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Quarterly Trends Report

The shifting oil and gas landscape

  • Public Equity
  • Energy
  • Global

Changing regulations, darkening public sentiment towards fossil fuels and appetite for mergers and acquisitions (M&As) are all high on corporate agendas, a series of Third Bridge Interviews with experts on the oil and gas sector found.

Australia is one major, developed market that is facing significant challenges in its gas market. Changes to government policy have affected transmission and distribution, with the effects split between the east and west of the country. Due to Australia’s vast scale, these operate on unconnected systems.

In western Australia, rules in place since 2006 have required gas suppliers to set aside 15% of reserves for the domestic market. This effectively constrains companies’ ability to market and sell gas at the best price. The effect is magnified, as only about 10% of the gas produced goes to western Australia’s domestic market. This is positive pricewise for domestic users, but not so much for producers. By contrast, in the east, increased competition means higher prices and lower demand than in the west.

However, the Australian government recently brought in the Australian Domestic Gas Security Mechanism. This annual assessment is in place to ensure that there is enough gas to supply the domestic market and it is expected to be less stringent than the reservation policy that applies in western Australia.

Mining and gas are interlinked. Mines – which account for a large share of western Australia’s economy – are usually reliant on gas to generate power, meaning the commercial demand for gas fluctuates in correlation with the commodities being mined. But in the east, the majority of demand is from the industrial sector, where users are more sensitive to price changes. As a result, demand has flatlined, and in some cases declined, as gas prices have risen.

However, overall, gas demand looks set to grow. In the east of Australia, around 70% of electricity is generated by coal. But demand for coal has fallen, as public sentiment has pushed companies towards cleaner forms of energy production. In a recent Forum Interview an expert predicted that coal will be replaced by renewables and gas in the near future. Furthermore, gas will be the preferred source, as gas-powered power plants can be ramped up according to electricity demand. Whereas on the renewables side, electricity supplies are intermittent and variable.

Another market facing headwinds is the US. Turning to the northeast market, in particular, pipeline construction has been challenged in several ways, specialists explained. Projects such as the Atlantic Coast and Mountain Valley – crossing West Virginia and North Carolina – have been delayed owing to legal challenges. These centre around protecting endangered species and stopping the pipelines crossing the Appalachian Trail.

New York and New Jersey are others areas where building pipelines is difficult, with the governor of the former, Andrew Cuomo, particularly known for opposing such construction projects. This places barriers to expansion for some companies, including UGI Energy, which recently acquired Columbia Midstream Group. However, pressure to keep up with demand has allowed some construction to go ahead.

Liquid, or “wet”, gas producers have also struggled recently due to fuel prices being decoupled. Previously, for example, propane stood at around 60% of the price of oil, but it’s currently trading at about 30-35%. Adding in the cost of getting that fuel to the market, and the profits available to suppliers are much lower than historical norms.

Nonetheless, despite difficulties, high-profile projects are on the horizon. LNG specialist Venture Global’s recent financing deal to enable the development of the Calcasieu Pass was also highlighted in Forum’s Interviews. Venture Global raised USD 1.3bn in equity and USD 5.8bn in debt to fund the development. However, it could face delays similar to projects in New York and New Jersey if those responsible for these projects are not careful to work with local communities.

There are a number of other reasons for watching the Calcasieu Pass deal, the specialist said, as it has been designed for efficiency in what is typically an inefficient market. However, it is reliant on certain factors going its way, including being able to source enough gas to reach capacity. Moreover, the government has a favourable stance towards LNG developments, which has helped get the project off the ground. Even if future administrations are less favourable, the development is at a stage where it should not hit significant problems.

M&As are also affecting the oil and gas sector. One specialist discussed the recent acquisition of pipeline operator Buckeye Partners by infrastructure investment group IFM Investors, announced in May 2019. The deal could pull Buckeye’s focus away from the US domestic market. The company has already been seeking to diversify its business portfolio with a move into the crude oil market. It also has global terminals in the Caribbean and a project in Puerto Rico, and it is working more on its base in southern Texas.

Another notable acquisition is UGI Energy’s purchase of Columbia Midstream in July 2019, adding assets in cities such as Pittsburgh, Pennsylvania, and Majorsville, West Virginia. There are few instances of duplication between the two companies, one specialist said, as UGI is a regulated utility whereas Columbia is a midstream transmission company. However, there are challenges to integrating the two businesses. Chief among these is the investment needed to update and reopen some of Columbia’s older assets, including some pipelines that were built in the 1940s and 1950s.

UGI must also get to grips with the Hickory Bend cryogenic processing plant, owned by Pennant Midstream, a joint venture between Columbia and Harvest Pipeline Company. UGI is yet to handle this kind of asset and must ensure it knows the requirements and risks involved. Although it could be run without their involvement, not fully understanding how it operates will “hurt them in the future”, for instance an awareness of how to continually keep the assets fed is imperative.

However, a new regulation on the horizon could prove disruptive, and many think the gas industry is largely ill-prepared to handle the required changes. The International Maritime Organisation’s IMO 2020 comes into effect on 1 January 2020, meaning that marine transport will need to cut sulphur emissions drastically. Companies, such as Buckeye, could be required to invest capital upfront to adapt storage facilities at major ports, such as New York Harbour, for new types of fuel in response to customer demand.

Third Bridge’s Interviews also touched on pricing and tariff trends, competition within the oil and gas sectors, and the activities of industry giants Shell, BP and Exxon.

The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.

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