Downsizing

Jake in January 2015:

I am not convinced the future of the oil industry lies solely with giant, complex mega-projects in very challenging locations.

 

With countries being able to raise their own financing and smaller, cheaper, faster projects becoming the norm, the lumbering giants which have dominated the industry for a century might find their opportunities drying up in the coming years as sleeker, more efficient companies provide the right mix of technology, delivery, and cost.

Such a move would be somewhat of a volte-face from the mega-mergers of the late 1990s which appeared to confirm leviathans exploiting vast economies of scale were the future of the industry.

In my opinion, the oil and gas landscape has changed dramatically in the last decade, and not to the benefit of large, private, western oil companies.

Tim Daiss over at Forbes last week:

Thai-state owned oil and gas company PTT will delay its long-term liquefied natural gas (LNG) buying plans and opt instead to make purchases on the spot market. The country inked long-term contracts with both BP and Shell in August 2015 to procure 1 mtpa from each oil company. At the time PTT was also in talks with Qatargas to extend a 2 mtpa 20-year supply deal already in place.

However, changing dynamics are in play. Total LNG output last year reached 250 mtpa, a new high, while prices for the super-chilled fuel have dropped in lock step with the plunge in oil prices and in concert with a supply glut that will only worsen well into the next decade.

[M]ore FSRU units (with cost advantages and time development advantages over onshore receiving and regasification facilities) will be built by smaller players to take advantage of lower prices and producers’ need to unload cargoes.Also, a shift away from large CAPEX intensive LNG projects to medium-scale and small scale projects will change the LNG sector of the future.

These smaller LNG projects will not have the huge financial burden of their larger counterparts and will be able to adapt more quickly to both changes in the market and to opportunities that these newer smaller more marginal buyers will bring.

The shift I talked about seems to be underway.  Until recently, many people believed that Shell’s giant Prelude FLNG project would pave the way for a whole fleet of them (assuming there wasn’t an almighty bang shortly after startup).  It might well be the case that, like the Tsar Bomba, the Saturn V, and the Antonov An-225, it will be the only one of its kind ever built.

“We’re thinking of renaming it Spruce Goose.”

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2 Responses to Downsizing

  1. phil says:

    I think Golar is a prime example of a company who see their future with small projects where they can quickly (relatively) bring a generic LNG barge to produce small reserves before going off to use it again on another project in 5/10/15 years.

    It will be interesting to see how the Perenco deal works out as i imagine there are plenty in the Gulf of Guinea who would like to get their stranded gas to market.

    • Jake Barnes says:

      quickly (relatively) bring a generic LNG barge to produce small reserves before going off to use it again on another project in 5/10/15 years.

      I think this is spot on: we will see proliferation of these, and a lot fewer of the giant $10bn+ LNG projects. Where that leaves the supermajors is anyone’s guess.