August 2012, Vol. 239 No. 8

Features

Fluor Executive Bullish On Natural Gas Prospects

Kuala Lumpur, MALAYSIA–These are heady times in the natural gas business, as the thousands who attended World Gas Conference 2012 in June will vouch. But conditions worldwide vary for a number of reasons, some overt, others not so obvious. That’s when it’s helpful to turn to someone with a global acumen like Peter Oosterveer for an accurate perspective of natural gas in the year 2012 and beyond.

Oosterveer is president of Fluor’s Energy & Chemicals Group, responsible for global business development and operations in the upstream, downstream and offshore oil and gas markets as well as its chemicals and petrochemicals industries. A native of The Netherlands, he has a background in electronics and joined Fluor in 1988 as a control systems engineer.

“These are exciting times to be in the energy industry as a whole and certainly in the oil and gas industry, simply because of the dynamics involved today. As we know and have heard, the demand for natural gas will continue to increase substantially,” he said in an interview outside of the bustling Kuala Lumpur Convention Center situated within the shadows of the world-renowned Petronas Towers.

Fluor is a global engineering and construction company now celebrating its 100th anniversary. Its increasingly active energy business breaks down into upstream, downstream, chemicals/petrochemicals and offshore markets.

Global Perspective
“Within the industry itself, of course, there are very significant changes which have an impact on the energy mix as a whole. But we see very good developments in all four of these industries in a variety of geographical regions,” Oosterveer said. Today, they are bullish in all regions except for Europe.

“We are more bullish about North America than we have been in a long time because of the availability of cheap gas. In the United States, this has a major impact on the energy landscape and offers tremendous opportunities for a variety of regions in the U.S. with the potential for substantial projects and the creation of jobs.

“We have a strong presence in Canada and we see really good opportunities there as well, mostly in the upstream sector with some prospects in downstream,” Oosterveer said.

“In Latin America we are seeing more opportunities than we’ve probably seen in a long time, especially Venezuela, Brazil and Argentina. We also have a strong presence in Mexico where we’ve been for almost 20 years.”

Then there’s Europe, which, as one might expect, where the prospects are not quite so rosy today.

“We have some opportunities in Europe but they are not as sizable as we see in other regions of the world because of the uncertainty and the lack of economic growth, among other reasons. We have been in the Middle East for a long time and we continue to see opportunities there, most of them now in the upstream and downstream, less so in chemicals,” he said.

Other regions that show promise for increased energy development according to the Fluor perspective include the east coast of Africa, South Africa, Russia and nations that once comprised the old Soviet Union such as Kazakhstan where Fluor is involved in the CPC pipeline expansion. Moving further east, Oosterveer’s interest perks up as he considers the rapidly growing Asia/Pacific region.

“This has definitely become quite an important region for us. For Fluor Corporation as a whole, not just oil and gas, the continent where we now do most of our work is Australia and that is split between mining and oil and gas activities where we have a number of projects ongoing. We have an active presence in a number of countries in Asia and especially see promise in Malaysia, China, the Philippines, Indonesia, and India.”

In Australia, Oosterveer was referring to the multibillion-dollar Gladstone LNG project in Queensland which includes a substantial amount of upstream work.

Golden Age for Natural Gas
“We probably are at the verge of entering the golden age of natural gas, including unconventional gas, being that it is cleaner than all other fossil fuel energy sources; it is now clearly abundantly available, and in fact we keep finding more and more. I would not be surprised in a few years that U.S. shale gas which is very, very substantial will be followed by shale gas findings in other parts of the world as well.”

Yet that growth will not come without confronting challenges, one being the very nature of the gaseous fuel.

“In many cases the supply and demand locations vary greatly and with gas being somewhat more difficult to transport and ship over long distances than oil, that’s going to be a challenge. We know how to attack that challenge, but it does require fairly substantial investments which as of now are feasible and will continue to be so for a while. In some places in the world those challenges may become even more difficult because of cost escalations, shortage of resources and other issues that may come into play,” he said.

The shale gas situation in the U.S. is a prime example as lawmakers are wrestling with the issue of whether to allow exports of the fuel which is now selling at historic low in the U.S. but could earn producers large profits if shipped overseas.

Should the U.S. ultimately decide to export LNG, it will require billions of investment dollars to put in liquefaction plants. When supply and demand is located in different regions of the country where there is a lack of pipeline infrastructure, the investment is much bigger than it would be to transport oil.

Showing the urgency of the LNG issue, on July 2 a bipartisan group of 21 federal lawmakers representing shale-rich states, petitioned the Obama administration to open the door for more exports of LNG or risk losing market share to Australian and Canadian competitors.

“Production is outpacing demand and depressing prices below the break-even point for some producers,” the lawmakers wrote in a letter to Energy Secretary Steven Chu. “One answer to the growing supply and demand imbalance is to allow American producers to capture a share of a growing global LNG market.”

Petrochemicals Benefits
The low price and abundant supply of natural gas is gradually weaning petrochemical suppliers from overseas locations back to the U.S. It’s a process which Oosterveer believes is still in its embryonic stage, but about to surge, and along with it new jobs.
“Five years ago we were heavily involved with virtually all of the large petrochemical investments in the Middle East and quite a few in China as well. Everyone was looking at those two regions as the places where large petrochemical investments would be generated. With the availability of shale gas we are on the verge again of large petrochemical investments in the U.S. We are involved in a number of feasibility studies representing prominent investments in the U.S. If they will proceed into the next phase – which we are optimistic about – you’ll really start to see how this affects the petrochemical industry on a more global basis,” he said.

On the petrochemical side this will include the construction and operation of a number of crackers in the U.S. as well as other downstream units, leading the U.S. to become more self-sufficient in terms of chemical supply, lessening its reliance on supplies from the Middle East and other regions. Fluor is already involved in developing a petrochemical plant in the Gulf Coast area with Dow.

