03/12/2015 - 14:46

Low price won't dent LNG flow: report

03/12/2015 - 14:46

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Analyst firm EnergyQuest has predicted lower liquefied natural gas prices will not lead to Australian operations switching off or cutting back production, in its latest quarterly review of the industry.

Low price won't dent LNG flow: report
An LNG tanker loading in WA.

Energy advisory firm EnergyQuest believes lower prices due to increased supply in the LNG market will not lead to Australian operations switching off, or cutting back, production.

In its most recent quarterly review of the industry, EnergyQuest said the LNG price would need to fall below $US4 per million British thermal units for newer projects to be ‘underwater’ in terms of variable costs.

Current average prices received by North West Shelf Venture and Pluto, Western Australia’s two projects currently shipping gas, were $US7.20/mmbtu and $US$9.12/mmbtu respectively, the report said.

By contrast, reports earlier this year flagged that the latest round of LNG projects would not break even at current prices.

The International Energy Agency was one such organisation, while Wood Mackenzie analyst Saul Kavonic said break-evens for those projects currently under way would range between $US12.50 to $US17 per mmbtu.

But EnergyQuest chief executive Graeme Bethune said those analyses were additionally accounting for capital cost payback, which was a major fixed cost for LNG producers.

Decisions on continuing operations, reducing production or shutting down are made on variable costs, which are better reflected by the operating breakeven cost.

“You wouldn’t be paying off a lot of the debt or sending dividends to the shareholders,” Dr Bethune said.

“They’re not going to be making a 10 per cent return on assets, it’ll possibly be in the single digits.”

Nonetheless, production would run at full tilt to support cash flow.

“We expect the Australian LNG projects will still produce uncontracted volumes for spot sales," he said.

"Even at low spot prices, these cargoes are still likely to generate valuable cash.

Projects have a very long lifecycle, however, and over the multi-decade time periods used it is likely that returns will improve when prices rises as the cycle turns.

It is this sort of long-term planning Dr Bethune said meant projects such as Woodside’s Browse could still receive the go ahead.

A positive for producers was that more than 90 per cent of new supply, both in WA and Queensland, was already under long term contracts, he said.

Competitiveness

WA projects have been marred by major cost blowouts, industrial action and substantial delays, with the largest, Chevron’s Gorgon, potentially delaying shipments until next year.

With construction more than 90 per cent complete and the project in commissioning, the company had an industrial relations scare in August, when threatened strike action was narrowly avoided.

That prompted concerns that the nation’s industrial relations system could be a handbrake on potential investment in big projects in the future.

Business News reported earlier this year that some in the sector believed projects in Canada were cheaper to get underway by almost a third.

 

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