Demand in Asia dictates project viability

February 11, 2015

ABB’s Will Leonard looks at how emerging economies are driving the future of oil and gas production.

A welder works on the Power of Siberia pipeline. Photos from Gazprom/RIA Novosti.

The ASEAN countries, along with China and India, are collectively shifting the global energy epicenter to Asia. The axis of the oil market is shifting from the trade between the Middle East exporters and US and European importers to one that links Asian developing markets to the Middle East. However, Asian markets are absorbing more oil than the Middle East can supply to support these markets’ growing needs. In fact, by 2035 Asia will account for more than half of the world’s energy consumption.

The countries of Southeast Asia, for instance, are extremely diverse with vast differences in the scale and patterns of energy use and energy resources.

Since 1990, the region’s energy demand has expanded 250% and further growth is inevitable when you consider that the energy use of its 600 million inhabitants is extremely low, at just half of the global average.

Southeast Asia’s energy demand is set to increase by over 80% between now and 2035 as a result of a forecast tripling of the region’s economy and the population expanding by one-quarter. As such, oil demand could rise from about 4.4 mb/d today to 6.8 mb/d in 2035, almost one-fifth of projected world growth; coal demand is expected to triple by 2035, accounting for nearly 30% of global growth; and natural gas demand is set to increase by 80% to 250 Bcm. As such, Southeast Asia’s energy-related CO2 emissions will almost double, reaching 2.3 Gt in 2035.

The abundance of coal in the region is set to be the main fuel that will boost its share of electricity generation from less than one-third today to almost one-half by 2035. The use of coal will be at the expense of natural gas and oil. This is already underway, with some 75% of thermal capacity under construction being coal-fired.

The Russian effect

Russian President Vladimir Putin, First Vice Premier of China’s State Council Zhang Gaoli, and Gazprom’s Alexey Miller attend the Power of Siberia construction launch in September 2014.

Meanwhile Russia, with proven reserves of some 5 Tcm of gas in its Eastern regions, has the potential to make significant export sales into the Asia Pacific region, which contains the world’s largest LNG importing nations and two of the world’s fastest growing gas markets in China and India.

However, despite this potential, Russia’s only significant exports in the region are from Sakhalin 2 project, which currently sells 10.8 mt of LNG/yr into Asian markets. But this is all about to change.

Russia’s signing of a multi-billion dollar, 30-year gas deal with China back in May, marked a significant milestone in the importance of the emerging economies to the future of oil & gas production. The deal between Russia’s Gazprom and China National Petroleum Corp. (CNPC) is expected to deliver some 38 Bcm of natural gas a year eastward to China’s burgeoning economy, starting around 2018.

Russia has been keen to find an alternative energy market for its gas in the face of European sanctions over the crisis in Ukraine. However, the deal has been some 10 years in the making and during that time China has found other gas suppliers. Turkmenistan is now China’s largest foreign gas supplier, and last year it started importing piped natural gas from Myanmar.

China needs the gas to help cut its reliance on coal-fired plants as well as the desire to diversify its supply. China is also Russia’s largest single trading partner, with bilateral trade flows of $90 billion (£53 billion) in 2013. The two neighbors aim to double the volume to $200 billion in 10 years. As such, the agreement is seen as much for the investment that China will make into Russia’s power and transport infrastructure.

Another reason for the lengthy delay in the deal has been the construction of pipelines into China. Currently, there is one complete pipeline that runs across Russia’s Far East to the Chinese border, called The Power of Siberia. It was started in 2007, three years after Gazprom and CNPC signed their initial agreement in 2004. But financing the $22-30 billion cost of sending it into China had become key to an agreement being reached.

Russian President Vladimir Putin, First Vice Premier of China’s State Council Zhang Gaoli, and Gazprom’s Alexey Miller attend the Power of Siberia construction launch in September 2014.  

Financing the future

Following close on the gas deal announcement, China was again at the heart of an initiative to increase infrastructure financing for developing countries. In July 2014, China, together with the other BRICS nations – Brazil, Russia, India and South Africa – agreed to create a new development bank (NDB) that would have initial capital of US$50 billion.

