The Reckoning — Profits From Offshore Oil & Gas Demand Are Surging From Europe To Asia Markets
The Weekend Brief (TWB) is inspired by modern heavy metal band August Burns Red. I thought it was only right to offer “Reckoning” by heavy metal band August Burns Red, featuring Spencer Chamberlain, as a piece of inspiration for writing this content piece about the offshore oil and gas industry. The vocals are extreme, and the guitar is heavy, but that’s how most people feel about oil and gas companies — and their profits — these days.
Press play: https://youtu.be/vvOG5b73r8w
TotalEnergies
TotalEnergies claimed record-breaking profits of $36.2 billion in 2022. It was then reported by Upstream that the company’s exploration & production (E&P) play in Namibia was set to become commercially viable after the offshore oil discovery in the Orange Basin in 2022. Shared with neighboring South Africa, this offshore production area covers 8,215 km² in the gas reserves of Block 2913B at the offshore Namibia production site.
The French oil and gas supermajor is one of the most important partners of Adani Group, operating under the subsidiary Adani Total Gas Ltd.
TotalEnergies came out with its own public statement regarding the Hidenburg report’s findings, claiming that due diligence was carried out appropriate to the company’s business practices. In the statement, TotalEnergies said: “TotalEnergies welcomes the announcement by Adani to mandate one of the ‘big four’ accounting firms to carry out a general audit.”
Indian-based Adani Group is a global investment enterprise founded by billionaire Gautam Adani. It’s a long story, but here’s one report that sums up the findings from US-based Hidenburg Research about Adani Enterprises’ flawed strategies. Once the richest person in Asia, the findings from Hidenburg have caused Adani’s market share to lose $26 billion from a massive stock market sell-off. One of India’s prominent billionaires, Adani has strongly criticized the Hidenburg report’s finding in the media.
Equinor
In case you didn’t already know, Equinor was one of the saviors during the European energy crisis when company increased production to 1.4 billion cubic metres (bcm) ahead of summer 2022. This was in response to soaring energy prices and security concerns as a result of the Russia-Ukraine conflict.
The Norweigan-based Equinor’s move was also somewhat controversial given that one of the European Union’s biggest energy companies had vowed to invest more in a renewable energy strategy.
Most of the media sources consistently report that Equinor’s hydrocarbon output will decline after 2026, reaching about 2 million barrels per day (bpd) of oil equivalent by 2030, thus ensuring that the company’s intentions are on a renewable energy future.
For instance, Equinor CEO Anders Opel told investors at a meeting in London: “We want to be creating value on the way to net zero.”
On the way, the company raked in some interesting P&L figures: a net income rising from $8.5 billion in 2021 to $28.7 billion in 2022, while posting a consistent loss of $136 million in 2021 to $184 million in 2022 from renewable energy businesses.
Speaking at Davos 2023, Opel told reporters that Europe’s energy crisis is directly related to the Russia-Ukraine conflict, noting that the situation around investment in news sources of gas will cause electricity bills to stay higher for many consumers.
According to Kpler, Norway is now Europe’s primary source of gas supplies, and the government approved Equinor’s plans to increase production from the Osberg field. This plan comes with €1 bn of investments by Equinor to upgrade the gas infrastructure so that more gas and oil reserves can be recovered for export markets. Two new compressors at the Osberg Field Center were announced 1 December 2022.
Osberg forms part of the critical North Sea Field complex, shared with the United Kingdom, which has recently come under the hot seat due to windfall taxes.
Shell
In another critical LNG project co-operated by Shell, the Abadi LNG project in Indonesia has gained a renewed interest from Japanese operator Inpex for its “national strategic importance” to Japan’s energy security.
Inpex will carry out comprehensive studies on how to conduct carbon capture, utilisation and storage (CCUS) at the Abadi production site, calling it “a clean and competitive project.” Inpex owns a 65% stake in the LNG project.
Indonesia is becoming an attractive prospect for offshore gas investments, especially LNG production, which is probably why Shell is interested in selling its 35% stake in the Abadi LNG project. Upstream gave figures of up to $13.5 billion in capital expenditures since Shell joined as a co-operator, while the assements of the production figures are around 10.5 million tonnes per annum (tpa) which will be a mix of LNG, pipeline gas and gas condensate.
