FLNG & FPSO are signs of surging demand for oil & gas products in the future

Energy Security For Brazil, China, Southeast Asia

Before the rise in Floating Liquified Natural Gas (FLNG), the floating and storing phenomenon was already operating in full force, being used for offshore production operations in the oil industry. Floating, Production and Storage Operations (FPSO) are critical to successful offshore development platforms; otherwise, these operations would not be able to sustain effective production in offshore areas around the globe. That’s also why the shift from oil and gas production to renewable sources would potentially cause harm to a thriving offshore energy industry, with multitudes of capital investments and employment at stake.

Nevertheless, as onshore oil and gas production continues to generate greater scrutiny from regulators, investors and conservation activists alike, so then the offshore oil and gas industry has positioned itself to receive massive investments and government subsidies for the short-term outlook of global demand and supply. But this still won’t speak to any solutions for solving maritime threat dynamics, for which this nascent global transport revolution shall face with ongoing fears and uncertainties into the foreseeable future.

Industry trends and analyses reveal that countries throughout Europe and Asia will benefit the most from Liquified Natural Gas (LNG). Two signs of this occuring are VTG Rail Europe’s innovative LNG transport designs via railway network modes and the China National Offshore Oil Company’s (CNOOC) largest LNG storage tank built at a receiving terminal in Yancheng near the metropolitan city of Shanghai.

On the news of the Biden Administration releasing approximately 180mn barrels of oil from the Strategic Petroleum Reserve people in the USA like to think of energy strategy in terms of security and defense. This is misleading from a variety of angles. I will focus on one aspect: Floating Production, Storage and Offloading Units (FPSO).

Nowadays there’s a much higher level of activity happening in the offshore oil and gas space. According to Offshore Engineer, FPSOs are more attractive in today’s industry because of new players, business models and a lower cost operators than traditional oilfield development services.

FPSO contracts are reportedly on the rise since the end of 2020, including Mero 4 in Brazil, Limbayong in Malaysia and Liuhua 11–1 in China — with the three key players in these areas being Petrobras, Yinson and CNOOC. One reason for the rise in FPSOs is that offshore drilling in Southeast Asia has gained a lot of momentum in 2022, such as a big discovery from Thailand’s PTTEP in an offshore Malaysia block.

As a result, business partnerships in this space are growing too. Petrobras and Yinson signed a letter of intent on February 8, 2022 providing FPSO contracts worth $5.2 billion. While CNOOC and Petrobras signed a Production Sharing Contract (PSC) for $2.12 billion in Brazil’s Buzios field on March 8, 2022.

The Buzios field is significant. As there are already four FPSO units in operation there, with six more planned by 2026, this area is the prime driver for Brazil’s strategic plan to have all FPSO contracts held at a firm price by 2025. This plan occurs under the backdrop of China’s Sinopec reporting its largest profits from crude oil production since 2011.

The reason I’ve been focusing on Brazil, China and Southeast Asia is to drive my point that while most Americans view oil and gas as a energy security and defense issue, other countries are viewing offshore oil and gas production as a major driver of their economic growth going forward — Brazil’s strategic plan is an indication to this fact.

With investments to the tune of $84 billion by Petrobras to develop technologies conducive to FPSO, the expansion of this market is a long-game strategy for an offshore energy space that is becoming a widespread, massively internationally-integrated market. Business is good now, but there are certainly going to be a wave of maritime threat dynamics for these companies operating and transporting in offshore areas — there’s going to be an unprecendented level of FPSOs.

France’s LNG Exporter TotalEnergies

On April 11, 2022, it was announced that a “heads of agreement” (HOA) was signed by TotalEnergies (Total) with Sempra Infrastucture, Mitsui & Co. ltd and Japan LNG Investment. Sempra Infrastructure owns 50.2% of the project while Total, Mitsui and Japan LNG Investment each own 16.6%.

According to TotalEnergies’ Chairman and CEO Patrick Pouyanné: “The expansion of Cameron LNG will contribute to our LNG growth strategy by investing in low-cost, long-term competitive LNG projects with lower GHG emissions.” This statement from the CEO was given to the public as a way to justify expansion of the Cameron LNG project located in Louisiana, USA.

This HOA is significant because the companies agreed to jointly increase production capacity to more than 6.75 mn tonnes per year (tpy). They also agreed to add a fourth train to improve on debottlenecking of the plant. Moreover, the project is seen as a way boost exports of USA LNG in the wake of recent events by Russia to affect Europe’s energy supply.

