Archives for posts with tag: energy

Environmental concerns are increasingly to the fore in world political economy, with the global energy mix and questions of “peak demand” for different fossil fuels receiving increasing attention as a result. While there is clearly still much uncertainty around this topic, it is worth exploring how shipping continues to develop alongside the changing dynamics of the global energy mix.

For the full version of this article, please go to Shipping Intelligence Network.

Indian offshore fields used to be the main source of the natural gas consumed in India’s rapidly growing, energy-hungry economy; now however, it is LNG imports. This recent change is largely due to a decline in the country’s offshore gas output. But as part of a drive to reduce reliance on energy imports, the Indian government has been introducing policies designed to raise offshore gas production once more…

For the full version of this article, please go to Offshore Intelligence Network.

“Look after the pennies and the pounds look after themselves” goes the saying, a mantra the shipping industry has a long taken to heart. In this week’s Analysis, we review trends in ship operating expenses (OPEX) that have taken the total cost base of the shipping industry through the $100 billion barrier for the very first time.

Watching The Pennies!

Of all global industries, perhaps few have had the extreme cost focus of shipping over the past 30 years. During the 1980s recession, any operating “fat” was largely removed with the growth of open registries and a drive to outsourcing. This helped shipping, alongside its near “perfect” competitive economic model, deliver exceptionally cheap and secure freight, in turn a key facilitator of globalisation.

Nice And Lean…

OPEX response since the financial crisis has been relatively modest. Our average OPEX index (using the ClarkSea “fleet” mix and information from Moore Stephens) shows just a 1% decrease in OPEX since the financial crisis to $6,451/day in 2016. By comparison, the ClarkSea Index dropped 71%, from $32,660/day in 2008 to $9,441/day in 2016 (a record low). In part, this modest, albeit painfully achieved, drop reflects upward pressures from an expanding fleet and items such as crew and ever- increasing regulation. However it also reflects the already lean nature of OPEX.

$100 Billion And Counting…

Our estimate for aggregate global OPEX for the world’s cargo fleet has now breached $100 billion for the first time, up from $98 billion last year and $83 billion in 2008. The largest constituent remains crew wages ($43 billion covering 1.4 million crew across the fleet). By comparison aggregate ship earnings for our cargo fleet fell from an eye watering $291 billion in 2008 to $123 billion in 2016!

Cutting The Fat…

One sector that has seen dramatic cost reduction has been offshore. Estimates vary, but 30% seems a reasonable rule of thumb for reductions in OPEX since 2014. While painful, this has been part of a process of making offshore more competitive against other energy sources (offshore contributes 28% of oil production, 31% of gas, and 16% of all energy) and one of the factors behind the increase in sanctioning of offshore projects.

Getting Smarter…

So shipping is one of the leanest industries around but is always under pressure to do more! It seems clear that squeezing cost in the traditional sense, offshore aside, will be pretty challenging — UK media reported on the docking of the 20,150 teu MOL Triumph, highlighting it was manned by only 20 crew! Getting smarter, collecting and using “big data” and technology and automation are all gaining traction. The industry’s fuel bill (accounted for outside of OPEX) is clearly a big target.

This will all require new technology, skills and perhaps new accounting approaches. Plenty of food for thought but it seems like just going on another severe diet won’t work this time. Have a nice day!

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Plagued by constant blackouts and power shortages, Egypt appears to be facing its worst energy crisis in decades. However, following the historic discovery of the giant gas field Zohr offshore Egypt in August this year and revived interest from IOCs, it seems that the tables are set to turn. Indeed, after a period of gas production decline, Egypt’s energy outlook is getting increasingly bright.

Slide Down The Gas Pyramid

Until recently, Egypt’s gas production story had been one of growth: production climbed from 1.68 to 5.76 bn cfd between 2000-2009 and in 2003, it was sufficient to kick-start LNG exports. However, a combination of political unrest (notably the Arab Spring of 2011) and rising population has resulted in natural gas supply shortages over the last 5 years. Domestic gas demand has on average grown by 8% y-o-y, eventually outstripping supply. As a result, Egypt has been forced to re-route LNG destined for exports to domestic consumption. Indeed, at the start of 2014, BG announced it was breaking its contracts because it was unable to export enough gas. This year, Egypt resorted to importing LNG from Qatar – a bitter moment for the previous exporter.