Shell is reportedly in talks with Indonesia’s state-owned company Pertamina to sell its stake in the project located at Masela in eastern Indonesia. There have been several revisions to the project since it was commenced in 2017.
For example, it was initially designated as a one of Indonesia’s strategic greenfield gas development projects. Next, it was approved by Indonesian regulatory authorities in 2019 to conduct an onshore liquefaction scheme, commiting the project to LNG production investments. In 2020, Inpex signed a memoranda of understanding (MoU) with the government of Indonesia to sell a proportion of the gas production to domestic distributors. This ensured that some of the gas would be utilized for domestic energy capacity.
However, the deepest significance of this offshore LNG project lies in the maritime boundary between Indonesia and Australia. There has been some tensions over the Exclusive Economic Zones (EEZ) of the two countries in this maritime area of the Timor Sea, including the Perth Treaty.
This offshore gas project in the Abadi field is estimated to contain more than 10 trillion cubic feet of gas reserves. By contrast, the Senoro-Toili gas block has proven gas reserves of 870 billion cubic feet. This is another one of Indonesia’s national LNG projects, located in Central Sulawesi, under the 50% ownership of Pertamina and with other Japanese partner, Mitsubishi.
These LNG projects signal Japan’s increasingly larger role in the offshore energy production investments of Indonesia. But also in the broader aspects of other energy production investments, such as coal, as when the Japanese government pushed Indonesia to lift the coal export ban in January 2022.
But make no mistake, China is on the radar too. Since the latest discovery by the British oil and gas producer Harbour Energy in Indonesia’s Tuna Block, territorial claims over the South China Sea and Indonesia’s EEZ in the maritime areas have sparked an intense focus on China’s interpretation of the nine-dash line. In response, Indonesia announced it would make the North Natuna Sea into its own Special Economic Zone (SEZ).
British Petroleum (BP)
For British Petroleum (BP) the world is headed for a sustainable energy future that should be affordable and secure — known as the energy trilemma.
BP CEO Bernard Looney has been very vocal about the company’s enhanced view of the Energy Transition on the company’s future outlook on oil and gas investments. According to figures reported by Upstream, the company’s capex of $16.3 billion comes with a 30% share in so-called transition growth engines. This percentage comes dangerously close to the company’s massive increase in the tax rate from the UK’s EU’s windfall taxes.
At a rate of 34%, the company had to pay $15.1 billion on the company’s global operations in the oil and gas sector. This includes $700 million in windfall taxes paid for its North Sea operations alone. It’s no wonder that UK’s biggest energy company is seeking to invest $60 billion in its energy transition over the next six year. It’s clear that the company’s oil and gas operations simply would not be able to thrive under the new windfall tax regulations in the UK and EU.
One way to successfully track the company’s progress on Environment, Social, Governance (ESG) frameworks, would be to look at how those investments in Energy Transition and Clean Energy Technologies are being spread out for domestic production (in the U.K.) versus other global energy production investments.
For example, Shell found that its offshore discovery in Brazil was not commerically viable. Because of the failure in locating hopeful oil and gas deposits, the company returned the Saturno production area, located in Brazil’s lucrative Santos Basin Pre-Salt Block.
This circumstance highlights the ongoing risks associated with oil and gas drilling, not only because of external factors like the ones mentioned in TotalEnergies’ African projects, but also because of issues related to commercial interests.
In this case, Brazil’s Floating, Production, Storage and Offloading (FPSO) market is a tremendous attraction to the world’s biggest energy producers. This means that hitting discoveries in offshore Brazil has a promising return on investment (ROI) because of the country’s developed FPSO market.
Equinor’s plan to invest €1 bn to upgrade the gas infrastructure in its North Sea Field operations, on the other hand, is seen as a lower risk for the European supermajor to explore and produce more oil and gas reserves that can be recovered for export markets.
These are the high-low risk scenarios to consider going forward for energy production investments around the globe. If the world is headed toward a more sustainable energy future, then European oil and gas supermajors are operating on the precipice of climate change action and shareholder values.