If Norway’s Equinor took the initiaive to help and solve Europe’s energy crisis, then it seems France’s TotalEnergies is striving to take the lead in promoting Europe’s energy transition. The HOA is an indicator of how seriously the company is taking its ambitions to push Europe forward on the energy transition.

Per OilPrice.com, the French supermajor is the world’s largest exporter of USA LNG and the second-largest LNG trader.

With the final investment decison on the Cameron LNG project to come in 2023, Russia’s invasion of Ukraine has raised concerns of how more exports of USA LNG can be carried out in the present. On March 25, 2022, a deal between the USA and European Union (EU) was initiated for the USA to increase deliveries of LNG to EU markets in the amount of 15 billion cubic meters. This circumstance reveals how critical USA LNG is to the EU’s energy supply mix.

TotalEnergies has been in business with USA LNG since September 2016 when the company acquired 75% of the Barnett Shale assets in North Texas from Oklahoma City-based Chesapeake Energy. Due to declining production, the Barnett shale assets are set to bottom out around 2028. What’s important here is that the production capacity at Total’s Barnett shale fields will allow the company to regasify its natural gas reserves into LNG at Cameron, in order to transport and export the natural gas from USA to Europe, Asia and African markets.

TotalEnergies is also launching North America’s first Cabon Capture & Storage (CCS) project at the Hackberry Carbon Sequestration (HCS) project. According to Thomas Maurisse, senior vice president LNG at TotalEnergies:

We are pleased to join forces with our partners to significantly reduce CO2 emissions at Cameron LNG export terminal, thus enabling us to supply our customers with low-carbon LNG, a key fuel for the energy transition and a valuable asset for diversifying Europe’s energy supply

It’s essential to point out that even when the largest companies are pushing for ways to successfuly carry out Energy Transition around the globe, that committments to natural gas production and exports via LNG will continue to grow over time. TotalEnergies even highlighted in its 2021 Energy Outlook that natural gas and renewable energy sources would play complementary roles to achieving the energy transition toward Net Zero.

One of the concerns is how geopolitics and international events are going to affect the global energy outlook and prospects.

For instance, Algeria and Morocco have both announced plans to source more gas reserves to the benefit of TotalEnergies, Eni and USA exporters. But underlying political and territorial issues between those two countries are inevitably going to be a major problem. Algeria cut off Morocco’s access to its gas pipeline in 2021 after Morocco announced that it would develop LNG terminal capacity.

Upstream has been writing about energy companies that are exploring Africa’s potential for LNG pipeline infrastructure as an alternative to Russia and Persian Gulf producers. For instance, Siva Prasad of Rystad Energy said “Asian and European importers will need to consider African priorities as they develop projects, as many African producers are focusing on supplying energy locally as well as to intra-African markets, along with catering to global markets.” Prime examples include a a proposed natural gas pipeline from Tanzania to Zambia.

China’s Shipbuilding Company Yangzijiang

On 12 September 2022 it was reported by TradeWinds that China’s top shipbuilder, based in Jiangsu Province, was awarded a license enabling it to build new LNG carrier capacity with some new technological components.

The license agreement was made with Singapore-based GTT with the purpose to use membrane technologies owned by GTT.

Upon the agreement between the two companies, chief executive of Yangzijiang, Ren Letian, said: “The awarded license will enable us to make strategic inroads into the large LNG carrier market, which we previously have not been able to penetrate into…This is a landmark achievement, and we are proud to be the first private shipyard in China to obtain the license.”

According to Llyod’s List Yangzijiang is the only privately-owned shipbuilder in China to recieve such a lucrative opportunity to expand on LNG carrier capacity.

Yangzijiang also has some major shipbuilding projects in the pipeline:

1. “TIGER MAANSHAN” — a shipbuilding construction project classified by the China Classification Society (CCS)
2. Tianyang Green Ship Technology (T-GET) — a manufacturing plant for LNG fuel tankers through a joint-venture of Yangzijiang and Mitsui Shipbuilding Company
3. Tiger Longkou — the world’s largest dual-fuel LNG tank carrier constructed by Yangzijiang for Hong Kong’s Tiger Gas

Notwithstanding the potential liabilities from African energy supply in the future, the Chinese LNG carriers are a potential savior for the European energy demand in the near-term.

