International Update: Pipeline Construction and Market Trends

By Jeff Awalt, Executive Editor

Global energy trends and forecasts in the final months of 2018 and into the first quarter of 2019 continue to support a generally bullish outlook for oil and gas production and infrastructure construction to meet growing demand and evolving patterns of interregional trade.

An improved world economy is expected to underpin solid increases in the trade of both crude oil and natural gas, and upstream market conditions are the best in recent years. The exploration and production sector, however, has continued to spend cautiously and focus on efficiency through its ongoing recovery from a downturn.

Consulting firm Wood Mackenzie projects there will be about 30 final investment decisions (FID) this year on oil and gas projects worldwide, but noted operators remain focused on less capital-intensive projects with quicker returns, as in 2017 when FIDs doubled amid falling costs and rising prices.

“The big question is whether the (upstream) industry is actually spending enough,” said WoodMac’s Research Director Angus Rodger. “We cannot just have lots and lots of small projects forever. It will not sustain the industry.”

The International Energy Agency (IEA) reported in July that total energy spending declined globally in 2017 for the third-consecutive year, while also highlighting the positive impact of exploration and production cost efficiencies in areas that may contribute to pipeline infrastructure expansion. Higher prices and operational improvements, for example, have put the U.S. shale sector on track to achieve positive free cash flow in 2018 for the first time ever.

Market trends

Global oil demand got an early boost from cold weather in the northern hemisphere and grew an average 1.5 MMbpd in the first half of 2018, according to IEA, which predicts a more modest 1.3 MMbpd growth rate in the second half. In 2019, the growth rate should remain steady at 1.4 MMbpd, but with a predicted slowdown in China, which together with India accounts for nearly 50 percent of worldwide demand. IEA projects the global rate will fall to about 1 MMbpd in 2023.

While there is no peak oil demand in sight, IEA sees signs of substitution of oil by other energy sources in various countries. A prime example is China, due to its intensifying efforts to improve air quality in cities through more stringent fuel efficiency and emissions regulations.

Natural gas is a primary beneficiary of the shift to cleaner fuels, and growing demand from developing countries is contributing to a transformation of world energy markets. In its latest medium- and long-term outlook, released in July, Cedigaz predicts that interregional (long-distance) natural gas trade will grow by 3.1 percent per year – more than twice the 1.4 percent rate in overall demand growth for natural gas worldwide.

Chinese gas demand is predicted to grow by 60 percent from 2017 to 2023, overtaking Japan as the world’s largest gas importer as early as 2019, and account for 37 percent of projected global demand growth over the next five years.

The expansion of global gas supply will be driven by unconventional gas in North America and Asia, as well as conventional gas in Russia and the Middle East, according to Cedigaz, which also expects the largest regional production gains will be in the Middle East, North America and Asia-Oceania.

LNG will take an increasingly larger share in global gas trade, with the United States leading gas production growth and emerging Asian markets leading the growth in demand.

Infrastructure

The total number of new onshore pipeline miles installed globally this year is forecasted to rise by 13 percent, according to Westwood Global Energy’s 2018 World Onshore Pipelines Market Forecast. In addition, “An increasing population of aging pipelines and stringent repair and maintenance regulations in regions such as North America and Western Europe will continue to act as stable long-term drivers for operational expenditure, which the firm expects to increase 17 percent during 2018-2022.”

An earlier Westwood forecast called for global installations to exceed 171,500 miles and total onshore pipeline capital expenditures to increase about 5 percent through 2021 to $203 billion. This compared with $194 billion in the preceding five years, with North America and Asia accounting for 53 percent of global spending over the forecast period.

Higher LNG demand also is contributing to infrastructure development, including liquefaction facilities, shipping terminals and pipelines. A wave of LNG export projects is expected to increase liquefaction capacity 30 percent by 2023, with U.S. output accounting for nearly three-quarters of the projected total growth in LNG imports over the next five years, followed by Australia and Russia, according to IEA.

LNG production may temporarily surpass global demand as liquefaction plants now under construction come online by 2020, but Cedigaz Chief Economist Armelle Lecarpentier said that delays in a second wave of LNG supply investments brings a risk of increasingly tight markets after 2020.

In a hopeful note, WoodMac’s Rodger said his firm sees “a lot of big LNG projects out there that are competing to be sanctioned” in 2019.

REGIONAL HIGHLIGHTS

Africa
The Nigerian National Petroleum Corporation (NNPC) said it will start building the largest natural gas pipeline in its nation’s history, following agreements that include financing for two of three sections of the Ajaokuta-Kaduna-Kano (AKK) pipeline.

NNPC hopes to complete the project by the first half of 2020, at an expected cost of more than $2.8 billion. The 381-mile, 40-inch AKK pipeline is designed to provide connectivity between eastern and western sections of Nigeria to supply natural gas for power generation and industrial development in key commercial centers in its central and northern regions.

