A new piece of research could help the oil and gas industry understand and implement greater collaboration in the North Sea, as the sector continues to manage lower oil prices.
Business advisory firm Deloitte launched its inaugural oil and gas collaboration survey, with support from Oil & Gas UK.
The research will assess the level and quality of collaboration currently taking place on the United Kingdom Continental Shelf (UKCS), as well as how companies across the supply chain could work together in new ways.
The research, which has comparisons with a Deloitte study carried out in the US looking at the automotive industry, will survey participants on:
Collaboration has been a consistent industry theme since the publication of Sir Ian Wood’s UKCS Maximising Economic Recovery Review. It was a core recommendation in Sir Ian’s report, but there is currently little data available on what it means and how it might benefit the upstream oil and gas industry on the UKCS.
Justin Watson, a partner in Deloitte’s consulting practice, said: “Collaboration has been the focus of many client conversations about how we take the industry forward. With subdued oil prices set to continue, it’s more important than ever that companies look at what could be gained by working more closely together to bring down costs, reduce complexity and boost efficiency.
“However, what collaboration means for the oil and gas industry is not well understood. Our research aims to help define what collaboration is, how it looks in practice and how companies can better collaborate with one another.
“We would encourage anyone operating in or providing services to the UKCS to take part in this research. We hope a better understanding of collaboration could help companies in the North Sea improve productivity and efficiency, cut costs, adopt new ways of working and make the most of what remains in the basin.”
Oil & Gas UK’s business development director, Stephen Marcos Jones, added:
“Whilst tough decisions on resources and projects are being taken by individual companies, there is a growing effort to work together to make the UKCS more efficient and attractive for investors in a world of $60 oil.
“Any work looking at collaboration in our sector, and specifically how companies can work together in new ways, is therefore of real benefit and will be warmly welcomed by the UK’s offshore oil and gas industry.”
This project builds on Deloitte’s previous work on ‘Making the Most of the UKCS’ – Cultural shift key to maximising economic recovery of oil and gas.
Between 2009 and 2014, refining margins rarely exceeded $5/bbl in Europe and $8/bbl in Asia, whilst the USA was the only safe-haven, averaging $15/bbl. In 2015, however, the game changed as the global oversupply triggered a crude price collapse, resulting in healthier refining margins – year-to-date averages in Europe are $9, $12 in Asia and the in USA $20.
This plot is not new and many would expect that in markets geared heavily towards light/sweet oil the premium for processing lower quality crude – the ‘complexity advantage’ – should tighten in a low oil price environment. However, this is not happening. Since early 2015, a barrel of Russia’s Urals trades at a discount to Brent of $1.5, oscillating in a -$1/-$2 range. Nigeria’s Bonny Light, arguably one of the highest quality crudes, traded last week at a 10-year low premium to Brent of $0.23, vs. +$2 in early 2014.
Many factors are at work here. Firstly, the downstream supply chain is rather rigid, as refineries are designed and located for ease of supply and so process specific crude grades, making switching uneconomical. But the primary driver of reduced premiums is now the level of oversupply of crude. Spectacular growth in US light oil production has squeezed output of light/sweet West African, and heavy/sour South American crude grades. Meanwhile, the Middle East maintains production and becomes the reference for Asian buyers, leaving European refineries with a steady Russian output supplied through pipelines.
Recent history teaches the virtues of composure. Following the US fracking revolution, Gulf Coast refineries freshly upgraded to process anticipated heavy/sour foreign crude have not seen returns on their investments, while those who passed on costly upgrades are now well positioned to process booming domestic light/sweet production. However, refiners shouldn’t be banking on sustained high margins. As the market works through an enduring supply glut, and grapples with the prospect of renewed Iranian output, the complexity advantage is likely to prove as volatile as crude prices.
Antoine Paillat, Douglas-Westwood London
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NYC-based PIRA Energy Group believes that the peak in the crude oil surplus has passed. In the U.S., commercial stocks reach new record level, as surplus falls again. In Japan, crude runs rebounded, imports were low and stocks drew. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
Asia-Pacific Oil Market Forecast
The peak in the crude oil surplus has passed. Products stocks, on the other hand, which had been near multi-year norms in the three major OECD markets, will grow in coming months, despite rising demand. The transition from crude surplus to more of a product surplus will begin to pressure refinery margins lower. Gasoline cracks should remain healthy for the next several months due to declining inventories and increasing coverage requirements in the Atlantic Basin. Middle distillate cracks will ease, with new refinery startups in the Middle East, Turkey, and Latin America ramping up and supplies increasing ahead of demand growth.
