Midyear International Report: Pipeline Construction & Market Trends

October 2017, Vol. 244, No. 10

By Jeff Awalt, Executive Editor

PG&J’s annual Midyear International Report began with a review of key trends driving natural gas development and pipeline construction, noting a growing consensus that the industry is on firmer footing now than in the previous two years. It concludes with a continuation of regional coverage, following Part 1 updates on the Africa and Asia Pacific markets.

Western Europe & EU Countries

Energy consumption has plateaued in Europe, but natural gas is taking a growing share of the mix, sparking political conflict and a predicted showdown between Russian pipeline gas and U.S. LNG imports.

Demand for natural gas grew 6.1% in 2016 – leading all regions and substantially outpacing the 1.6% global average, according to Cedigaz, the international association for natural gas. BP’s Statistical Review of World Energy 2017 reported natural gas consumption grew even faster within the European Union at 7.1%.

“Energy efficiency improvements have had a downward impact on consumption, and there is a growing diversification of the energy mix toward a low-carbon energy system in Europe,” explained Armelle Lecarpentier, chief economist at Cedigaz. “Natural gas will continue to gain ground as a percentage of the energy mix in Europe as it takes market share from coal, but efficiency gains and the growing share of renewables will leave less space for overall growth in gas consumption.”

Cedigaz’s “Medium and Long Term Natural Gas Outlook 2017” forecasts Europe’s overall energy consumption will decline about 1% during 2014-2035. In contrast, the organization projects natural gas demand in Europe will grow 2.2% in the same period, outpacing a projected average growth rate of 1.8% worldwide.

Declining production and increasing demand have made Europe a natural target for natural gas and LNG exporters, prompting a surge of natural gas pipeline and LNG infrastructure construction. Wood Mackenzie estimated LNG imports to northwest Europe will more than double this year to 31 million tons, commenting, “This means U.S. LNG will be competing on price in Europe with cheaper Russian pipeline gas – and both of them will be vying to replace coal in the power market.” Illustrating these trends, the first U.S. LNG shipment to Central Europe arrived in Poland in June, just as Hungary signed an agreement to link with Gazprom’s Turkish Stream (TurkStream) pipeline by the end of 2019.

Concerns over Europe’s growing reliance on Russian gas has also motivated some countries to build new infrastructure that helps diversify their supply sources. In June, for example, the Finnish government authorized state-owned Baltic Connector Oy to start construction next year on the Balticconnector natural gas pipeline and announced it will open wholesale and retail gas markets to competition in time for the project’s scheduled completion in 2020. Its goal, Finland said, is to “widen the range of gas distribution routes, improve the security of supply for Finland and the Baltic Sea region, and promote integration in the gas market.”

Despite the decline in the North Sea activity in recent years, research and consulting firm GlobalData reported a total of 30 crude and natural gas projects are expected to start operations by 2020. GlobalData said companies are operating more efficiently, as projects being sanctioned now have costs of just over US$15 per barrel compared with nearly US$30 per barrel for those sanctioned in 2013.

The first sign of one of the North Sea’s largest oil fields became visible in July when Heerema Marine Contractors installed a 26,000-ton jacket for the Johan Sverdrup riser platform offshore Norway. Pipe-lay operations are to start in 2018 for the Statoil-operated project, and Phase 1 is scheduled to be onstream in 2019. Saipem was contracted to install an 18-inch, 97-mile, gas export pipeline for the Kårstø gas terminal and a 36-inch, 175-mile oil export pipeline linking to the Mongstad terminal. Technip won the contract for infield pipeline fabrication and installation of 18 miles of plastic-lined,16-inch water injection flowlines. Lundin Norway, Petoro, Det norske olijeselskap and Maersk Oil are partners in the project.

BP is progressing toward the expected 2018 startup of the Clair Ridge Project with partners Shell, ConocoPhillips and Chevron. The conventional oil project includes two bridge-linked platforms and new subsea pipelines to be tied into existing export systems.

Also in the UK North Sea, Maersk commenced drilling at its Culzean high-pressure gas project with partners BP and JX Nippon. Startup is planned in 2019. The project includes a stand- alone three bridge-linked platform development with dry gas export via central area transmission system (CATS) and liquids export via a newbuild floating storage and offloading tanker (FSO).

Middle East

Power generation is the biggest source of global gas demand growth, and the Middle East is the projected growth leader in gas-fired power generation, so it’s no surprise the top oil-exporting region is expected to remain among the fastest-growing markets for natural gas demand.

Cedigaz forecasts gas demand growth in the Middle East will run a close second to China during the 2014-2035 period, accounting for 24% of incremental growth volume versus China’s 28%. Overall, energy consumption in the Middle East should grow nearly 50% through 2035, according to BP, with natural gas accounting for over half that growth and rising to 52% of total energy demand, compared with 50% in 2016.