This summer is already signaling a competition for LNG tankers among the world’s largest energy companies — TotalEnergies, Shell, China Unipec — to stock up on LNG supplies ahead of the winter season in 2022. Because of this trend the price of LNG carriers is rising to the highest levels in 10 years, at around $120,000 a day, as LNG import demand is expected to grow higher and higher for developed countries.

All of this activity in the LNG sector is critical as governments prepare for their energy supplies for the upcoming winter season. It’s also a signal to the world that companies are searching for new sources of energy during such volatile times for the oil and gas markets.

Oil is also on the radar as of late.

Warren Buffet has won regulatory approval to buy up to 50% of shares in the Houston-based oil and gas production company Occidental Petroleum. Analysts have reported on this story with fervor, but this prospect has been in the works since 2019.

Concluding Thoughts

There’s been a major comeback for the unsung heroes of the commodity markets: thermal coal and crude oil.

ExxonMobil’s offshore oil discovery in Guyana began exporting crude oil to European markets — around 49% — in 2022 — up from 16% in 2021.

Glencore’s thermal coal production has witnessed massive profits to the tune of $8.9billion in H1 2022.

Of course, this is all occuring under the backdrop of the Russian-Ukraine war which has put oil and gas supply and demand at the crux of sanctions on Russia and the geopolitics of global energy, fertilizers and metals.

Moreover, oil prices are likely to resume at higher levels due to Russia’s invasion of Ukraine and the ongoing sanctions on Russia’s energy sector.

In the event that OPEC+ comes to an agreement over production and supply targets, it may be too late to make a difference on prices overall, as Americans and Europeans will continue paying for higher prices.

This is a lesson that many people tend to ignore.

On the news of Russia taking over the Sakhalin-2 Project, the effects on LNG production will have an impact on global supplies; therefore, Russia has once again disrupted LNG scenario in a big way — Russia already disrupted oil supplies from the Caspian Pipeline Consortium (CPC) in Kazakhstan.

If you ask me, it seems like the world is still desperate for the commodities that have been lambasted as a tool of influence for adversarial governments, bringing in some key concepts about the effect of foreign policy aims: For which commodities? Against Whom?

In this scenario of the world, it’s a pretty scary place to live in, since the demand for raw materials, commodities and energy are producing effects in the foreign policy area of many countries today, including in both developing and developed areas — I’ve already written extensively about the illustrations of this theory from the perspective of how countries and corporations are formulating industrial policies around oil and gas while preparing for the Energy Transition in the future.

These strategies are being carried out under the backdrop of increasingly volatile global markets and diverging geopolitical trends, which have put global commodities at the forefront of geopolitics. For instance, the of future industrial production revolves around future facing commodities which means that industrial policies are also being regulated by Environment, Social, Governance (ESG) framework with respect to global commodities.

Moreover, the China-Russia relationship is not only a cause of concern for the United States and European Union but also enhances the narrative around geopolitics and commodities: a paradigm shift whereby global commodities are at the forefront of geopolitics and ESG corporate frameworks.

The strategic dilemmas for both China and Russia reveal that advancements and achievements in the new Space Race are a top priority for their geopolitical objectives vis-a-vis the United States and European Union.

The competition for this new Space Race allows for China and Russia to use this adversarial geopolitical scenario as a political tool of information to use against the United States and European Union, to the effect of bolstering “anti-Western” values of their domestic populations.

While both countries seek to dominate the production and supply of raw materials, of which those commodities are directly linked to the aerospace industry, and therefore are susceptible to geopolitical tensions. The evidence of this trend is apparent in legal cases revolving around food security and energy dependence.

Commodities are global in nature. The only attention being truly paid to regional development is about large investments in infrastructure — these investments do not seek to enhance regional connectivity, but give an advantage to a producing country so that it can more efficiently transport raw materials to markets far away from the original source.

This is the essence of the Arctic Strategy, Belt and Road Initiative (BRI) and Indo-Pacific Strategy: all of them revolve around the maritime domain while also seeking defense mechanisms through military cooperation.

The question of whether China and Russia will align industrial policies shall be determined by the outcomes of the Arctic Strategy and BRI — not the Shanghai Cooperation Organization (SCO) — and how the defense and security interests of the United States converge with other actors in the Indo-Pacific. This is the long game of geopolitics for decades to come.