Axford predicts an uptick in US gas-turbine orders for 2017

Mark Axford, the Houston-based consultant considered by many to be the leading independent expert on gas-turbine markets, packed more information than ever before into his annual one-hour presentation on the state of the energy industry’s GT sector for the Western Turbine Users Inc’s annual meeting (Las Vegas, March 19-22, 2017). He accomplished this by partnering at the podium with Tony Brough, PE, president of Dora Partners & Co, who shared his company’s stats on more than 35,000 GTs worldwide rated from 1 to more than 300 MW (total capability, 1525 GW).

First, Axford’s predictions: At last year’s meeting in Palm Springs, The Turbine Guy forecasted US orders for GTs in 2016 would decrease by 10% (megawatt basis) compared to 2015; also that orders worldwide would decrease by 10%. Axford got the direction right, but the magnitude wrong: US orders were down 30% year over year and worldwide orders were down by 14%.

For 2017, he sees orders for units larger than 10 MW up by 10% in the US, in part because of improving demand in regional pockets. Plus, expected approval of new pipelines will increase orders from companies in the oil and gas industry. Worldwide, Axford predicts a 10% decrease in orders year over year for 2017.  

The following bullet points reflect some of his thinking on international business:

      • Europe still is in recession. Power demand is soft and orders for GTs will reflect that in 2017, as it has for the last few years. Germany is retiring nuclear generating stations and adding high-efficiency (high cost) coal-fired units and offshore wind. Electricity is very expensive, perhaps a luxury product.

      • Business in South America—mainly Argentina and Bolivia—was good in 2016. Whether a robust GT order book continues in 2017 is open to question.

      • In Canada, political pressure may limit growth in the oil and gas sector despite Keystone Pipeline optimism. Any spending likely will be cautious given the strength of the US dollar against Canada’s.

      • Mexico remains active thanks to continuing development of its energy-industry infrastructure. Energy reforms and financial help from north of the border are the most significant business drivers. However, 2017 GT orders are predicted drop back to the traditional annual order book of about 1000 MW from the 5000 MW bought last year to support six new pipelines. What happens after President Enrique Pena Nieto’s term expires at the end of 2018 is anyone’s guess.

      • In Asia, LNG spot prices, linked to crude, are down dramatically from the $19/million Btu recorded in 2014. In 2015 the price had dropped to $11 and by May 2016 it plummeted to $4. By early spring 2017 the spot price had rebounded to about $9/million Btu. Axford believes $8 LNG is feasible long-term. This is positive news for GT owner/operators and should stimulate orders.

      • Action in Africa and the Middle East does not signal an order bonanza in the near term, although business in Saudi Arabia and the Sahara region remains good. Orders in 2016 from Oman for 2900 MW of combined-cycle capacity, and from Egypt for 6500 MW, may be the last of the good times for a while.

Observations, comments

Axford closed out his portion of the state-of-the-industry report with “some thoughts and comments.” He believes these are some of the things industry participants—users as well as suppliers—at least should be aware of in their planning activities. They are facts and observations, not analyses, and were delivered rapid-fire:

      • GE closed its Houston gas-turbine packaging facility (formerly Stewart & Stevenson) which had delivered more than 800 LM turbines in its 30 years of operation. First out the door was an LM2500 for the city of Wellington, Kansas (1986), last was an LMS100 for the Exelon West Medway II Project in Massachusetts (2016).

      • The medium-size GT genset market is shrinking, with units larger than 100 MW capturing the lion’s share of available business.

      • Medium-speed reciprocating-engine gensets accounted for 45,000 MW of installed capacity worldwide—the equivalent of 900 LM6000s—since the beginning of 2006. The selling points: quick start and flexible.

      • Renewable-energy generating facilities installed last year in the US totaled 26,000 MW. Solar and wind each captured half of that total or 30% of the market, natural gas 33%.

      • Axford spent a couple of minutes talking about subsidies and how they have favored electricity production by solar and wind resources. He reminded attendees of the “Grand Compromise” that congress jammed into the 2016 federal budget:

          • The oil export ban enacted in 1975 was canceled permanently.

          • The investment tax credit for solar facilities was extended through 2019 at 30%. In 2020 it drops to 26%, in 2021 to 22%, and in 2022 to 10%. The effect of extending solar subsidies from 2011 through 2021: The installation of 18,000 MW of solar power—the equivalent of 360 LM6000s.

          • The wind production tax credit of 2.3 cents/kWh was extended through 2016. This year it is 1.84 cents, in 2018 it drops to 1.38 cents, and in 2019 it goes to 0.92 cents. Axford noted the effect of extending wind subsidies from 2011 through 2021: The installation of 19,000 MW of wind power—the equivalent of 380 LM6000s.

He then got a chuckle for his definition of “subsidy”: “A government grant to a private party to encourage an investment that no logical person would consider.” Subsidies are sold to the public as “the right thing to do” but the only thing they really do is distort free markets.