China’s LNG Deals
China is on the radar of oil and gas producers. The International Energy Agency (IEA) has been warning about coal since July 2022, when they released a Coal Market Update explaining a surge in gas-to-coal switching as a result of high costs for natural gas imports. This scenario is largely an issue of China’s and India’s industrial production. As the two countries continue to compete for foreign direct investment (FDI) and export market share.
This is probably why analysts are pointing to China’s mad rush for LNG as a sign of the future dilemmas for global energy demand.
Statistics cited by Global LNG Hub show that since China has invested in its LNG infrastructure, that the amount of imports have increased from 50 billion cubic metres (bcm) in 2017 to 91 bcm in 2020. Following this uptrend, China became the world’s largest LNG importer by volume in 2021, only to be surpassed by Japan, formerly the world’s top importer before 2021, due to China’s covid-19 restrictions on economic recovery.
But China’s LNG push as a carbon reduction strategy is still in full swing. For example, Bloomberg reported that because 15% of new long-term LNG contracts belonged to China that it would gain significant market share over LNG import competition. Argus also highlighted how China continues to invest in LNG terminal capacity, which indicate how seriously the country is taking into consideration the future of gas imports as a main source of the country’s overall energy composition. Thus establishing the link between infrastructure investments and future industrial production.
This is a trend that is picking up some speed with the United States’ Inflation Reduction Act (IRA), not to mention China’s Belt and Road Initiative (BRI) which is all about providing for the developing world’s infrastructure needs that would supposedly facilitiate new pathways for global trade. (This is my personal interpretation of BRI; it doesen’t mean I necessarily agree with the facts or outlook.)
The biggest story for LNG in 2022 was the China-Qatar supply deal — touted as the world’s largest-ever LNG supply deal at $60 billion over a total of 27 years.
Upon the news of this landmark deal, the Carnegie Endowment for International Peace published an in-depth report about its significance to global energy dynamics and geopolitical trends. One of the key points mentioned in the report is that this deal brings China much closer to Qatar, and forms part of the country’s “multifaceted engagement strategy to expand its economic and geopoltical footprint.”
Australia’s & US’s LNG Exports
Two of the United States’ biggest LNG producers are Cheniere Energy and Freeport LNG. These two companies have played the biggest role in what is being called a First and Second Wave of US LNG production.
Now, a Third Wave has been cited by Wood Mackenzie is one of its latest research findings. The title of the report is Third wave US LNG: a $100 billion opportunity.
They argue that the US position as a world-leading LNG producer will be a boon for carbon reduction strategies worldwide. With new final investment decisions (FIDs) commencing around the US, long-term deals for US LNG supply are likely to increase substantially for energy security as well.
Cheniere Energy made a total revenue of $33.42 billion in 2022. This was mainly attributed to an increased demand form European countries in light of the fallout with Russia over the gas price cap and sanctions.
It’s clear that the European Union (EU) views LNG as a stable supply for its energy security needs. In addition, it is a force multiplier as a carbon reduction strategy on the continent. Just look at the overall trends toward LNG from some of the world’s largest producers: Freeport LNG is resuming natural gas exports in March; Chevron is increasing shale production in the Gulf of Mexico; and Shell is calling for more investments in liquefactions projects over the next decade.
I will further illustrate by looking at one of Australia’s biggest energy companies: Woodside Energy.
This company has went under the radar, and I don’t know why. Because they landed one of the biggest deals in the energy sector during a time when all of the attention has been focused on energy demand and security.
In November 2021, the Perth-based Woodside Energy announced its FID on the Scarborough offshore gas project in Western Australia. This deal was finalized after the company successfully acquired BHP Group’s petroleum division of the project through a binding share sale agreement to merge with BHP’s oil and gas venture in the Scarborough gas field. According to a report by Energy Flux, this merger will create the largest company in Australia in terms of market capitalisation at A$41 billion.
Australia was the world’s largest LNG exporter in 2021 when revenues hit $35.3 billion in 2021. This was due to China’s rise as the world’s largest importer, of which 31.6 million tonnes of the country’s LNG imports came from Australia.