Asia and Oceania
Already the world leader in energy demand, China’s policies mandating a shift from coal to cleaner energy sources have boosted demand for gas and LNG imports, while setting a course to more than double its pipeline infrastructure, during the next seven years, to nearly 150,000 miles. Its National Development and Reform Commission plans to add about 80,000 miles to its current 69,600 by 2025. After expansion, natural gas pipelines will account for 76,400 miles, or 51 percent of the system.

Gazprom announced midyear that 83 percent of its Power of Siberia gas pipeline is complete, and construction is on track to begin delivering natural gas to China at completion in 2019. The 1,864-mile project will transport 38 Bcm of gas annually from the Irkutsk and Yakutia gas production centers to consumers in Russia’s Far East and to China via its eastern route. Construction of the Power of Siberia began in 2014 and has involved building extensive gas processing infrastructure in Russia’s Far East.

Since the new Russia-China oil supply agreement took effect at the start of the year, an extension of the East Siberia-Pacific Ocean (ESPO) oil pipeline between Russia and China started operating, and PetroChina’s largest refinery has almost doubled the amount of Russian pipeline crude oil that it is processing. The 410,000 bpd PetroChina refinery in the northeast port city Dalian will process 260,000 bpd of Russian pipeline crude oil in 2018, up by 85-90 percent, compared to 2017, Reuters reported. The Russian pipeline crude replaces seaborne shipments from the Russian Far East and crude oil shipments from the Middle East.

Russia and CIS Countries
Russia is projected to remain the world’s largest energy exporter as it continues to focus on oil production and increased natural gas exports through major pipeline expansions to Europe and Asia.

Construction has commenced on the Afghan section of the Turkmenistan, Afghanistan, Pakistan and India (TAPI) gas pipeline. The 1,130-mile project will deliver gas from Turkmenistan to Pakistan and India. In a rare announcement, the Afghan Taliban said it will support and protect the pipeline in areas under its control. Uzbekistan announced plans to join the $8-billion project. TAPI reportedly received an investment from Saudi Arabia as it began construction on the difficult Afghan section, which runs abreast the 346-mile Kandahar-Herat highway.

Western Europe
With growing gas demand and declining oil and gas production, Europe has become a key battleground for global natural gas and LNG market share.
In a sign of further weakening, the Dutch government in late June revised its 2018 production forecast downward for the Groningen natural gas field to 19-20 Bcm, from an earlier projection of 21.6 Bcm, compared with 24 Bcm last year. The government announced in March that it plans to stop all production in Groningen by 2030 due to the risk of earthquakes.

Russian expansion has motivated some countries to seek supply diversity. The Finnish government, for example, authorized state-owned Baltic Connector Oy to start construction this year on the Balticconnector natural gas pipeline, and announced it will open wholesale and retail gas markets to competition in-synch with project completion in 2019-2020.

State-owned Bulgaria Energy Holding (BEH) reached a preliminary agreement with the European Investment Bank in June to finance construction of a natural gas pipeline with Greece. The proposed 113-mile gas link is expected to begin transporting gas from Azeri to Bulgaria in 2020, as well as some liquified gas from terminals in Greece. According to ICGB, the project company for the gas link, BEH is receiving preferential financing through a government-backed guarantee of $128 million. BEH holds a 50-percent stake in ICGB. Greece’s DEPA state energy firm and Italy’s Edison each hold 25 percent.

Middle East
The Middle East accounts for 34 percent of the world’s crude oil production, 45 percent of oil exports and 48 percent of proved reserves, but oil-producing countries in the region are turning to natural gas for domestic use, while Israel looks to become a natural gas exporter.

Jordan and Iraq agreed to a framework for construction of a 1,044-mile, twin oil and gas pipeline from Basra to Aqaba. When completed, the project would move 1 MMbpd of oil and 258 MMcf/d of gas to its destination. The pipelines would eliminate exposure to terrorist activity at border crossings, which have forced Jordan to find more expensive sources for most of its 134,000-bpd demand.

South and Central America
Despite having the world’s No. 2 shale gas reserves, Argentina is still a net energy importer, but there are signs of change under a business-friendly administration. Government incentives to develop and create markets for the Vaca Muerta shale and Austral Basin are starting to pay off. Transportadora de Gas del Sur S.A. (TGS) committed to an initial $250-million project to add gas transportation infrastructure in the Vaca Muerta during 2018-2019, including a conditioning plant and a 57-mile, 36-inch gas pipeline that will cross 16 hydrocarbon areas with initial capacity of 37 MMcm/d, expandable to 56 MMcm/d.

Argentina is expected to start exporting natural gas to neighboring Chile by the end of 2018. Existing agreements limited gas and electricity exports to emergency situations only and required equivalent re-imports within a year. A recent agreement removing export restrictions could mark a turning point in energy trade in the region.

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