The “duck curve” was worth a minute or two given about 40% of the attendees were from California. “Who pays?” was the speaker’s question. More solar would be required to hit the state’s goal of 50% renewables by 2030. But the duck’s belly, already fat, is getting fatter and its head is getting bigger. The impact: Heavy ramp daily from 1500 to 1800 hours; GT load is highest from 2100 to 2200.

When you considered the curves and data on the screen, some questions came to mind. Example: What is the practical maximum for renewables as a percentage of total installed capacity? Do you shut down solar and wind plants in favor of big hydro in the North during the spring runoff?

Axford frequently is asked if President Trump will try to repeal solar and wind subsidies. His typical response is “probably not,” but no more extensions. His reasons include the following:

      • Subsidy value declines until expiration in 2021.

      • The Grand Compromise was passed by bipartisan vote.

      • The largest wind installations are in the Midwest (Republican states).

Axford said to expect more wind and solar “gold rush” in 2017 and 2018.

Regarding oil price, his outlook is for crude to remain below $60/bbl throughout 2017.

An update on LNG exports was the subject of another slide. These are the LNG export terminals in construction or operation in the US and their production capability in millions of tons per year:

      • Cheniere 1, Sabine La, 27.

      • Dominion, Cove Point, Md, 5.

      • Cameron, Hackberry, La, 15.

      • Freeport, Freeport, Tex, 14.

      • Cheniere 2, Corpus Christi, Tex, 13.

Axford said one or more North American terminals might be added to the list, given permits pending for three sites in the US and two in Canada.

EV and battery markets

The speaker’s final 10 slides focused on electrical vehicles (primarily Tesla) and batteries. Axford closely follows the EV market for personal and business reasons. The latter: If successful, he says, Tesla will disrupt automotive, oil, and electricity markets. The Houston consultant provided details on Tesla’s background, sales, goals, etc. Challenges for Tesla abound. For one, it seemed as if it would be tough to justify to an investor the financial data provided. Regarding technical issues, likely they will take years to uncover and correct.

Using a published prediction of EV market penetration by 2030 equivalent to 7% of the US vehicle population, Axford calculates that the additional generation required to fuel this fleet would be at least 5000 MW. That translates to the equivalent of 100 LM6000s over the decade leading up to 2030.

Finally, the speaker pointed to batteries as the next energy subsidy. As many in the room were aware, the California PUC mandated, in October 2013, 1325 MW of storage by 2020. Southern California Edison and Pacific Gas & Electric each were responsible for 44% of that total, San Diego Gas & Electric the balance.

Gas-turbine database

Dora Partners’ Tony Brough answered many of the questions regularly received by the editors regarding numbers of gas turbines in service, fleet sizes, etc. By way of background, he was affiliated with GE Aeros from 1986 to 2003 and with Rolls Royce from 2003 to 2007. Brough founded Dora in 2013.

His firm has sliced and diced the worldwide installed base of gas turbines every which way:

      • By OEM. GE has a 52% market share on a megawatt basis, Siemens is a distant second at 27%.

      • By turbine capability. Units in the 150-300-MW range dominate the market (megawatt basis) with a 54% market share; units in the 100-150-MW range have 11% of the market; those in the 40-100-MW range, 15%.

      • By sector—electric power producer (82% on a megawatt basis), oil and gas (15%), marine (3%).

      • By geography—regions and countries. In round numbers, North America (25%) and Asia Pacific (24%) combine for half of the world’s gas turbine capability. The Middle East comes in third at 17%; Europe is fourth at 14%.

      • By type of cycle—simple, combined, cogeneration.

      • By topography—onshore, offshore.

      • By application—power generation, mechanical drive.

      • By technology—heavy duty (82% on a megawatt basis), aero (12%), light industrial (5%).

Brough dissected the aero market for attendees. Here are the number of engines in the respective fleets:

GE. LM6000, 1103; LM2500, 1073; LM2500+, 948; LM5000, 87; LM1600, 119; LMS100, 83.

Siemens.  RR501, 678; RB211, 640; Avon, 763; Trent 60, 111.

PWPS. FT4000, 3; FT8, 561.

A snapshot of the US aero market for 2016 provided these facts:

      • Aero unit orders were down 46% in 2016 compared to 2015.

      • Aero megawatt orders were down 65% in 2016 year over year.

      • GE’s share of market was more than 90%.

Globally, the picture was not much different:

      • Aero unit orders outside the US were down 42% in 2016 compared to 2015.

      • Aero megawatt orders outside the US were down 35% in 2016 year over year.

      • GE’s share of market outside the US was just under 50%.

      • There were no FT4000 or RB211 orders in 2016.

The aftermarket. Finally, annual spending to maintain the global aero fleet is about $2.2 billion, according to Dora. And this doesn’t include BOP equipment, controls, and accessories.

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