Enter Zohr

They say that when you hit bottom, the only way is up and for Egypt, this seems to be the case. Earlier this year, ENI made what is believed to be the largest ever gas discovery in the Mediterranean, named Zohr. The field is part of the Levantine Basin, home to other prolific gas finds such as the Israeli Leviathan field. ENI puts the find down to different use of sequencing models, concentrating on carbonate rather than classical sand reservoirs. The gas giant (estimated to hold 30 tcf of lean gas) is located in water depths of 1,450m, providing an exciting departure from typical shallow exploration of mature basins in the region. Additionally, BP announced a $12 billion investment in Egypt’s West Nile Delta project: another deepwater discovery with 5 tcf of gas resources. A move to deeper waters creates opportunity for subsea development, the current production solution of choice in all of the country’s active deepwater fields. Out of the 68 active subsea units in Egypt, 40 are operated by ENI and 8 by BP. It is likely that these operators will continue to implement subsea development in their future projects.

Clash Of The Giants

Elsewhere, the discovery of Zohr was not such welcome news. There were plans to import gas via a pipeline from the Tamar field and (once in production) the competing gas giant, Leviathan, in Israel. Plans for the Leviathan field will now have to be redrawn and potentially accelerated if Israel wants a claim of the region’s LNG exports. However, following extensive regulatory and anti-trust objections, its start-up date remains uncertain.

Nevertheless, it is clear that Egypt’s fortunes are turning. The Zohr discovery, alongside other scheduled start-ups, will strengthen Egypt’s energy balance in the long-term. And the story does not end here: it has been reported that there are 7 other deepwater blocks with similar lithology to ENI’s. There is evidently a revived interest in the Levantine basin, as IOCs begin to wonder where the next giant could be hiding.

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How fast will ship demand grow? It’s the ultimate question for serious shipping investors. Today’s global economy relies on owners stepping up to invest in the ships that will be needed in the future ($115 billion was invested in new contracts last year). With so much cash on the table, the future trade growth issue cannot be ignored. But it’s tricky and even experienced analysts fall back on “rules of thumb”.

Faster Than World GDP

When they worry about the future most shipping investors have the world economy at the back of their minds. But although world GDP is the obvious starting point for analysing sea transport, the relationship between the world economy and seaborne trade growth needs handling with care. Unfortunately things do not always turn out the way investors expect.

For example, over the 50 years since 1963 these two key ship demand variables have increased by a not too dissimilar amount. GDP grew on average at 3.7% p.a. and sea trade grew at 4.5% pa. Overall trade volume increased 722% and GDP by 501%. If the relationship had been steady, the ratio of trade to GDP would have followed the path shown by the dotted line on the graph, moving steadily up from 100% in 1963 to 137% in 2013 (i.e. the sea trade index 37% higher than the GDP index, both of which were 100 in 1963). Interestingly today’s GDP forecasts are close to the 50 year trend, with projected growth of 3.6% in 2014 and 3.9% in 2015. So does that mean about 4.5% trade growth?

Sea Trade Multiplier?

That’s not always how things happen. The red line shows that the “sea trade multiplier”, which compares the cumulative year by year growth in the sea trade and GDP indices since 1963, was all over the shop. In the 1960s trade shot ahead of GDP and the multiplier reached 160% in 1974. Then the relationship reversed and in the period 1980-88 sea trade growth averaged only 0.4% pa compared with 3.2% pa for GDP. Again in 2005-09 trade lost ground as GDP growth averaged 3.5% pa and trade only 2.4%.

Structural Changes

This analysis suggests that when looking ahead more than a year or two, the structural changes that lie ahead are more interesting than the trend. The 1960s boom was driven by the OECD countries adjusting to global free trade by importing massive quantities of bulk commodities like iron ore and oil. Then the trade collapse in the 1980s was a structural response to high oil prices. And the trade slowdown in the late 2000s shows that the slowing OECD economies (less growth and more services) were important enough to shave the top off the Chinese mega-boom.

Brave New World

So, demand trends are all very well, but structural changes may matter more. Today high energy prices are squeezing the oil trade and the non-OECD world, which is increasingly important, seems to be moving into a different phase of growth. Although the 4.5% trade growth “multiplier” scenario looks convincing, remember that it is during structural changes that shipping fortunes are often made and lost. Have a nice day.

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