Midyear International Report: Pipeline Construction & Market Trends

August 2017, Vol. 244, No. 8

By Jeff Awalt, Executive Editor

The global oil and gas industry closed 2016 with cautious optimism that the worst of a prolonged downturn might be over. Midway through this year, there is growing confidence that 2017 marks a turning point in several key areas that drive long-term demand for natural gas development and pipeline construction.

While the industry still faces a challenging year, analysts believe the oil and gas industry is on a firmer footing in 2017 than at any time in the previous two years.

Turning Point

Wood Mackenzie projected earlier this year that exploration should return to profitability in 2017 after five years of only single-digit returns and predicted that 2017 will be a turning point for the global gas market. The firm reiterated the theme in a mid-year report that the 15 upstream projects which have reached final investment decision (FID) in the first half of 2017 already exceeds 12 in all of 2016 and could double to 25 this year.

“There are positive signs that the upstream industry is continuing on the road to recovery and that the more competitive conventional projects are moving down the cost curve sufficiently to attract new investment,” said Angus Rodger, research director, Asia-Pacific upstream at Wood Mackenzie.

ExxonMobil announced it will start five major offshore projects in 2017-18, and the Wood Mackenzie report highlighted the company’s June sanction of the first phase of development on its 1.5 bboe Liza oil field offshore Guyana as a positive example of the majors’ long-term view.  “This goes to show that it is not just about short-cycle investments; the best greenfield opportunities are also moving forward to commercialization,” Rodger added.

A Barclays survey projected global exploration and production spending to increase 7% this year, driven by a 27% increase in North America spending, compared with a 38% decline in 2016. International spending was predicted to increase 2% vs. an 18% decline last year.

Douglas-Westwood’s World Onshore Pipelines Market Forecast offered more reason for optimism over the next five years, projecting global installations will exceed 276,000 km (171,500 miles). Douglas-Westwood said total onshore pipeline capital expenditures are expected to increase about 5% through 2021 to $203 billion, compared with $194 billion in the preceding five years, with North America and Asia accounting for 53% of global spending over the forecast period.

Addressing the looming competition between Russian gas and U.S. LNG in Europe, Wood Mackenzie predicted 2017 will be a turning point for the global gas market. “With new post-FID projects supplying the markets from Australia, the U.S. and Malaysia, LNG supply is set to increase.” The report projects U.S. LNG exports will hit 11 million tons in 2017, up from 4 million tons in 2016

Market Trends

Natural Gas

Preliminary estimates by Cedigaz show global natural gas demand in 2016 continued to grow at an annual rate of 1.6% to 3,528 Bcm, while low prices and harsh upstream conditions caused global natural gas production to stagnate, marking a break in the average growth rate of 1.8% during the previous five years.

Commenting on the impact of the weak price environment on natural gas markets in 2016, BP Group Chief Executive Bob Dudley noted in BP’s June 2017 Statistical Review of World Energy that global gas production was essentially flat, adding, “This is the weakest growth in gas output for 34 years, other than in the immediate aftermath of the financial crisis.”

Cedigaz Chief Economist Armelle Lecarpentier said the international gas association’s mid- and long-term projections suggest global demand for natural gas will continue to grow approximately 1.6% a year through 2035. The projection compares with 2.2% annual growth over 1990-2015, with the decline attributed to improved energy efficiency and the strong expansion of renewables. Emerging economies represent over 85% of the projected growth in demand. China alone accounts for 28% of the projected demand growth, Lecarpentier said, followed by the Middle East at 24%.

“In percentage terms, renewables is the fastest growing category, but in absolute terms, natural gas will still have the largest growth, and we see the growth in absolute consumption of natural gas will outstrip that of all other energy resources,” Lecarpentier said, adding that the main drivers to growth include the expected strong expansion of LNG supply and the vast availability of resources, with supplies boosted by unconventional gas in North America and Asia, as well as conventional gas in Russia and the Middle East. Cedigaz predicts that unconventional gas will account for one-third of global gas production by 2035, compared with only 20% today.

“We anticipate significant expansion of intra-regional and long-distance pipeline trade and a crucial need to build new infrastructure in emerging markets of the world, including Asia, Africa, the Middle East and South and Central America,” Lecarpentier said. “LNG will have a growing share in inter-regional trade, driven by emerging markets – especially China and India, but also new markets in Asia. Pipeline gas is also important to India and other markets that will seek to diversify their supply.”

BP’s Dudley believes the growth spurt in LNG supplies expected over the next few years “is likely to have a major influence on global gas markets, leading to greater integration of markets across the globe and a move toward more flexible, competitive markets.”

Deloitte forecasts the average price of natural gas at the benchmark Henry Hub will increase from $3.10 in 2017 to $4 in 2027. For the same 10-year period, Deloitte projects increases from US$5.20 to US$6.10 for UK-NBP, and from US$2.70 to US$3.80 for India domestic gas.

