Priming the Pump: Surviving volatility in the oil and gas market

0715_OilGas_ftA 70-tonne piece of energy equipment had to be sent by air to the inland city of Erbil, Iraq, from Bakersfield, U.S., in February. Many thought it couldn’t be done due to the sheer length and size of the cargo, and the fact that it had to be transported in one piece. Ruslan International, a joint venture between Antonov Airlines and Volga-Dnepr Airlines, was asked to ship the cargo, an oil refinery stripping tower, using an An-124-100. It took more than a month just to plan how to do it.

First of all, the tower – measuring 126 feet by 12 feet by 12 feet, with protruding elements – was 6.5 feet longer than the cargo floor of the aircraft. To accomplish the mammoth lift, Volga-Dnepr Unique Air Cargo designed two special transportation cradles developed with 3D modeling. Timing was critical, but they got it done. Even with the price of a barrel of crude oil at a less-than-optimal level, the energy business marches on.

At press time, the price of crude oil was about US$60 a barrel, but it had dropped to a low of $46 at the start of the year. While most airlines welcomed the dramatically lower fuel costs, the oil exploration industry went into a nosedive as the more expensive methods of oil production – tar sands extraction, oil shale, hydraulic fracturing, etc. – quickly became financially dubious.

But in spite of this volatility, there is still interest in oil exploration, and still plenty of work for the carriers and forwarders who provide logistical support for energy businesses. Oil exploration takes place in virtually every harsh climate – from burning desert sands to humid jungles to the frozen tundra of the Arctic. In many cases, there are no roads, railroads or ocean port facilities near these often-remote locations. But there usually is some kind of airstrip, and the industry must rely on airfreight – there is simply no other option.

And there is optimism even during the current slow period. Like all things cyclical, the price of oil will bounce back, said most logistics firms specializing in the energy field; it’s just a question of time. Soft energy prices are not halting airfreight initiatives in the oil-and-gas industry.

In fact, even with the recent slowdown, existing projects have not been cancelled, and future projects are being planned.

Cautious optimism

Some forwarders and carriers, although aware of the problems in today’s energy market, see opportunity regardless of the price of crude. Consequently, they’re positioning themselves for the comeback. Lufthansa Cargo AG, for example, recently opened a new route for the industry, despite low oil prices. The carrier launched a Houston (IAH)-Stavanger, Norway (SVG)-Frankfurt (FRA) route with a 777F. Lufthansa flies the route once a week on Wednesday, solely aimed at the oil-and-gas industry. Generally, Lufthansa is flying oil and gas equipment to Norway.

“We could have had a better time to enter this market,” admitted Achim Martinka, vice president, the Americas, Lufthansa Cargo. That is not to say Lufthansa and Martinka, who manages the route, are disappointed with IAH-SVG-FRA. On the contrary, Martinka says the route is “still matching expectations. We are pretty happy with the results,” he says.

“Happy” may be a relative term. It turns out that Lufthansa Cargo set “conservative” expectations for the route’s performance. There was no previous main-deck service between Houston and Stavanger and, as Martinka says,“Everyone expects that one day fuel prices will go up.”

Forwarder DB Schenker is also counting on a positive correction in the oil and gas sector. Edward Fish, Schenker’s vice president of global projects for oil and gas, based in Houston, concurred that the market today has taken a hit. Many companies cut back and there were “major, major layoffs.” But Schenker is what he calls a “sleeping giant,” making capital investments now where many companies simply are not. Schenker recently built a 150,000-square-foot facility in Houston – and is still looking for high-quality hires in the area. The facility includes 123,500 square feet of warehouse space, 26,500 square feet of office space and a five-acre, secured storage yard. The facility is also certified to handle dangerous goods. “We’re sending the industry a message that we’re here to stay,” Fish said.

Additionally, Schenker recently launched weekly air cargo service linking Hong Kong to Chicago and Houston to fulfill the needs of the oil & gas (O&G) industry, as well as the automotive and industrial sectors, using a new 747-8F nose-loader. The route, he said, was introduced initially because of the West Coast port crisis earlier this year, but clients liked it so much that Schenker decided to keep it. Much of the raw materials for the O&G industry come from China on this new route.

