imperil exploration and production from deep-water, Arctic offshore, shale and LNG projects in process.
The first key project to get caught in the crossfire of this sanctions battle is Exxon Mobil’s drilling project in the Kara Sea in the Russian Arctic, for which drilling is now being halted and equipment removed.
French Total SA is also reeling from the sanctions, and will now be forced to seek non-dollar financing for its Yamal liquefied natural gas (LNG) project. Total has also been forced to put paid to its joint venture with Lukoil to explore shale oil in western Siberia.
Also this week, the winding down of extraordinary measures taken by the US Federal Reserve to ameliorate the effects of the financial crisis could reverberate through energy markets, Oilprice.com reported on 25 September.
This week’s analysis comes from the Executive Report in Premium and takes a look at how the Panama Canal will impact the global LNG market – the full report is below.
Please do also click here to receive this week’s Premium service for free. You can read Dan Dickers latest thoughts on natural gas stocks, Martin Tillier looks at alternative energy investments, Jim Hyerczyk makes his weekly forecasts for the oil markets and our Intelligence Notes cover all important geopolitical events from the week and the impact they are likely to have on regions, markets and companies – and it’s all free. Click here to start your free trial now.
That’s it from us this week. I hope you enjoy the below report and have a great weekend.
Best regards,
James Stafford
Editor, Oilprice.com
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What's in Oil & Energy Premium this week: |
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Inside investor |
• Weather Forecast Looks Bright For LNG But I’m Skeptical |
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Inside Opportunities: |
• A Big Pension Fund Is Investing Heavily In Clean Energy. What Should You Do? |
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Executive Report: |
• Panama Canal Expansion to Grow LNG Trade |
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Inside Markets: |
• Oil Market Fundamental & Technical Analysis – 26th September 2014 |
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Inside Intelligence: |
• Iraqi oil exports down as US begins airstrikes against IS |
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Panama Canal Expansion to Grow LNG Trade |
The U.S. is in a relatively strong position to take advantage of Asian demand for natural gas. There are now a total of three proposed export terminals for liquefied natural gas (LNG) in the U.S. that have achieved all the necessary permits.
With full federal approval, political risk for LNG exports can be laid to rest. Now, the bigger challenge for LNG exporters is finding and securing a captive market for their product. In this regard, there is a lot to be excited about as well.
But investing in U.S. LNG exporters is not without risks. For one, a rapid rise in demand for LNG in Asia is suddenly looking a bit less of a sure thing. That is largely due to China’s flagging growth rate.
More importantly, American producers will face stiff competition from their Australian counterparts. A massive volume of liquefaction capacity is set to come online over the next several years. Australia is bringing online 62 million tonnes per year (mtpa) of LNG export capacity by 2018, which is a staggering figure considering the country only has 22.2 mtpa today. And they are much closer to the markets of China, Japan, and South Korea.
That proximity lowers shipping costs, which may seem nominal considering the cost of production, liquefaction and regasification. But lower shipping costs could be just enough to make the difference in winning long-term contracts. Australia, therefore, is sitting in the best possible spot to serve the hungry consumers in East Asia.
The equation could be upended, however, due to one massive infrastructure project: the expansion of the Panama Canal.
The Panama Canal just passed its centennial, having been inaugurated in August 1914. For 100 years the canal has allowed shorter shipping times between Atlantic and Pacific nations. But the canal is vastly outdated as it cannot handle modern super tankers. Its system of locks and passages are too small and too narrow for the ships that carry enormous loads of crude oil or LNG. For that reason, the Panama Canal is currently not a major thoroughfare for energy.
That is set to change with the historic expansion of the canal. Through an international consortium, Panama is building an additional set of locks that can handle much larger vessels.
As it stands, only ships with the capacity to carry 400,000 to 550,000 barrels of oil can pass through the canal. Known as “Panamax,” these ships of 80,000 deadweight tons (dwt) tend to be on the smaller end of oil tankers used in global trade. The expansion will lift the upper limit of ship sizes to 120,000 dwt, with the ability to carry 680,000 barrels of crude (see chart).
