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Collapsing Crude Prices Set to Change Australia’s LNG Market

Author - Purushottam Uniyal   Date-January 21, 2015

Summa​ry

The plunge in crude oil prices has also led to a significant drop in global LNG prices. The Asian spot LNG price has dropped below $10 MMBTU from the highs of about $18-20 MMBTU. This significant drop in LNG prices will impact the under construction and planned LNG projects globally and specially the once in Australia which are already battling with high cost overrun.

Australia LNG Overview

The rapidly growing LNG demand and high prices that Asian market attracts had made LNG a very lucrative investment in the region. In race to dominate the market and take advantage of the huge coal seam gas reserves, Australia has invested heavily on LNG.

The country is likely to emerge as the world’s biggest supplier of liquefied natural gas. Of the 12 LNG projects under construction globally, 6 are located in Australia. LNG exports from Australia are expected to increase three and a half fold to ~85m tonnes a year by 2017. However, given potential export competition and cost inflation, industry watchers are increasingly sceptical that that figure will be reached. To add to the difficulties, the prices of LNG are at their lowest in last few years.

Australia LNG Project Details

Australia currently has four operating LNG projects - North West Shelf Venture(1989), Darwin LNG(2006), Pluto (2012) &Queensland Curtis(2014) and six other under construction. Queensland Curtis is the latest addition in the list of LNG projects. The project has two trains each with a capacity of 4.25mtpa. As of Dec 2014, only one train is in production while the second train is due to start producing in 2015. The existing production capacity of the country is 28.35mtpa.

Six under construction projects are at various stages of development. Four of the projects (Gorgon, Prelude, Wheatstone and Ichthys) will receive the gas from the gas fields off the north coast of Western Australia, while the remaining two (Gladstone LNG and Australia Pacific LNG) are located in Queensland and will convert coal seam gas (CSG) to LNG. Overall, the country has more than $170 billion of LNG projects under construction.

Project

Start Year

Capacity

Partners

Status

Capex

North West Shelf Venture

1989

16.3

Woodside, BHP Billiton, BP, Chevron, Shell, MIMI

On-stream

50.0

Darwin LNG

2005

3.7

Conoco Phillips, Inpex, Eni, Santos, Tokyo Electric, Tokyo Gas

On-stream

1.5

Pluto

2012

4.3

Woodside, Kansai Electric, Tokyo Gas

On-stream

15.3

Queensland Curtis LNG

2014

8.5

BG Group, CNOOC

On-stream

20.4

Gorgon

2015

15.0

Chevron, ExxonMobil, Shell

Under Construction

54.0

Australia Pacific LNG

2015

9.0

Origin Energy, Conoco Phillips, Sinopec

Under Construction

24.7

Gladstone LNG

2015

7.8

Santos, Petronas, TOTAL, Kogas

Under Construction

18.5

Wheatstone

2016

8.9

Chevron, Apache, KUFPEC, Shell, Kyushu Electric Power Company, PE Wheatstone Pty Ltd.

Under Construction

29.0

Ichthys

2016

8.4

Inpex, Total

Under Construction

34.0

Prelude

2017

3.5

Shell

Under Construction

13.0

Source: APPEA

The country overall capacity will reach ~85mtpa by 2017, and will become world's largest producer of the fuel.

Key challenges faced by the sector

The Australian LNG industry is facing several challenges ranging from project cost overrun, plunging crude oil prices, and weak demand etc. which could meanlosing billions of dollars invested in the LNG projects. The growth in the past that the industry has seen has been stalled by these factors.

Plunging crude oil prices and high breakeven prices make projects unviable

The collapse in crude oil prices has a huge impact on LNG industry. The oil-linked pricing has brought down LNG prices to below $10 per million British thermal units and has impacted investor’s profit along with the possibility of an early cash flow for these projects. According to an article in Reuters, if Brent crude averaged $75 in 2015, average LNG import prices into Japan will be $11 per MMBTU and if the same increases to $85 per barrel then the prices could reach $12.60 per MMBTU. These prices will not be sufficient enough for the high break-even prices of these projects.

According to estimates from Credit Suisse and Wood Mackenzie, the LNG projects in the country would need to sell LNG for at least $12-to-$14 per million British thermal units to break-even and in some more expensive projects even higher than this.

Project

Break-Even Price dollar per MMBTU

Queensland Curtis LNG

19.8

Gladstone LNG

19.0

Gorgon

17.7

Australia Pacific LNG

15.0

Ichthys

11.1

Source: The Wall Street Journal

Cost Overrun

The LNG projects in the country are facing several challenges which have led to increase in cost of the several projects. Some of the reasons for the high costs are:

·         Inflation

·         Currency Swings: Since 2009, Australian dollar has witnessed a considerable appreciation against the US dollar

·         Limited existing infrastructure due to development of projects in remote areas

·         Skilled Labour shortages

Several projects in the country haveovershot their estimated budget. Countries biggest project, Gorgon has changed its investment several times which was originally pegged at $37 billion in 2009. At a current budget of $54 billion, the project is expected to start in mid-2015

New supply

The industry witnessed a dramatic event which changed the complete LNG supply scenario. With the advent of shale gas, US transformed in one of the highest natural gas producer in the world and could become a significant LNG exporter. Shale boom has freed supplies by removing the US need for LNG imports. These new supplies(from the US and from the regions from where US was importing LNG) globally are weighing on long-term prices, at a time when Asian demand growth is slowing thus making difficult for the projects in Australia to find long term contract. The country’s largest project, Gorgon has only been able to contract their 65 percent supplies far less than the estimated supply of 85 percent.

Future Ahead

Most experts believe this fall in prices in only a short term affair and prices will pick up eventually driven demand in the Asian countries mainly Japan, China and Korea. However, the development of shale gas in resources in US and also other regions will continue to have an impact on the profitability of the Australian LNG projects.