Editorial comment

A. Blume, Managing Editor
Adrienne.Blume@GulfPub.com

Falling crude oil prices have impacted profit forecasts for oil and gas producers, as well as for petrochemical makers and gas processors. Companies with revenue streams that are tied to the dollar price of oil are scaling back on costs, including construction expenses for major capital-intensive projects. 

In the gas processing sector, projects under scrutiny include multibillion-dollar LNG and GTL ventures. Gas projects that have been suspended as a result of the oil price drop include Sasol’s $14-B GTL plant in Lake Charles, Louisiana; Petronas’ $11.4-B Pacific NorthWest LNG project in British Columbia, Canada; and Shell’s $25.5-B Arrow LNG project in Queensland, Australia.

The oil price slide has also pushed down oil-indexed Asian LNG spot prices, making some LNG export projects less economical—at least, in the short term.

The long-term picture is more important to consider. Oil prices are cyclical in nature; the market will balance itself out in time, and short-term forecasts are too varied and speculative to be considered as predictive. The energy industry must view capital-intensive projects through a long-range scope.

In the gas processing sector, major LNG and GTL projects are designed for life spans of 20–30 years or more. The feedstock will be there; huge reserves of primarily unconventional gas in the US, Canada and Australia guarantee that fact. 

The demand, too, will be there, as the world’s population continues to grow, as middle classes in emerging economies expand and as the use of natural gas as a source of low-emissions energy continues to rise.

Failure to meet demand could be more costly in the long run. According to Wood Mackenzie, more than $100 B of LNG investments that are linked to the price of oil could be delayed by 3–5 years, or canceled, as a result of the 50% decline in crude prices. However, if too many projects are pulled back, then global LNG output could tighten after 2020.

The long-term success or failure of major gas processing projects will depend on how smartly they are planned. Where companies must be prudent is in competing for market share in areas that are already saturated with new project announcements, such as the US, Canada and Australia. 

Project partners should be capable, committed and sharing the same vision of risks and results. Environmental and regulatory permissions should be analyzed before projects begin to avoid undesirable surprises. Offtake agreements and sales contracts should be secured early on, before major amounts of capital are invested in engineering and design work.

Realistically, only projects with strong financial backing and smart planning will survive, and those that persevere stand to reap the financial rewards of a trimmed-down gas export market. GP