U.S. Commercial Stocks Reach New Record Level, As Surplus Falls Again
Total commercial stocks built last week to a new record high level. However, last week’s stock build was less than half of last year’s build, as the total commercial stock surplus versus last year narrowed to the lowest excess since January. June of last year is when commercial stocks began to approach the top of the five-year range.
Japan Crude Runs Rebounded, Imports Were Low and Stocks Drew
Crude runs recovered almost one third of the drop from the previous week despite the ongoing outage at Kashima. Crude imports were very low and crude stocks drew 4.1 MMBbls. Finished product stocks drew 1.4 MMBbls. There were draws on all the major products other than kerosene. Demand performance was mixed across products, but aggregate demand was higher. The indicative refining margin remains very good. Gasoline and naphtha cracks firmed, while middle distillate and fuel oil cracks eased.
Tight Oil Operator Review
Operators focused on the direct and indirect effects of the lower price environment on their production profiles for 2015. Drastically lower rig counts have started to make a dent in production growth, but the bulk of the effect will not be felt until 2Q15. Most operators predict that their 2015 exit rate will be lower than 1Q15 production, indicating a relatively weak 2H15, unless prices improve. The outlook for 2016 remains uncertain, but most operators appear upbeat for 2016, expecting prices to rise and claiming to be ready to ramp up activity.
U.S. Octane Values Spike Higher
Octane values have recently spiked. This follows a pattern that has prevailed since 2012 of rising octane values during spring turnaround season and the transition period between summer and winter grade gasoline. There is a confluence of factors that led to this increase, notably increased premium gasoline demand and changes in refinery and petrochemical operations.
El Niño's Impact on Distillate Demand in the U.S. and Europe
PIRA analyzed the 5 strongest El Niño's measured over the October through March period for the last 20 years. For the U.S. only the strongest El Niño impacted distillate demand. For Europe, 3 out 5 El Niño's had an impact on distillate demand.
Waterborne LPG Freight Leaps Higher
Spot VLGC freight rates are soaring at the highest levels of the year. The cost of freight on the benchmark Ras Tanura to Chiba route jumped 5% to just below $120/MT. Meanwhile the cost of freight from the USGC to Japan continues to be quoted above $250/MT and around $90 for shipments from the U.S. Gulf to NW Europe.
Ethanol Prices plunge
U.S. ethanol prices plummeted the week ending June 12 due to near record production and rising inventories. Manufacturing margins fell for the fourth consecutive week as co-product DDG prices decreased to the lowest level of the year.
Ethanol Output Falls
U.S. ethanol production fell for the first time in six weeks during the week ending June 12, dropping to 980 MB/D from 992 MB/D in the preceding week. Despite the decline, output was still at the second highest rate of the year.
Biofuels Programs Continue in Over 60 Countries
Although about 80% of the biofuels are produced or consumed in the U.S., Europe and Brazil, more than 60 countries have biofuels programs.
The information above is part of PIRA Energy Group's weekly Energy Market Recap - which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.
The crash in oil prices has led to a dramatic decline in the number and value of awards for FPSO units. There have only been three contracts awarded this year; a conversion for the Sankofa-Gye Nyame development in Ghana, a small conversion in Iran and an upgrade in Indonesia. In total these awards account for around $1.5 billion.
By comparison, in the first half of 2014 there were six orders and crucially, the value of those six was 528% higher than the three this year – demonstrating the lack of high Capex orders in the current low oil price environment. H1 2014 saw two newbuild contracts worth over $1 billion each, in addition to the awarding of a $4 billion contract for two converted FPSOs on the Kaombo field in Angola. This demonstrates the current caution of operators at the moment as they aim to bring costs down and wait for a recovery in oil prices before commissioning major projects.
Expectations for the rest of this year are little-better. Many awards have been pushed into 2016, while Petrobras are rumoured to be considering cancelling two topside contracts for FPSOs planned on the Buzios field. Douglas-Westwood forecasts that four more awards are likely this year while a further five could potentially be awarded if there is an improvement in the oil price.
Whilst the immediate outlook may not be positive, the future of FPSOs is still considered encouraging. FPSO solutions will be vital for the development of oil and gas fields in deeper waters as well as for marginal fields in mature regions. The current low oil price may lead to a decline in orders that continues well into 2016. However, Douglas-Westwood still forecasts FPSOs with a total value of $60billion will be installed 2015-2019 and within our in-house data we are tracking over 130 potential future deployments.
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