“Overall, if you look at the oil drop, it was probably the best stimulus for the economy,” Fish added. “This is a cycle you see every seven to 10 years.” Although the current price dip hasn’t hit Houston as hard as the collapse that occurred in the 1980s, he said the drop in the price of oil has impacted the carriers and added to the over-capacity. However, other verticals outside of oil and gas are doing well, and he expects that by the third quarter of 2016 the O&G price will also be in a comfortable place. He doesn’t see oil prices returning to $100 a barrel unless there is stabilization in the Middle East, but he does expect $75 to $80 a barrel.

Fish said countries in the Middle East, specifically members of OPEC, are worried that the U.S. might become a self-sufficient oil producer, given the rising U.S. domestic production, which includes hydraulic fracturing. While so-called “fracking” is practiced in at least 25 U.S. states, most of the activity is in Texas, Colorado, Pennsylvania and North Dakota. “North America is the focus point now.”

The North Slope

When one mentions oil and gas exploration in North America, the conversation almost always includes Texas and Alaska, the nation’s two largest states, which are also rich in oil reserves.

In Alaska, production and exploration on the North Slope, or Prudhoe Bay, takes longer to realize because of access to the oilfields. Prudhoe Bay winter weather frequently dips below -50°F with a strong wind-chill factor so it’s frozen most of the time. Preparation for any project must be made far in advance and as weather permits.

Lynden Oilfield services, a newly created company this year, carved from the Lynden Freight Shipping and Logistics Companies, was created specifically to service the oil and gas industry in Prudhoe Bay. Heavy lift, heavy haul and getting freight to the various fields are its expertise. Jeanine St. John, vice president of Lynden Logistics, said it is most likely the only integrated logistics company serving the North Slope.

The largest cargo Lynden has taken up to Prudhoe weighed 110 tonnes. “It was the largest single unit hauled over a public highway – the heaviest weight ever shipped out of Anchorage,” St. John said. At 75 feet long, 20 feet wide, and 14 feet, 4 inches high, it was a module for BP, with corrosion detection equipment. To move it, they used one pull truck, four push trucks, three mechanic’s trucks, five pilot cars, three managers and a motor home with a driver and a cook.

St. John said everything comes into Deadhorse, the “city” on the slope. From there, Lynden transports equipment and freight to the various fields using several different modalities. The Alpine field, which is near the National Petroleum Reserve, is only accessible by ice road in the winter, or air. The Oooguruk field, which is run by Caelus Energy Alaska, is on an island six miles offshore, so Lynden supplies it by truck in the winter and boat in the summer. The company uses a hovercraft to access some fields, helicopters, a “rollagon” – which operates nicely on tundra without tearing it up because of its large, rounded tires – and a fleet of L-382 Hercules to move equipment and freight. There is a large airstrip in Deadhorse that can handle jets and the Hercs, St. John said. The company’s Hercules flights are scheduled or chartered and are exclusively for cargo – what she called a flying truckload.

Alaska-based airline Northern Air Cargo supports the North Slope oil business by flying food, fuel and other necessities into Deadhorse. The carrier’s business boomed this spring when the 414-mile highway from Fairbanks to Deadhorse suffered unprecedented flooding and was closed on and off for two months. Dave Squier, chief operating officer for parent company Northern Aviation Services, said they were sending four to five extra aircraft each week with supplies for the oilfield workers.

Summing up, Lynden’s St. John echoed the sentiment expressed by many others. Oil prices may be depressed at the moment, but “the investments for the North Slope are long-term. The outlook is for oil prices to return.”

Global chessboard

The U.S. and Canada are in the O&G spotlight now, but fortunes can turn quickly, cautioned DB Schenker’s Edward Fish. Less than two years ago, the darling of the industry was Australia. In 2013, energy analysts were tossing around nicknames like “the next Saudi Arabia” for the estimated A$20 trillion worth of oil shale discoveries in South and Western Australia. These discoveries attracted liquefied natural gas (LNG) projects from Chevron and Conoco Phillips, but when oil prices fell, the cost of extraction cooled off Australian activity dramatically.

But even as Schenker finishes its work in support of the Chevron and Conoco Phillips projects in Australia, it is moving on to new projects in the Asia Pacific region with companies such as Bechtel, Fluor, Chevron and Shell.

