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Where to now for Australian LNG exports?

Gas Today talks to them about what lies ahead for the LNG sector.

In direct response to the fall in Brent crude prices below $US50 and the negativity surrounding Australia’s term of trade, Westpac released a research paper entitled What Price Australian LNG to measure the impact of the recent weakness in crude prices on LNG markets in Asia.

“There has been a lot of sensationalistic press around the recent slump in energy prices and what that means for gas projects here in Australia. We just wanted to gain a better context around that,”? co-author Mr Rennie says.

Australian LNG exports

The first LNG exports from the Queensland Curtis LNG (QCLNG) project have taken place, meaning that the first of seven major Australian gas projects has come online.

Other gas projects like Ichthys, Wheatstone and Prelude are currently around the 50 per cent complete mark, meaning delays are still possible. However, Gladstone LNG (GLNG), Gorgon and Australia Pacific LNG (APLNG) are in the region of 85 per cent to 90 per cent complete – meaning material slippage from their timelines seem unlikely.

According to the Westpac study, LNG exports can rise as much as 15 million tonnes (MMt) in calendar year (CY) 2015, 24 MMt in CY2016 and 18 MMt in CY2017 – lifting the volume of Australian LNG exports by a factor of three between now and the end of 2017.

Mr Smirk says even the pessimistic press cannot deny that the gas industry is about to start exporting. “It’s going to happen. They’ve built the terminals. Unless they’re making cash losses on each boat sold, the gas will be sold and exported. The industry is about to grow and take off.”?

Where is Australian LNG headed?

Last year, 75 per cent of Australian LNG was delivered to Japan. As contracts with China and other nations are delivered on this year, the Westpac study said the percentage will drop to 60 per cent. In 2016, it will drop below 50 per cent. At least for the next seven years however, Japanese pricing will remain a key driver for LNG exports.

Gas operators’ reaction to oil prices

Mr Smirk says the oil price drop has changed gas operators’ perception of risk. “Rather than being focused on growth and projects at any cost, gas companies are now asking themselves, “˜who has the most projects, who has the most cost-efficient resources, and who can get gas to the market at the lowest cost, thus providing the largest margin?'”?

He says the oil price drop was effectively a “˜wake-up call’ for many Australian gas operators. “There’s a large demand for product that continues to grow out of Australia, but gas operators will have to be very cost-efficient to make sure they can tap into it.”?

Mr Smirk says he expects to see gas companies firmly focused on cost minimisation, and says expansion beyond projects already in the pipeline may only happen after half a decade. “If we do expand, it will have to be quick and efficient, and will probably be through floating platforms.”?

Mr Rennie says companies are now consolidating their operations. “Instead of each project having to have their processing plants in place, the idea is that you can look at processing gas from other fields through existing plants.”?

How oil prices will affect Australian LNG export values

Using export volume profile and current consensus Brent forecasts, the Westpac study said export values will be unchanged in FY 2014/15 versus the previous year, rising to $A11 billion in FY 2015/16 and $A15 billion in FY 2016/17. The current Brent consensus profile implies that Australia’s annual LNG export value will triple to $A51.57 billion in FY 2017/18 from $A16 billion in FY 2013/14.

“Clearly both profiles are well below what might have been seen if LNG prices remained unchanged from levels seen in FY 2013/14. Had that been the case, values would have increased fourfold from $A16 billion in FY 2013/14 to $A67 billion in FY 2017/18.”?

The downsides to the above export value profile are:

    Consensus forecasts for Brent could be too upbeat;

  • Given consensus forecasts for the $A is used, if the value is different, it will impact export values; and,
  • LNG charter costs and other associated shipping costs can change.

The obvious downside risks for the LNG markets in Asia in general are:

    If Brent prices remain below $US60 for a significant period, current projects that are not yet close to completion may be run “˜slow’;

  • A period of increasing Brent co-efficients post-2010 due to tight demand in Asia would see a period of falling co-efficients as increasing supply comes on stream, meaning structurally lower LNG for a given level of Brent; and,
  • The Asian Japan Customs-cleared Crude (JCC)-based LNG long-term contract system starts to break down.

Conversely, the upside risks for LNG in Asia are:

    Supply response in global energy markets is starting to kick in, with number of operational oil rigs in the US dropping almost 11 per cent from September;

  • Global demand will benefit from stronger global growth in late 2015 and into 2016;
  • Some contracts have a floor embedded into the price, meaning lower Brent prices will not be directly priced on to LNG producers;
  • Brent prices in the mid-to-low $US50s make LNG attractive versus oil in Asia; and,
  • Natural gas is becoming cheap versus other forms of thermal energy at current levels.

Westpac forecast for Brent and LNG

Westpac expects stronger world growth from the second half of 2015 to be a key factor in its forecast lift in overall commodity prices, as both consumers and producers respond to the dramatic price fall.

“One of the most beautiful and amazing things that happens in the world is that nothing is static. With oil prices falling by half, you change both the supply and demand dynamics,”? Mr Smirk says. Further, he says projects that are unable to come online in the current environment will change all the matrixes.

“If you look at how lower oil prices can lift demand, then you overlay stronger underlying demand you can see how crude demand in late 2015, or early 2016, can be much stronger than it is right now. We will also see a supply response that’s quicker than you’ve ever seen in the past due to the nature of the industry now – marginal producers can respond very quickly and they stop drilling when prices fall, which dries supply up.”?

Furthermore, Mr Rennie says increased demand should kick-in in the upcoming months, with energy sources in the US power generation sector increasingly switching to natural gas.

Bottom line – the glass is half full

Although LNG prices would have fallen some 50 per cent from the extreme highs seen in mid-2012 by May this year, LNG prices will still be some 30 per cent above the average price seen through the last decade.

“And as we move through 2015, we expect a crude supply correction to unfold which will be accompanied by an acceleration in demand leading to a sustainable bounce in crude prices.”?

However, Mr Smirk is not ruling out the risk of prices worsening before they improve.

“The reality is that before we start talking about the recovery, we are going to see things get a lot worse. We haven’t seen prices come through yet and the gas industry is going to see the prices for the first half of the year fall by quite a bit.

“It takes a while for the supply correction to unfold, but you should be seeing prices stabilising by mid-2015.”?

That being said, Mr Smirk says he does not expect the recovery in gas prices to match the recovery in oil prices.

“Even if oil prices recover, we’re not talking about getting to peak levels because now that we’ve introduced significant volatility, it introduces greater uncertainty. Projects that were viable at higher prices won’t be viable now at lower prices in an environment with greater volatility.”?

In the midst of this price weakness and uncertainty, the LNG sector will be buoyed by export values that are set to rise materially. “With LNG in the region now much more competitive versus US LNG and versus other forms of thermal energy, we do not subscribe to the much more pessimistic outlook for Australia’s LNG export industry.”?

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