Crude Oil

A persistent supply imbalance and increased inventory levels caused oil prices to fall toward the end of 2015 and into 2016. Prices stabilized through the middle of the year as a combination of strong demand and weak supply moved the oil market broadly back into balance by mid-year, but not before inventories had increased from already excessive levels, according to Spencer Dale, Group chief economist at BP.

Prices firmed somewhat toward the end of 2016 after the OPEC/non-OPEC agreement, and dated Brent averaged $44 per barrel in 2016, down from $52 in 2015 – its lowest (nominal) average since 2004, Dale wrote.

In the first half of 2017, prices have averaged about $53 as the OPEC cuts have started to take effect, albeit partially offset by the strong recovery in U.S. tight oil. Wood Mackenzie’s mid-year report puts the figure in perspective, noting increased efficiencies and improved project economics at $53 oil.

Deloitte projects the average price per barrel of WTI Spot will increase from $48 in 2017 to $70 in 2022, and Brent Spot will grow from $49 in 2017 to $71 in 2022. In other international markets, Deloitte forecasts for the same five-year period include: Avg. OPEC basket, US$47 to US$64; Nigerian Bonny Light, US$49.50 to US$71.50; Mexico Maya, from US$41 to US$63; and Russia Urals, from US$47 in 2017 to US$69.70 in 2022.

And what might this mean for the global pipeline construction business?

Africa

Oil remains the dominant fuel in Africa, but there is a growing opportunity for natural gas to displace oil. “We anticipate a massive switch from oil to natural gas, especially in the power generation sector,” Cedigaz analyst Lecarpentier said. Cedigaz projects 3% annual in natural gas demand, but notes that the rate is comparatively high, in part because it started the base period in 2015 with less mature markets and infrastructure development than other regions.

Morocco and Nigeria recently agreed to explore a potential pipeline between the two countries tagged “The Wonder of Africa” to fuel electrification projects in West Africa and serve as basis for the creation of a competitive electricity regional market. A memorandum of understanding was signed by the Nigerian National Petroleum Corporation and the Office National de Hydrocarburers et des Mines for a potential feasibility and front-end engineering and design (FEED) studies

Uganda and Tanzania signed an agreement on a proposed $3.55 billion electrically heated crude export pipeline that would pump Ugandan oil to international markets. An official at Uganda’s Ministry of Energy told Reuters the agreement covered timelines, project details and terms on tax incentives. The 1,445-km pipeline would start in western Uganda and terminate at Tanzania’s Indian Ocean seaport of Tanga.

Oil and gas activities in several African countries have been curtailed in the past by pipeline theft, attacks on infrastructure and threats to personnel. In Nigeria, Shell is moving ahead with the Loopline Project, which will create an alternative route for the Trans Niger Pipeline (TNP) to avoid sabotage. The three-part project will install 58 km of 30-inch pipeline over land and swamp terrain to bypass an area where theft and illegal refining have been common and install monitoring systems to detect any intrusion or leak. Shell is operator and partners include NNPC, Total E&P Nigeria and Nigerian Agip Oil Company (NAOC). TNP transports about 180,000 bpd of crude oil to the Bonny Export Terminal in the eastern Niger Delta and natural gas from the Gbaran, Agbada, Okoloma and Alakiri gas plants. Other Shell projects in the region will add about 80 km of pipelines and associated construction.

South Africa, which has been considering tentative proposals for a nationwide pipeline network, agreed with Mozambique in early June to conduct a feasibility study for a proposed 2,600-km natural gas pipeline between the two countries. Independent South African oil and gas company SACOIL Holdings would build the estimated US$6 billion pipeline to harness the commercial potential of gas reserves discovered in the Rovuma sedimentary basin in the Mozambican province of Cabo Delgado.

Eni, which made its first major Mozambique find in the Rovuma Basin 2011, finalized a $7 billion investment this year in the Coral South LNG project. The floating LNG plant will have a capacity of about 3.4 million tons a year. BP has a 20-year contract to buy all LNG production from the Coral plant, which Eni is developing with Galp Energia SGPS SA, Korea Gas Corp. and Mozambique’s state-owned Empresa Nacional de Hidrocarbonetos.

ExxonMobil has agreed to buy half of Eni’s stake in Area 4 offshore northern Mozambique and will lead construction and operation of the onshore liquefaction facilities. Eni will continue to operate the Coral floating LNG project and all the subsea wells and pipelines in the block. The construction contract for the floating LNG unit was awarded to the TJS venture, which includes Technip, JGC Corp. and Samsung Electronics. First gas is expected in 2022.