In October, 21 Asian countries agreed to establish a new Asian Infrastructure Investment Bank (AIIB) for which China will provide up to 50% of initial capital. The bank’s aim is to provide funding for infrastructure projects in underdeveloped Asian countries.

While the initiatives have been criticized by some as a way for China to simply challenge Western-backed institutions such as the World Bank or International Monetary Fund (IMF) – as a result of Beijing’s growing discontent with these bodies – there are others who believe the new development banks might have a positive impact on emerging economies.

Acquisitions and sales

Welders work on the Power of Siberia pipeline during the construction launch in September 2014.

The impact of the emerging economies can be felt across the world, with China’s influence on the North Sea alone, resulting in some 20% ownership. Ventures such as Nexen’s purchase by China’s national oil company CNOOC and that of Talisman with China’s Sinopec are typical of the acquisitions that are continuing in the market.

More recently BG Group announced the sale of its 543km pipeline that runs between coal seam gas fields in the Surat Basin to BG’s QCLNG plant on Curtis Island in Gladstone; the first of three large LNG export projects due to begin production over the next 12 months. Australia’s biggest gas transporter, APA Group has agreed to pay US$5 billion ($6 billion) for the recently built pipeline in BG Group’s liquefied natural gas project in Queensland and buying its way into the growing LNG export sector in eastern Australia. LNG from the project will be mostly shipped to China, to CNOOC.

The sale, expected to complete in June 2015, may set the scene for similar pipeline divestments by the two other LNG projects in Queensland, Santos’s US$18.5 billion GLNG venture, and Origin Energy’s Australia Pacific LNG project.

Surge in FPSO interest

Another area of importance is that of floating production, storage and offloading systems (FPSOs) which are now recognized as the most dominant floating production facility. Brazil tops the list of FPSOs in service and on order, followed by Southeast Asia and then Africa. Other major locations include the Gulf of Mexico, Northwest Europe, Australia, the Mediterranean and Southwest Asia/ India.

Many Southeast Asian countries are moving to FPSOs in order to grow their businesses. Traditionally, the companies established their businesses by operating as service providers to the upstream petroleum sector, offering services in areas such as the supply of offshore support vessels or offshore fabrication. Most of them have since widened their services to grab a larger slice of the lucrative upstream market, including the supply of FPSOs.

A few petroleum services firms in Malaysia and Singapore have made a gradual entry to the global FPSO market, where they will compete with the likes of BW Offshore, SBM Offshore and MODEC. In recent years, industry heavyweights such as BW, SBM and MODEC have shifted their focus to more profitable deepwater projects in West Africa and Brazil.

Interest in FPSOs is rising as offshore production – now accounting for about 30% of global petroleum production– is projected to track the anticipated gains in world’s energy consumption, while advancement in technology may facilitate hydrocarbons extraction in more challenging deepwater environments.

The outlook

The role of global companies like ABB in assisting the emerging economies should not be understated. ABB, for instance, is present in over 100 countries, with manufacturing facilities in many of the emerging economies.

In China alone, ABB has an accumulated investment of about $1.8 billion, and has maintained a presence in China for over 100 years. This continues to grow steadily with over 19,000 employees sitting across 109 locations. Over 80% of sales come from locally made products, systems and services.

However, it is not just in the supply of products, systems and services where opportunities lie. As important is an exchange of knowledge on all aspects of the industry. Take functional safety as an example. ABB has established a network of safety execution centers (SECs) that help play a key role in delivering total safety-assurance for customers operating high-risk process installations. The SECs design and engineer safety instrumented systems (SIS) to support effective functional safety throughout the entire lifecycle of process and functional safety solutions.

Many operators and contractors within the oil and gas industry do not have access to specialist functional safety resources in-house. ABB’s support can ensure that safety is designed into projects properly from the start, avoiding not only the potentially catastrophic consequences of underspecifying safety systems, but also the added costs of overspending on unnecessary equipment.

Will Leonard is the head of marketing for ABB’s Chemical, Oil and Gas business in the UK & Caspian region. Will has a dual honors degree in Business and Law at Keele University. He has worked in the industry for the past 10 years.

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