Oil companies cut spending and delay FIDs on major offshore gas projects designed to underpin LNG production in Australia
Gas has been a major driver of OSV activity in Australia over the last decade, and several new megaprojects were targeted for FID in 2020, building upon the country’s new status as the world’s largest LNG exporter.
These gas projects, however, are now being ‘pushed to the right’ as demand destruction caused by the Covid-19 pandemic and the OPEC+ price war force oil companies to make deep cuts in capex and opex. While it is too early to determine the full extent of the impact of these cuts, it is clear that the knock-on effect will be fewer opportunities for drilling contractors, vessel owners and suppliers.
In a move to preserve cash, Australia’s largest natural gas producer and the supplier of 6% of the world’s LNG, Woodside, is halving its proposed spend for 2020 and delaying until 2021 FID on developing the Scarborough gas field, expanding the Pluto LNG facility and deferring its development of the Browse resource. All of the projects are tied to the development of 20 to 25Tn cubic feet (tcf) of gas resources supporting the creation of a regional LNG hub on the Burrup Peninsula.
“We have taken the difficult but prudent decisions that were needed, delaying our proposed projects and non-essential activities, contributing to a halving of forecast spending this year, to approximately US$2.4Bn,” Woodside chief executive Peter Coleman told investors at the annual general meeting in April during a conference call. The belt-tightening cuts 60% of Woodside’s forecast investment expenditure and suspends all non-essential maintenance and most of the energy company’s exploration programmes.
“To be frank, this extraordinary confluence of events is the worst situation I’ve seen for our industry in the 36 years I’ve been in this game,” said Mr Coleman.
Woodside is moving ahead on some projects however and Mr Coleman said it had “made good progress” on the Burrup Hub that is “continuing even though we have deferred target final investment decisions for Scarborough, Pluto expansion and Browse.”
“At some point vessel operations will be halted through the absence of crew members”
He also said that Woodside is aiming to start construction this year of the pipeline component of the Pluto-Karratha Gas Plant Interconnector, part of its integrated production hub. Woodside reached FID early this year on the North West Shelf’s Greater Western Flank Phase 3 and made significant progress on executing the Pyxis Hub and Julimar-Brunello Phase 2.
Mr Coleman conceded that there would be “challenging times” for its suppliers and contractors and appreciated “their willingness to work together to get through.” Part of that willingness will translate into a review of existing contracts and drilling rates, given that earlier price pressures have been removed from the market.
Norway’s Siem Offshore, which operates vessels around the world, including in Australia under a long-term charter to Woodside, pinpointed another potential challenge to contracts: the lack of mariners.
Its board raised the alarm in its annual report about the possible long-term adverse effects of Covid-19 on vessel operations, saying it is “working with the unions and the crews to find ways to secure the safe and healthy operation of its vessels.” It is, however, likely that at some point in the future vessel operation will be halted through the absence of crew members. “If the shutdown lasts for an extended time, there is a potential risk of contracts being cancelled, which would negatively affect the cash flow of the company,” it noted.
Ichthy LNG expansion
Japan’s Inpex, operator of the Ichthys LNG project in the Browse Basin offshore northern Australia, is “closely monitoring” its investment plans to minimise the impact of the current low-oil price environment. In April, Australia’s National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA) approved Inpex’s plan for subsea construction and installation work, starting Q1 2021 at Ichthys LNG project, some 230 km off the Australian coast. The scope of the work will require the construction and installation of subsea umbilicals, risers, and flowlines (SURF), with other activities focusing on the expansion of the subsea production system.
One of Inpex’s suppliers for the Ichthys LNG project is Houston-based oilfield services contractor Halliburton, which secured seven contracts for drilling and completion services for the next phase of the project’s field development in January. The well development campaign is expected to last three years. The contracts awarded include directional drilling, logging while drilling, surface data logging, drilling and completions fluids, cementing, liner hangers, coring and well completions services.
“This may be the most brutal environment for oil and gas businesses in decades”
Another greenfield development project that might be impacted by recent spending cuts by BP is the Ironbark gas prospect. In April, BP said it would reduce its planned spending in 2020 by 25%. “This may be the most brutal environment for oil and gas businesses in decades,” BP chief executive Bernard Looney said. BP said it would reduce spending to US$12Bn and cut opex by US$2.5Bn in 2020.
However, New Zealand Oil & Gas, BP’s partner in Ironbark, reported that the well remains on budget and is targeted to drill by the end of 2020 or early 2021. Diamond Offshore’s semi-submersible Ocean Apex has been contracted for the project.
Chevron has reduced its capital and exploratory spending by 20% to US$16Bn. In 2019, Chevron Australia started work on the Gorgon Stage Two drilling campaign, off the northwest coast of Western Australia. Plans call for drilling 11 additional wells in the Gorgon and Jansz-Io gas fields to maintain long-term natural gas supply to the 15.6 mta of LNG and domestic gas plants on Barrow Island. Chevron Australia had awarded Maersk Supply Service a contract for the charter of the dynamic position class 2-capable anchor-handling tug supply vessels Maersk Mariner and Maersk Master to support the programme.
Papua New Guinea campaign
In April, Australia’s largest OSV owner MMA Offshore completed long-term survey and production support contracts for Inpex and offtake support for Woodside and its subsea business unit, Neptune Marine Services; it also completed a campaign for Oil Search Limited (OSL) in Papua New Guinea under a long-frame agreement.
The five-week work scope comprised of inspection, repair and maintenance work on OSL’s assets in the Kumul Field, with work carried out from chartered vessel Normand Australis, which was mobilised in Singapore and subsequently sailed to Port Moresby in Papua New Guinea.
Much like the oil majors, OSL is undertaking operational and financial action due to the impact of Covid-19. Operating all of Papua New Guinea’s producing oil fields, OSL has suspended all upcoming discretionary activities, except those required to maintain reliable production of oil and gas from its facilities in the country. Additionally, OSL is reducing its staff by 100 in Sydney, Australia, and Anchorage, Alaska in the US, and its executive team and board have also agreed to a 20% cut in salary over the next six months.
OSL managing director Dr Keiran Wulff says the actions “will ensure our company is in the best position possible to ride out the current global economic challenges, continue production safely and reliably, and be in a strong position to deliver our growth projects when economic conditions turn around.”
OSL holds a 29% interest in the ExxonMobil-operated PNG LNG project and material interests in the Elk -Antelope and P’nyang gas fields and is undertaking a range of activities to support further LNG expansion in PNG.