Middle East gas consumption grew an estimated 3.5% in 2016, aided by improving infrastructure and availability of gas, while total energy consumption in the region declined about 2%. Israel remained the growth leader with a 14.5% increase in natural gas demand, reflecting the increasing availability from discoveries offshore Haifa.

“We anticipate significant expansion of intraregional natural gas flows in the Middle East, especially from Iran,” said Lecarpentier of Cedigaz. “This will include additional exports to neighboring countries like Oman and Iraq, but also new export flows past 2025 from Iran to Pakistan and India.”

Gas discoveries off the coast of Israel may also impact gas flows in and from the region, as the 21.9 Tcf Leviathan field becomes fully operational and Israel looks to expand exports beyond neighboring countries to Western Europe and Turkey. Jordan has already signed a $10 billion deal to import Israeli gas, and Israel, Cyprus, Greece and Italy recently agreed on a $6.4 billion pipeline to deliver Israeli gas to Europe. The European Union’s climate and energy commissioner said the project supports the EU’s strategy to diversity energy sources.

In June, Iran started natural gas exports to Iraq for the first time in four years, and Iran’s oil minister said the two countries will study the feasibility of a pipeline to export crude oil from Iraq’s northern fields through Iran. Total and the National Iranian Oil Company (NIOC) agreed in July to develop Phase 11 of the giant South Pars gas field, with production capacity of 1.8 Bcf/d targeted for domestic use. The first stage is projected to cost about US$2 billion and include 30 wells and two wellhead platforms connected to existing onshore treatment facilities by two subsea pipelines.

Qatar Petroleum plans to boost natural gas production 20% in the giant North Field, which it shares with Iran, along with a project to raise LNG capacity by 30%. CEO Saad al-Kaabi said the company will build new LNG trains to increase capacity to 100 million tons from 77 million, Reuters reported.

A long-awaited 72-mile pipeline connecting Saudi Arabia and Bahrain is under construction and scheduled for completion early next year. Originally targeted for completion in 2016, the 350,000-bpd A-B pipeline is expected to begin flowing light crude oil from the Abu Safa field after a six-month trial. It replaces an outdated link and expands processing capacity at Bahrain Petroleum’s Sitra refinery.

Research and Markets reported that construction has begun on a 300-mile pipeline project jointly developed by Abu Dhabi National Oil Co. (ADNOC) and Masdar. In its “Middle East & Africa Oil & Gas Pipeline Market” report published in June, the Dublin-based firm also noted that a 143-mile pipeline under construction between Central Oman and Maritime Hub in Duqm is expected to start operations this year.

Russia & CIS Countries

Russia is projected to remain the world’s largest energy exporter through 2035 as it continues to focus on oil production and increased natural gas exports through major pipeline expansions to Europe and Asia.

Gazprom said it will proceed with development of the Nord Stream 2 natural gas pipeline despite U.S. sanctions and continued opposition from European countries concerned with over-reliance on Russian gas. Nord Stream 2 is scheduled to start flowing natural gas from Russia’s Baltic coast to Germany by 2019, running alongside the first Nord Stream pipeline, which was completed in 2011. Earlier this year, Wasco said it began concrete weight coating of the pipeline’s 12-meter, 48-inch joints. Blue Water Shipping was awarded a contract from Wasco for the handling, storage and on-demand delivery of the 113,000 coated pipes from storage yards in Kotka, Finland, and Mukran, Germany, during construction through the Baltic Sea.

If Nord Stream 2 is completed, it will concentrate about 70% of Russian gas exports to Europe into a single route and render existing pipelines obsolete – including several pipelines that run through Ukraine. S&P Global Platts reported that Ukraine stands to lose about US$2 billion in annual transit revenues if gas is diverted away by Nord Stream 2. Gazprom and its project partner, a subsidiary of Germany’s BASF, said the project is essential to meet growing demand for natural gas, noting a 17% increase in Russian gas deliveries to Germany to 3.8 Bcm during the first half of 2017, compared with the same period of 2016.

Construction of Gazprom’s 560-mile TurkStream natural gas pipeline began in early May when the Audacia vessel started laying pipe in the Black Sea near the Russian coast. It was joined the following month by Allseas’ largest vessel, Pioneering Spirit, which is responsible for the deeper water section of route. Each of TurkStream’s twin 32-inch pipelines have an annual throughput capacity of 15.75 Bcm. One of the lines will connect Russian reserves to Turkey’s domestic gas transportation network; the other will deliver gas to Europe via an extension to the Turkish-Greek border.

Allseas is construction contractor for both strings of TurkStream’s offshore section, and Petrofac said it was awarded a US$400 million contract for development of TurkStream’s onshore pipelines and a gas-receiving terminal in Turkey. The contract calls for Petrofac to provide engineering, procurement and construction services for the terminal, which will receive 31.5 million Bcm of gas annually from the TurkStream pipeline, originating from the compressor station in Anapa, Russia. Operations are scheduled to start in December 2019.