Some of these projects may be shelved, he said, but others, particularly connected with natural gas extraction in Canada and the Gulf of Mexico, are being tendered and going out to bid. Natural gas is seen as the future, as exemplified by Shell’s recent purchase of British Gas. This is the largest takeover in the O&G sector since Exxon purchased Mobil in 1998, and the acquisition will boost Shell’s oil and gas reserves by 25 percent.

Fish said Angola, an OPEC member since 2007, has always been an area for major oil exploration, while Tanzania and Mozambique are the future in natural gas production. About 45 percent of Angola’s GDP comes from the oil industry, and petroleum products make up 95 percent of its exports. OPEC estimates that Angola, which is the second largest oil producer in Africa, has more than 9 billion barrels of crude oil in reserve, most of it offshore.

According to Faycal Boumerkhoufa, global projects director for Volga- Dnepr Unique Air Cargo, the main focus for Volga-Dnepr is still ongoing LNG development, specifically in the Africa/Middle East region. “LNG is continuing its growth and setting a stronger footprint in the global energy vertical,” he said. “Moving gas turbines, power plants and rotors, are just a few examples of special air transport the company masters well.”

Other emerging markets include Argentina, Brazil, Columbia and, if it becomes economically and politically stable, Venezuela. Venezuela has the world’s largest oil reserves, but when the government began nationalizing foreign-owned assets in 2008, drilling dropped by 80 percent. Furthermore, Petroleum Venezuela owes US$1.6 billion to Exxon Mobil. Market research and consulting service Douglas- Westwood believes onshore crude production in Venezuela will continue to decline at 1 percent per year from now until 2021.

Fish also said Iran could be a big player if sanctions are lifted, adding: “It’s a very, very political chessboard around the world.”

Mixed bag for smaller forwarders

While much of the world’s O&G shipments involve huge pieces of machinery, there are also numerous smaller forwarders around the world that keep vital supplies moving, always trying to keep ahead of the boom-and-bust cycle.

Rosendo Gonzalez, director of Houston-based international freight forwarder Salinas Forwarding Co., is no exception. Seventy percent of her company’s customers are in the oil and gas industry. “The price of crude oil has affected most of our clients,” she said. “Our international shipping is 50 percent down from last year.”

Gonzalez said her customers are not doing much drilling or exploration. Consequently Salinas Forwarding is shipping only spare parts to keep the current equipment working while waiting “for the price of gasoline to go up – to go back to normal. For the very first time in 40 years, we have had to lay off some employees,” she added.

What’s happening today isn’t nearly as draconian as 1985-1986, when the price of crude oil dropped 67 percent and took two decades to recover. Granted, prices have dropped 60 percent since June 2014, but the difference is that shale oil production can come online in weeks, not years. Also, in the 1980s, the savings-and-loan business had its meltdown due to deregulation and risky lending, a scenario that has not repeated itself during the most recent price decline. World demand for oil is not pulling back, and won’t be anytime soon. It might take a few more years for the price of oil to come back to a level where new investment feels right for energy companies, but that’s better than 20 years.

“Our first quarter was extremely strong, when oil prices were at their lowest,” said Volga-Dnepr’s Boumerkhoufa. “It’s hard to predict, but it is our belief that the oil and gas sector will remain a profitable sector for us.”

Brian Fainter, the president of forwarder N/J International in Houston, is similarly optimistic. “Everybody’s looking at $65 to $75 a barrel by the end of the year or sooner,” he said. This expectation is based on the reduction of new production in the U.S. and increasing demand over the summer, continuing into winter. He said N/J is still working because materials to maintain existing wells are needed, even if new wells are not being drilled. However, he said materials are not flowing like they used to, and many of his customers have had to furlough employees. However, while he is not seeing new exploration in the U.S., a partner firm in Venezuela told him it is picking up five new oil and gas clients, and he has been told to “power up.”

Interestingly, the sector where he has started to see more action is in agriculture. Through his Venezuelan partner, Fainter sent 20 silos to Venezuela. “Agriculture-heavy machinery is being shipped around the world,” he said.

N/J is currently seeing more action in agricultural heavy machinery shipment than in the oil and gas industry, but Fainter remains confident about O&G. He’s shipped millions of tonnes of oil and gas equipment by air in support of GE over a 15- to 20-year period, working with carriers such as Amerijet, LAN, Qatar, Emirates, Etihad and many others.

We’re hopefully optimistic that the market is going to turn,” he said. “It always does.”

 

 

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