Earlier in the week, we looked at how China and Iran and Russia are increasingly caught in a co-dependency over oil and gas. Now we look at the consequences of the cycle of violence in the Middle East and the ongoing Russian war on Ukraine.
The first consequence of this geopolitical mayhem is that all shipping stocks and oil and gas service company shares remain highly volatile. Plausible scenarios can be modelled either that there will be a glut of oil next year, or that an Israeli attack on Iran’s Kharg Island terminal could drive prices to record nominal highs. At the time of writing (a few days before you read this…), the fears of a glut dominate.
We reported earlier how Tidewater’s senior management, its board members, and (especially) its multimillionaire CEO Quintin Kneen had disposed of close to US$100 million of shares in the company through multiple transactions when its shares stood at over US$100. Today those same shares stand close to US$60. Surprise!
Those who held onto their Tidewater shares, whilst the CEO and his coterie sold theirs, look like fools, but such is the volatility of the market. Year to date, the shares in the three biggest drillers Transocean, Valaris and Noble Corp are all down between 28 and 42 per cent. Even SLB, the former Schlumberger, is down 19 per cent. Fears of recession in China and Saudi production increases continue to dampen oil prices, even as the Middle East flashes red.
This makes it difficult for new companies to come to market (thinking of Hornbeck Offshore here) and it makes raising debt more expensive. This may temper newbuilding plans in offshore, even as the drip-drop of orders continues. It makes planning and budgeting difficult, and this uncertainty may slow down some offshore oil projects.
Whilst Russian LNG and piped gas are subject to far fewer sanctions than oil, so long as Russia is attacking Ukraine, pressure to stop buying Russian gas will only intensify. Every country that is not Russia or Iran and that has undeveloped gas reserves is moving to monetise them now in a high-price environment in the expectation that Russian gas exports will be further squeezed by the US and its allies.
“There are no excuses, the EU can live without Russian gas,” the EU Energy Commissioner, Kadri Simson, said last week.
It doesn’t get clearer than that. Why would EU members pay Russia for gas when the Kremlin is reported to be bringing thousands of North Korean troops to within a few hundred miles of European capital cities in an invasion of Ukraine?
Therefore, we see a wave of long-stalled gas projects moving ahead. Upstream even reported that even Woodside’s twenty-year delays to its Sunrise LNG project in the waters of Timor-Leste 450 kilometres north of Darwin might be over.
Now a new development study is nearly completed and Japanese producer Inpex is tipped to enter the project.
In Indonesia, Inpex is also moving ahead with tendering key contracts for the twenty-year delayed Abadi LNG project. Inpex hopes to build a two-train onshore LNG plant in Saumlaki in the Taminbar Islands to produce 9.5 million tonnes per annum (MTPA) of gas piped from subsea wells, plus additional local gas supply, and a floating production storage and offloading vessel (FPSO) for processing 35,000 barrels of condensate a day in the remote Arafura Sea.
For nearly a quarter of a century, Inpex and the Indonesian government have wrangled on the terms and design of the project, rejecting a Shell-inspired plan to produce via floating LNG facilities. Pertamina of Indonesia and Petronas of Malaysia bought out Shell’s 35 per cent share in the US$19 billion project last year.
Also in Indonesia, Eni is moving ahead with the development of its Geng North project and the former Chevron discoveries in the Indonesia Deepwater Development off Borneo that the Italian major purchased in 2023, as we reported.
Eni will install a large deepwater floating production unit with condensate storage offshore to receive peak production of 80,000 barrels a day, and the existing onshore Bontang LNG plant will then process the gas from the project. First gas is slated for 2027.
Papua New Guinea’s Post Courier newspaper reported that state oil company Kumul Petroleum has completed a feasibility study for a new floating LNG facility in the Gulf of Papua, and has commissioned Chinese engineering company Wison New Energies on to conduct pre-FEED work for an FLNG unit with an expected capacity of 1.5 MTPA.
Elsewhere in Asia, PTTEP is bidding key contracts on what it claims is the single biggest gas discovery in Malaysian history, its Lang Lebah development off the state of Sarawak in Block SK410-B. The field is expected to come into production in 2027 via two jacket-based wellhead platforms, a central processing platform with jackets, a flare platform, two bridges, and a 42-inch trunk pipeline that will take the gas ashore, where it will be processed at Petronas’ Bintulu LNG Complex.
Lang Lebah means “just a bee” in Bahasa Melayu, according to Google. Fun fact.
In Mozambique, we understand that TotalEnergies will shortly lift force majeure on the construction of the 13 MTPA Mozambique LNG project in conflict-ravaged Cabo Delgado province, and that ExxonMobil has commenced engineering studies on its neighbouring Rovuma Phase 1 LNG trains, which will be built beside the Total project for first gas in 2029. The original discoveries here date back a decade.
Both the TotalEnergies and ExxonMobil LNG plants in Afungi will take gas via pipeline from deepwater wells offshore. Eni also is moving ahead with a second deepwater FLNG to develop Coral Norte in northern Mozambique, which will copy its existing Coral Sul FLNG design (with a capacity of 3.4 MTPA). The Coral Sul FLNG is supported by a trio of Robert Allan-designed terminal tugs operated by Smit Lamnalco.
So, there’s a dash for gas to replace Russian supply. This is supportive of medium-term offshore drilling demand. As we have said often, gas is cleaner than coal and has half the carbon emissions per unit of energy when burnt, and far fewer toxic particulates.
The unexpected twists and turns of geopolitics mean that oil and gas will remain volatile, prices unpredictable and adverse shocks very possible. But the core conflict between Russia and Iran, financed by Chinese fossil fuel purchases, on one side, and the West and Israel and Ukraine looks set to continue, regardless of who is in the White House, and regardless of whether oil is at US$40 or US$140 a barrel.
In such a violent and dynamic geopolitical environment, “Stop the war” seems as futile a suggestion as “Stop oil.”
How exactly?
Background reading
Part one of our geopolitical updates series is here.