When completed, an estimated 80 percent of the global LNG shipping fleet will be able to pass through those narrow waters. Currently, the canal cannot handle any LNG ships.
The big question is when it will be finished. Having initially been approved over seven years ago, the project is now wildly over budget and behind schedule. The original price tag was just $5.2 billion, but that may balloon to $7 billion when all is said and done. The project suffered from a halt in construction in early 2014 over whether or not the consortium building the expansion would be reimbursed for the higher costs. The canal was expected to open in October 2014, but the start date has slipped to the end of next year or the beginning of 2016.
Despite the setbacks the canal expansion could alter patterns of trade for LNG. Only Trinidad and Peru have liquefaction facilities in the Americas, the latter of which would not need the Panama Canal to reach Asia. The completion of the canal will coincide with the commencement of operations for some of the first major LNG export terminals on the U.S. Gulf Coast. When U.S. liquefaction facilities come online, they will discover that there will be a shorter route to Asia.
This could provide larger opportunities for American LNG suppliers as they compete in the global marketplace. Cheniere Energy (NYSE: LNG) hopes to be the first supplier in the U.S. to begin operation. At its Sabine Pass facility in Louisiana, already equipped to handle incoming LNG, Cheniere plans on adding two liquefaction trains by the end of 2015, with two more to be built in the 2016-2017 timeframe. Each train will be able to export 4.5 mtpa. Cheniere already has a contract in hand with Korea Gas, which plans on purchasing 3.5 mtpa for 20 years beginning in 2017. A similar contract was agreed to with Gail India, with deliveries set to begin in 2016.
The Panama Canal expansion will allow Cheniere to cut costs for its deliveries. According to the Panama Canal Authority, travel times for Cheniere from the Gulf Coast to East Asia could be cut from 63.6 days down to 43.4 days, reducing costs by 24%.
Another big winner is the Cameron LNG facility. It received final approval from the U.S. Department of Energy in early September 2014, greenlighting construction. The $10 billion facility is owned by Sempra Energy (NYSE: SRE), which has a 50.2% stake. Three other companies each own a 16.6% stake in the LNG export project: GDF Suez (EPA: GSZ); Mitsubishi Corporation (TYO: 8058); and Mitsui and Co. Ltd. (TYO: 8031).
Mitsui’s role is an interesting one. It holds upstream assets in the U.S., with shale gas holdings in the Marcellus and Eagle Ford Shales. It will pay the Cameron LNG facility a “tolling” agreement – essentially a fee to liquefy its gas and transport it. Mitsui contracted out tolling capacity for 4 mtpa for 20 years. Mitsui also has its 16.6% stake in Cameron LNG. All of this provides a level of stability for the project – it has a certain amount of upstream supply guaranteed, as well as steady toll fees that aren’t subject to price volatility.
The Panama Canal will reduce costs for this project as well.
Another set of winners will be the shipping owners. With shipments from the U.S. to Asia set to increase, there are a few companies that stand to gain. Teekay LNG (NYSE: TGP), which is the third largest owner of LNG ships, is banking on increased marine traffic to boost its bottom line. It has booked five-year contracts for two of its ships to carry U.S. LNG.
Golar LNG (NASDAQ: GLNG), another LNG shipper that is eyeing rapid growth over the next few years. It has 13 ships under its management right now, but it is building more as quickly as it can in order to take advantage of rising demand for marine vessels. Golar is also building floating LNG liquefaction vessels. The ships will be able to liquefy natural gas at offshore fields, and ship directly from there. Golar is building 10 units over the next five years. In a vote of confidence, Bank of America upgraded Golar LNG’s stock to a “buy” rating because of strong demand for its services.
The LNG trade is in a holding pattern of sorts as a flurry of construction is still underway. But beginning in 2015, and definitely by early 2016, LNG trade will take off. The Panama Canal expansion will be completed just in time, and will play a key role in facilitating trade flows between the U.S. and Asia.
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