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W|EPC: Gorgon LNG – Operational Breakdown Could Have Contributed To Kettle Cracks – Mid-October A More Likely Restart Timeline

W|EPC: Gorgon LNG – Operational Breakdown Could Have Contributed To Kettle Cracks
Mid-October May Be A More Likely Restart Timeline

Key Takeaways:

Pump The Brakes: While potential fabrication errors have been the primary narrative around the Propane Kettle cracks that shut down Gorgon LNG, it’s feasible that operational issues (and one in particular) may have contributed or even partially caused the cracks on Train-2’s kettles, which could have significant and more complex implications.

  • The propane kettle cracks were noticed ~3-years after the kettles were placed in-service (likely beyond any warranty period), potentially shifting costs to Chevron.
  • According to our in-house engineers, a breakdown in the propane vapor transfer step could subject the propane kettles to temperatures significantly below the minimum design metal temperature; creating stress on the metal and an optimum environment to cause cracks.
  • If the root cause involved an operational issue, it would require not just replacement or repairs, but more robust inspections, testing, and training, which would add to the out-of-service timeline (below).
  • If a breakdown in the propane vapor transfer step did contribute to the cracks, it would have likely needed to be repeated routinely to cause the visible cracks on Train-2, increasing the likelihood that such an error would have been repeated on Trains 1 and 3 as well, given the likelihood of crew rotation.

Timeline Implications

According to recent press reports, Chevron has suggested an early September restart for Train 2 and provided train 1 & 3 inspection time-frames.

  • Train 2 – Currently Down since July, Online Sep 20
  • Train 1 – Shutdown Early Oct 20, Online Nov 20 to Jan 21
  • Train 3 – Shutdown Jan 21, Online Mar 21 to Apr 21
  • We think mid-October for Train 2 may be more realistic. While the repairs themselves may fit within a mid-September target, we believe a thorough assessment of the route problems, inspections, training, etc., likely push out the downtime. We don’t know yet what approvals and 3rd party reviews will be necessary to confirm the repairs were made in a satisfactory way, but this could impact the timelines given as well. Continued…

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Tankers: Floating Storage Scenario Analysis & Utilization Impact

Our 3-Stage Approach To Tankers For the Remainder Of 2020

  • Our 3-Stage Approach To The Remainder Of 2020                            Pages 1-2
  • Floating Storage Scenario Analysis – Impact On Utilization             Pages 2-3
  • Storage Arbitrage, Inventories, & Rate Reactions                               Pages 4-7
  • Multi-Factor Crude Tanker Utilization Model                                       Pages 8-9
  • Updated Tanker NAVs, Valuation Metrics, & Estimates                     Pages 9-10

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Depth Of Floating Storage Build Key For Tanker Equities In Q220. Amid the double black swan start to the year (OPEC supply shock/pricing war coupled with demand destruction from the COVID-19 response), tanker equities have (generally) acted as a hedge against the rest of the energy tape, as the prospect of significant structural and arb-driven floating storage has supported tanker earnings well above seasonal trends (page 4). While increasing OPEC & Russian crude production battle to replace US exports (the degree to which remains in question) – the market mechanism for finding that new global production balance should ultimately result in saturated land based storage and a ramp in floating storage (already ~100mb), and narrower tanker capacity, providing a significant tailwind for tanker cash flows. From an equity perspective, we think about Tanker stocks (FRO, EURN, DHT, ASC, etc.) in 3 stages….(Pages 1-2)

What Would Robust Floating Storage Mean For Tanker Rates & Utilization In Q2/Q3? We ran a multi-factor scenario analysis based on our updated crude tanker utilization model, flexed for different levels of incremental daily crude production moving into floating storage over the next 2-3 quarters. At the low end of the range…(Pages 2-8)

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