The Big Drop: oil price collapse fuels upheaval in African and global energy and shipping, Afrimari meeting hears
By James Brewer
Some of the hottest projects in the oil and gas market have cooled in response to the dramatic fall in crude oil prices – and traders have had their fingers burned in some transactions, a London meeting of the shipping and trading network Afrimari heard.
On its fifth anniversary, Afrimari welcomed two experts in the energy field to evaluate the impact of the commodity turmoil, under the title The Big Drop. Oil prices have tumbled in the past year from more than $100 per barrel, to $55 at the time of writing, and gas prices too have halved. Liquefied natural gas projects on the drawing board for 2020 to 2030 have been cast into doubt.
The event, at Cass Business School and in association with the Cass Shipping Society, was addressed by Jeffrey Hartman, senior vice-president for business development at Taleveras Group, and Debbie Turner, senior LNG advisor at shipbroking group Simpson Spence Young.
Ms Turner started her review of the gas market by saying that currently, with the demand for oil storage, “you cannot get a VLCC for love or money.” What, she asked rhetorically, had that to do with the gas market? Historically the liquefied natural gas price had been based on the crude oil price. The price of LNG imported into South Korea and Japan for instance was based on a ‘basket’ of OPEC crude. China had earlier gone into the market at $19 per million British Thermal Units [before the price slumped to $10].
Japan since the Tsunami of 2011 shut down nuclear power, which was replaced either by extra crude, or LNG, particularly for town gas, or coal. Significant amounts of coal were being imported, because of the high price of crude and LNG, but quantities of the latter diminished as the price in the Far East for a barrel of crude fell to the $67 to $70 level.
There were a growing number of LNG carriers, and a “loose market, ” so loose that some of the owners to get their ships moving will accept a lower freight level. They felt a need to get ships from the newbuilding yards moving prior to going into a project five to six months ahead.
The pricing slide is having a major effect on where the projects are going to be, on Africa in particular. Mozambique [with 75trn-plus cu ft of estimated recoverable natural gas so far discovered offshore] will go ahead, forecast Ms Turner, but at what price? In Tanzania a rival LNG development has been put on hold because the developer BG Group has decided there are more important projects. The cost of developing the Tanzania scheme is huge [up to $30bn has been mentioned, although a potential project site has yet to be decided], being offshore and totally green-field.
Given the number of projects planned worldwide, it does not look as though the amount of LNG they would produce will be required, said Ms Turner. Nobody had factored in the substantial fall in the price of crude oil. Products including kerosene and aviation fuel had become substantially cheaper, which made the importation of natural gas a lot less realistic.
Africa lacks sufficient gas reserves of its own. The west coast certainly does, even though Nigeria and Angola have natural gas on the doorstep. Nigeria does not currently have enough even for its domestic economy, let alone for Ghana, Togo and other states along the coast.
Ms Turner outlined the gas storage dilemma. If you are storing gas on board a ship, you are boiling off the cargo. As new terminals have started up, they have put cargoes into tanks, but that is costly and there is not much margin in the LNG market for the traders to make a play. Some of the traders “have had their fingers badly burned.”
The vital point about Africa was power, said Ms Turner. “Africa is very short of electricity – electricity is the key.” If generated supply became more secure, industries would “take off.”
Asked about the role of new forms of energy, she said: “I do not think you will ever get sufficient renewables to replace fossil fuel.”
Jeffrey Hartman, who leads his company’s upstream activities, oversees crude oil and feedstock trading, said that crude oil had undergone a significant price correction, losing half its value in less than 12 months.
He said that beneficiaries of the price fall included some refiners and energy-intensive industries, the retail consumer and some countries. The hitherto higher prices had enabled producers to invest in extracting oil and gas from shale and sands.
From the perspective of a non-producing company with no debt to service, this did not really matter. What mattered were the opportunities that the market allowed. He drew attention to the contango phenomenon – in which the future spot price is lower than the price today. This incentivises trading companies and refineries to monetise the problems. A lot of the contangos have begun to support storage on land because it is cheaper than storing on vessels. Shipowners had to be quick to react – freight rates had started to rise. “Wherever we have seen a contango that is interesting, it has disappeared within a week, ” he said. Some ships were being taken on time charter, with an option for storage.
Mr Hartman said that oil majors had sold assets in Nigeria in the knowledge that there were much easier operating environments in other countries. There was an opportunity for domestic private companies to become involved in the industry – “Nigeria has entrepreneurial flair.”
A member of the audience said that although some projects had been shelved or put on hold, the picture was mixed. Other things were happening, such as Mauritania’s plans to increase power capacity.
Moderator for the debate, Temi Binitie, who co-founded Afrimari with Gemina Cooper, said that it was an emotional day as Afrimari marked its fifth anniversary. She praised members for the achievements of the organisation, adding “Afrimari is beyond individuals now: we are a collective.” Both she and Ms Cooper are alumni of Cass Business School.