Home' Trinidad and Tobago Guardian : April 23rd 2015 Contents BG8 ENERGY
BUSINESS GUARDIAN www.guardian.co.tt APRIL 2015 • WEEK FOUR
When the price of oil
crashed last year,
many assumed that
the earliest casualties
would be the small,
companies that specialise in getting "uncon-
ventional" oil out of shale, tar-coated sand
and the like. After all, with their high pro-
duction costs and heavy debts, these firms
inherently were more vulnerable to price shocks
than big oil companies, the thinking went.
Indeed, Saudi Arabian officials even suggested
that they were refusing to cut their output
precisely in order to put such firms out of
Six months later, though, there is little sign
of a bust in America s shale basins, where
horizontal drilling and hydraulic fracturing,
aka fracking, have led to a boom in oil and
gas production in the past five years.
Scott Nyquist of McKinsey, a consultancy,
says that the price drop has not caused the
"immediate distress" that originally was
assumed. An analysis of 300 independent
American oil and gas companies in the first
quarter of this year showed that more than
two-thirds had healthy balance sheets, with
at least as much equity as debt.
By the same token, the debt of two-thirds
of the midsize firms in the survey was trading
at 80 per cent or more of its face value, sug-
gesting that investors are not too worried about
their health. The firms that have been in trouble
are those with dud leases, or which had
embarked on big takeovers last year, imme-
diately before the price began falling.
Figures compiled by investment bankers at
Barclays tell a similar story. Although yields
on the "junk bonds" issued by American energy
firms spiked from a low of 5.0 per cent in the
summer to more than 10.5 per cent in Decem-
ber, since then they have fallen back to 8.0
per cent, roughly the same as in mid-2012.
It has become a little more expensive for frack-
ers to borrow, in other words, but there is no
sign of a crippling squeeze.
The number of rigs drilling for oil in America
has fallen by half since October, from some
1,600 to 800.
That will eventually sap output. For now,
though, American oil production still is grow-
ing: In March it rose by 120,000 barrels a day.
One reason is that frackers have been able
to cut costs, along with the rest of the oil
industry, as the price of labour, steel and other
inputs has fallen. That gives a one-off boost
to their finances.
They also are benefiting from continuing
improvements in productivity. These include
better seismic data, which means that more
fracks are successful, the ability to drill ever
more wells from a single spot and, on the
horizon, polymers and other fluids that cut
water use or replace it altogether.
It is not all plain sailing. Oil reserves are
valued in October, Michael Cohen of Barclays
noted. Those priced last year, with oil around
US$100 a barrel, will be worth much less this
time round. Even troubled firms do not nec-
essarily cut production, though. New owners
can purchase their assets cheaply and keep
The main lesson is that, although the price
drop has been bad for producers in such places
as the North Sea, it has not derailed America s
oil boom. Indeed, America is replacing Saudi
Arabia as the world s swing producer. Frackers
have drilled lots of wells and then plugged
them, waiting for the price to rise again. If it
does, Cohen expects between 300,000 and
800,000 barrels a day of production to start
up.Nor is there any sign of a shift away from
unconventional oil in terms of capital invest-
ment. Unconventional oil has been gaining an
increasing share of the pie in recent years.
Investment of all kinds will dip this year, but
Rystad Energy, a research firm, sees it rising
strongly again thereafter. A new forecast from
America s Energy Information Administration
reckons that rising production and greater
efficiency mean that the country will stop
importing energy between 2020 and 2030,
depending on the price.
This contributes to a picture in which oil
prices, barring big geopolitical upsets, look
unlikely to rise sharply. True, global demand
for oil is set to rise and old oil fields are deplet-
ing, meaning that much of the industry needs
to run in order to stand still.
However, the message from America is that
finance and technology combined are more
than a match for geology. Reuters
Oil prices: Unconventional but normal
The world s first floating liquefied
natural gas (LNG) project, built by
Petronas, is expected to supply its first
cargoes in the first quarter of 2016,
senior officials from the Malaysian
state-oil firm said on Tuesday.
The 365-metre (1,200 ft) long
Petronas Floating LNG 1, with a capac-
ity of 1.2 million tonnes per annum,
would be completed by March next
year, the firm s vice president and ven-
ture director LNG projects (domestic)
Abdullah Karim told reporters.
"We expect the first cargo of LNG
to be available in thefirst quarter of
2016," Abdullah said, adding that the
gassupplies will likely be used for
Abdullah did not reveal the total
investment value of thefacility nor the
LNG price assumption used during the
final investment decision (FID) in March
2012, but said the projectwas currently
"We are still optimistic about this.
Our projection numberis not for oil
prices at US$110. Even today with prices
at US$62 or so, it s still viable for
Petronas," he said.
Brent crude oil steadied around
US$63 a barrel on Tuesday, not far
below the 2015 high hit on April 16,
while US crude was trading at US$55.93.
Oil has climbed around 15 per cent
this month, fuelled by concerns over
the conflict in Yemen, southern neigh-
bour to oil-rich Saudi Arabia.
"At the current oil prices, it is chal-
lenging. But if oil prices rise to US$70
a barrel, we can get double-digit inter-
nalrate of return," said the senior vice
president of Petronas Technology and
Engineering unit Colin Wong.
Industry players have raised questions
over whether it is more cost-efficient
to build land-based or floating LNG
Royal Dutch Shell is building its own
floating facility in Australia, named
Prelude. The project is anticipated to
be the world s biggest maritime vessel
and is set to start up in 2017.
Abdullah said PFLNG1, with an
expected lifespan of between 20-25
years, would save Petronas around
Petronas is due to make a FID on an
US$11 billion LNG export terminal in
British Columbia by June, after post-
poning thedecision late last year.
In March, unlisted Petronas,
Malaysia s only Fortune 500company,
reported a US$2 billion fourth-quarter
loss and announcedplans to cut in
spending over the next two years, hit
by a slumpin global oil prices. Reuters
Petronas to deliver LNG cargoes from
world's first floating facility in Q1 2016
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