This could also be a great opportunity for China, if enough shale gas is found that it can capitalize on. “The industry is increasingly more optimistic that there is very substantial shale gas availability in China, which they will also be able to convert into chemicals and liquids, making them also less dependent on supplies from the Middle East.”

Converting gas to liquids (GTL) is another opportunity which shale gas may offer. Fluor is working on an early feasibility study for a GTL plant that the South African company SASOL is looking to build in Louisiana. Oosterveer points out that the today’s low-price environment vs. fairly high liquids prices is making that prospect feasible, as Shell has demonstrated with its venture in Qatar.

Unlikely To See Major Shift
The differential between oil and natural gas prices that are now in the $2 per MMBTU range in the USA is greater than it has been in the last 25 years. The Fluor executive said that is unlikely to narrow greatly anytime soon, with increasing supplies outweighing demand. In fact, he believes it will be several years before that gap narrows. Meanwhile, the current differential will make some (consumers, power generation and petrochemical plants) happy while leaving the gas producers less so.
“As the U.S. starts to find more gas and begins to export, that should result in a higher gas price. In some of the early discussions relative to exporting U.S. gas $8 per MMBTU seems like a price level which could satisfy a lot of people.” But how would that affect the burgeoning petrochemicals sector?

“I don’t see gas prices in the U.S. for domestic use reaching $8 any time soon,” Oosterveer said.

He has found that governments worldwide have quickly become aware of the opportunities for economic growth that natural gas development may be able to provide.

“It’s very obvious to everybody now who is actually active in the industry that gas is on the rise. Governments are aware that this resource is available although that has not yet resulted in all cases in an all-encompassing energy policy. But that’s just a matter of time. It will get there.”

Does that mean there could be movement toward a global gas market?

“That is going to take a substantial amount of time because the market is out of balance with all of the recent discoveries. When the gas portfolio is more aligned with supply and demand as well as the increased certainty that shale gas is indeed abundantly available where we suspect it will be, then we’ll probably get there. The question really is, do we expect to see global pricing for natural gas similar to what we generally now have for oil? I don’t see a truly global gas market the next few years,” he said.

The Role of LNG
“There is no question that LNG will be part of that whole equation, again, because we have the gas but not always in places where we actually need it. India and China contain about 35% of the world’s population but do not yet have an abundantly available natural gas resource. There are early signs of shale gas in China but they have not gotten to the point where we are in the U.S. India has not found any meaningful gas yet; in fact domestic supply is coming down.”

Fluor has built several regasification terminals and is involved in developing similar projects in Malaysia, Singapore; Australia (Gladstone), and is pursuing a partnership for what Oosterveer described as a “very large LNG facility” in Mozambique. “We have a few more pure LNG projects on our radar screen including Australia and other places in the world,” he said. “If you look at our entire portfolio in oil and gas there is annual revenue between $8-10 billion. LNG and LNG-related facilities, which are either upstream or in the chemicals side of the business, now account for about 25% of our business.”

Oosterveer also suggested the importance of governments devising energy policies, including the U.S. but even more so in Europe. Those energy policies cannot ignore alternative energies such as nuclear, he said.

“Despite all the gas that is now being found we will have to run on all cylinders if you want to satisfy demand in the world as a whole. It’s fantastic that we’ve got so much gas available but it is still not as large a base-load fuel like nuclear and coal.

“While what happened in Japan last year is a tragic disaster I still argue that nuclear is a relatively safe and clean means of energy. I believe nuclear will see a renaissance and that we will also see more renewables entering the portfolio. They, of course, have to be competitive and in quite a few cases they are not without government incentives.”

Challenges Of The ASEAN Region
Doing business within the Association of Southeast Asian Nations requires extensive knowledge of the region and plenty of experience. With that behind you, it’s comparable to doing business anywhere in the world, Oosterveer said.

“I wouldn’t say that we have challenges unique to the ASEAN region which we wouldn’t see elsewhere. Perhaps a challenge here – and we do face competition everywhere in the world – is that Asian competitors happen to be the more aggressive competitors. Quite a few of them, including the Korean companies, are expanding into other places in the world. They already have a pretty strong foothold in the Middle East and we see them in other places as well.

“Because of our footprint and the fact that we have been in Asia for a long time, we have a pretty strong position here. We’re one of the very few Western competitors that can say we have done work in China and on a very steady basis for decades as well.”
Fluor employs more than 2,000 people in the Philippines; nearly 1,000 in China and another 1,000 in India. That has become increasingly important in recent years as clients are demanding having a local “face” on their projects.

“Having been in Asia for a good number of years we have a fairly substantial execution capability which gives us an advantage compared to some of our competitors,” he said.
“Many say that it is difficult to compete in China but we have been there for over 40 years and have proven that we can compete in China working for Chinese clients but also working for ventures which are combinations of Chinese and Western clients.”

One project under review by Fluor is a large refinery that Shell and PetroChina are pursuing. Fluor also won a bid for a major project in the Philippines that Oosterveer said was due to its substantial Manila and Philippines presence.

(According to Wikipedia, the Association of Southeast Asian Nations is a geo-political and economic organization of ten countries located in Southeast Asia, which was formed Aug. 8, 1967 by Indonesia, Malaysia, the Philippines, Singapore and Thailand. Since then, membership has expanded to include Brunei, Myanmar, Cambodia, Laos, and Vietnam. In 2010, its combined nominal GDP had grown to US$1.8 trillion. If ASEAN were a single entity, it would rank as the ninth largest economy in the world, behind the United States, China, Japan, Germany, France, Brazil, the United Kingdom, and Italy.)