After years without progress, the proposed Trans-Saharan Gas Pipeline appears to be gaining renewed interest following additional discoveries offshore West Africa. The estimated $12 billion pipeline would span 4,401 km from Nigeria to Algeria where it would connect to existing pipelines for delivery to Europe via Spain. It would have an estimated annual capacity of 30 billion cubic liters of natural gas with first flows targeted for 2020.

The Zohr natural gas field may start production with accelerated startup by yearend, enabling Egypt to boost production to 5.5-6 Bcf/d in 2019. The massive field, discovered offshore Egypt by Eni in 2015, contains 12 natural gas development projects with price tags totaling $33 billion.

Asia Pacific/Australia

The Asia Pacific region leads the way in projected energy demand growth and its emerging markets play a central role in the projected 3.7% annual growth of international LNG trade to 669 Bcm in 2035, says Cedigaz. China remains the largest growth market for consumption, but Cedigaz projects India will be the top energy consumer by 2035 in its new Mid and Long Term Energy Outlook. First 2016 estimates by Cedigaz show India led the world in natural gas demand growth at 9.5%, followed by China at 8% – substantially above the 1.6% global growth.

Natural gas faces an uphill battle for market share in coal-dominant Southeast Asia and OECD countries, but BP’s statistical report shows natural gas consumption rose in every Asia Pacific country during 2016 with a 2.7% growth rate. Oil consumption increased 3.3% in the region.  Asia Pacific ranked only behind the Middle East in natural gas production growth of 2.9% in 2016, according to BP statistics, including a 25.2% gain in Australia, where several new LNG facilities came onstream.

“There is a substantial need to invest in natural gas infrastructure in Asia at the local level and to serve global trade and service exchanges between markets,” Lecarpentier said. Reflecting this need, a July report by Research and Markets projects that the Asia Pacific oil and gas pipeline market will reach $19.16 billion by 2022

China will begin receiving natural gas from the eastern route of the Power of Siberia Pipeline in 2019, under a supplementary agreement approved in July by Gazprom and Chinese National Petroleum Corporation (GNPC). An earlier contract called for natural gas supplies via the eastern route to begin between May 2019-May 2021. The 1,864-mile Power of Siberia will transport gas from the Irkutsk and Yakutia gas production centers to consumers in Russia’s Far East and to China via its eastern route, with 38 Bcm to be transported annually. Construction of the Power of Siberia began in 2014.

The Myanmar-China Oil Pipeline began operations in June after a three-year delay, allowing faster supplies to southwestern China from the Middle East and Africa. The 479-mile pipeline is part of the China-Myanmar oil and gas pipeline project which includes a parallel natural gas pipeline that started operation in 2015. The oil pipeline is designed to carry 22 million tons of crude per year (442 bpd) of which Myanmar can take up to 2 million tons annually.

Eni’s Jangkrik development project offshore Indonesia started natural gas production in May with volumes to supply Indonesian domestic and LNG export markets. Production from 10 subsea wells connect to the Jangkrik FPU, which flows gas through a 79-km pipeline that connects to an onshore receiving facility and delivers to the Bontang gas liquefaction plant via the East Kalimantan transportation system. Eni said its nearby Merakes gas discovery could start production within two years and potentially use the Jangkrik FPU as a development hub. Jangkrik  production is expected to reach 450 MMscf/d, or 83,000 boe/d. Eni subsidiary Eni Muara Bakau is operator with 55% interest. Partners are Engie E&P subsidiary GDF SUEZ Exploration Indonesia with 33.33% interest and PT Saka Energi Muara Bakau with 11.67%.

In India, GAIL initiated a major step toward construction of the Jagadishpur-Haldia-Bokaro-Dhamra Natural Gas Pipeline (JHBDPL), by approving orders for the 133-mile section from Phulpur to Dobhi (under phase-IB/Two section) to be constructed simultaneously by JSIW Infrastructure Pvt. Ltd. and IL&FS Engineering & Construction. Work is targeted for completion by late 2018. Once completed, the 1,578-mile pipeline will connect homes in major cities and towns along the route with piped natural gas.

In Australia, Jemena awarded a contract to McConnell Dowell to construct 299 miles of the 386-mile Northern Gas Pipeline and selected Spiecapag Australia to construct the Queensland portion of Northern Gas Pipeline, which includes 88 miles of the pipeline from east of the Queensland border to the pipeline’s end-point in Mt Isa. The Northern Gas Pipeline is an AU$800 million system that will connect gas fields in the Northern Territory with customers in its Eastern Gas Market. Project Director Jonathan Spink said Jemena secured several recent approvals, including its pipeline license and construction approval from the Northern Territory Government, allowing work to proceed on schedule. First gas is expected by late 2018.

Part 2

In the September issue of P&GJ, our Midyear International Report continues with regional reviews of pipeline construction and market trends in Western Europe & EU Countries, the Middle East, Russia & EU Countries, and the Americas.  P&GJ Social Media Manager David Vauthrin also contributed to this report.

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