The chairman of the Turkmenistan-Afghanistan-Pakistan-India Natural Gas Pipeline (TAPI) project told TOLOnews in July that construction work is expected to begin in Afghanistan within a year. The 1,100-mile, 56-inch TAPI pipeline would export up to 3.2 Bcf/d of Caspian Sea natural gas from Gylkynish and adjacent fields in Turkmenistan to Afghanistan, Pakistan and India. Evaluation and practical work on the project will start as soon as technical assessments have been finalized. Initial construction began in Turkmenistan in 2015 and completion of the estimated US$10 billion project is targeted for 2019.

Construction of the Trans-Anatolian Natural Gas Pipeline (TANAP) is scheduled for completion in 2018. TANAP is central part of the Southern Gas Corridor, which will connect to TAP and the South Caucasus pipelines to transport natural gas from the giant Shah Deniz gas field in Azerbaijan to Europe.

South/Central America and Caribbean

Demand and production trends in South and Central America have lagged the world in most categories as it struggles to emerge from a prolonged downturn, but some recent glimpses of progress support analyst projections for substantial long-term growth in natural gas demand and infrastructure.

Natural gas demand is forecast to grow by 2.4% a year through 2035, according to Cedigaz, but Brazil and Argentina are likely to grow significantly faster. Brazilian consumption is expected to grow 41% during the period, and BP projects it will become a net energy exporter as production from oil and gas, hydroelectric, nuclear and renewables exceeds its domestic needs.

The availability of other energy sources is not expected to deter natural gas demand growth, however, because it will be driven largely by the power generation and industrial sectors, including petrochemical and manufacturing, which need reliable supply.

“We will see an expansion of gas power plants in Brazil to increase their security of supply because hydro potential can be constrained, and the power supply from renewables is unpredictable in the short term,” said Lecarpentier.  “So natural gas will have an important role to play in the power sector, and supply will be boosted by increasing production of unconventional gas in Argentina.”

A Wood Mackenzie analysis showed new pilot and development agreements in the Vaca Muerta have been announced with increasing frequency since the start of this year, demonstrating a significant uptick in interest.

“Our scenarios from the study demonstrate that production could peak between 0.7 and 1.25 mboe/d by 2031,” explained Elena Nikolova, Wood Mackenzie’s Latin America upstream oil and gas research analyst. “Production gains driven by drilling speed and completion intensity in the U.S. will materialize in Argentina as more and more operators enter the play.”

Among them, BP and Total announced with Germany’s Wintershall in July the signing of an investment agreement with Argentina’s state-run oil company, YPF, to jointly invest US$1.15 billion in the Vaca Muerta shale. BP’s Pan American Energy, Total Austral, Wintershall Energia and YPF plan to drill over 60 wells in the Aguada Pichana area. ExxonMobil also plans to speed up its investment plans for shale drilling in Vaca Muerta. Chevron has also been developing acreage with YPF.

With increased development and growing demand for natural gas throughout the region, Lecarpentier said, “Massive investments are needed in the gas sector at the midstream and downstream level to integrate markets and connect markets between countries.”

BP Trinidad and Tobago (BPTT) announced first gas from its US$2 billion Juniper development in August. The project, BP’s first subsea field development in Trinidad, produces gas from the Corallita and Lantana fields and is expected to boost BPTT’s gas production capacity by an estimated 590 MMscf/d. The gas flows to the Mahogany B hub via a 10-km flowline that was installed in 2016. TechnipFMC was the engineering, procurement, installation and commissioning contractor on the project.

The Trinidad Onshore Compression project began operations in April. In June BPTT announced that it had sanctioned development of the Angelin gas field, which is expected to start production in late 2019. BPTT also announced two natural gas discoveries in the Savannah and Macadamia exploration wells, which may support future developments offshore Trinidad.

ExxonMobil made an FID in June to proceed with Liza Field in Guyana with initial production of up to 120,000 b/d and production to start by 2020, less than five years after discovery. SBM Offshore was awarded contracts for front-end engineering and design of a floating production, storage and offloading (FPSO) vessel and will construct, install and operate the vessel. The Liza Field has a potential recoverable resource estimate in excess of 1 billion/boe.

ExxonMobil also increased estimated reserves on its Strabroek block offshore Guyana, where it announced a new discovery on the Snoek well, to an estimated 2-2.5 billion oil-equivalent barrels from its initial estimate of 1 billion. Exxon’s Guyana subsidiary is operator with 45% interest in the 6.6 million-acre Strabroek Block. Hess Guyana holds 30% interest and CNOOC Nexen Petroleum Guyana holds 25%.

 

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