At a time when Australia’s market share over LNG exports is projected to start declining vis-a-vis Qatar and United States, Woodside Energy dominated LNG production in 2023. According to The Sydney Morning Herald, Woodside made more than $1 million an hour in profits due to the rising demand for natural gas. It also reported that Woodside made $6.50 billion in net profits for the year of 2022, since the BHP merger was taken into account.
In conclusion, the issues around areas of production investments and the dilemmas facing producers in the global energy demand scenarios are critical to geopolitical trends in the global economy at present. But what does this mean for future industrial policies?
Although LNG is one of the most important indicators for carbon reduction strategies, energy producers like Woodside Energy are taking Net Zero projects a step further, especially in advantageous markets like the United States, where the company announced it would launch a hydrogen project — H2OK — in Oklahoma at the Westport Industrial Park in Ardmore.
Russia’s Gas Exports & Turkey’s EastMed Production
Russia’s Gazprom is the state-owned energy giant responsible for a large share of the country’s revenues, as it is the largest taxpayer in Russia.
Reuters has reported that overseas gas sales from Gazprom have dropped to $3.4 billion in January 2023, which means that it is trending to lose around half of its overall revenues on a year over year (yoy) basis. Although the declining sales revenues are being attributed to the lack of European imports, what’s happening in other parts of the world tell an important part of the story too.
A flashpoint case has recently come into the spotlight over a disputed claim where natural gas discoveries in the maritime EEZ of Cyprus are at the center of the territorial dispute between Greece and Turkey.
On 21 December 2022, it was announced that French oil and gas producer TotalEnergies and Italian oil and gas producer Eni had made new discoveries of natural gas deposits off the coast of Cyprus in the Mediterranean Sea. This part of the sea is referred to as the Eastern Mediterranean, or East Med.
It has been estimated that the offshore gas area of Cyprus can produce 2 trillion tcf, or 72 billion cubic meters (bcm), but territorial issues have come into play between the Turkish Cypriot government and the Greek Cypriot government. The former entity is only recognized by North Cyprus, which was occupied by Turkey in 1974.
The offshore gas exploration and production (E&P) in Cyprus has caused Turkey to accuse Cyprus of escalating tensions with Turkey. The Turkish foreign ministry said that the latest discovery intends to “violate the rights of the Turkish Cypriots, who are one of the co-owners of all natural resources of the island.” Reuters
Since Turkey is one of Russia’s biggest natural gas importers, how this offshore gas project plays out could determine factors in Gazprom’s market share. Read about Grain Markets & Natural Gas Production Explain Key Trends Going Into 2023 for an in-depth analysis on issues related to natural gas and geopolitical trends.
Another one of Gazprom’s biggest customers is China. OilPrice.com has been working overtime to put all of the critical pieces of information together on this momentous turn of events in Iraq’s oil industry. According to the latest report, PetroChina is going to become the sole leading operator of the massive West Qurna 1 oilfield in Iraq, with ExxonMobil coming close to finalizing its sale of the 32.7% stake in the production.
The significance of this oilfield has to do with its location near the oil and export hub of Basra. The West Qurna 1 oilfield contains an estimated 43 billion barrrels of recoverable reserves. The production strategy by China comes in line with Iraq’s Oil Ministry plans, which OilPrice.com noted is to boost oil production capacity to more than 700,000 barrels per day (bpd) by 2025.
At the same time, PetroChina and Sinopec have publicly announced their intentions to resume imports of Russian crude oil. According to a Reuters report, an oil trader in China remarked: “Prices of Urals are well below the price cap, and the cheap feedstocks are timely as they would increase refining throughput when China’s demand picks up.” Sanctions on Russian seaborne exports of crude oil will be in focus, of course, since they went into effect on 5 December 2022 after the results of the G-7 Summit in 2022.
While sanctions on Russia will have an impact on China’s crude oil imports, Sinopec announced its plans to historically increase capital expenditures for upstream production in March 2022. Thus, crude oil market prices and the outcomes of other global oil supply dyanmics will play a bigger role in China’s success to secure its own oil production and supplies.
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