Price pain to hit LNG exports

National LNG export revenue could fall by as much as 40 per cent in 2021 because of a collapse in the oil price, and the industry is unlikely to emerge as Australia’s saving grace as it did during the Global Financial Crisis.

Consultancy EnergyQuest estimates LNG exports could be worth $30 billion in the 2021 financial year, down from $50 billion in the year to June 2020.

That’s because of a dramatic collapse in the oil price from $US52.52 per barrel at the start of March to be $US22.24/bbl at the end of the month, EnergyQuest said.

Moves by Saudi Arabia and Russia to abandon production cuts in early March had turned out to be the worst possible decision for OPEC+, the report said.

“In its April Oil Market Report the International Energy Agency estimates global oil demand will fall by a record 9.3 millon barrels a day in 2020,” EnergyQuest said. 

“Demand in April is estimated to be down to the level last seen in 1995 and even if travel restrictions are eased in the second half of the year, the IEA expects global oil demand in 2020 to fall by 9.3 mbpd versus 2019, erasing almost a decade of growth.”

Lower oil prices take time to feed into LNG spot market prices, but the impact is already showing, the consultancy said.

Nonetheless, Australian operations, such as the five in Western Australia, will continue to operate at the oil prices seen in recent days.

“Australian projects have been selling spot cargoes at these prices ($US3.60 per million British thermal units) and lower,” EnergyQuest said. 

“According to Platts LNG Daily, (Inpex’s) Ichthys sold a spot cargo in February at a price in the low US$2s. 

“In March Kufpec sold a Wheatstone cargo at US$3.10/MMBtu. 

“At current oil prices Australia’s LNG exporters will not thrive but they will survive. 

“Santos has a target 2020 break-even of US$25/bbl. 

“Woodside’s break-even is US$32-33/bbl.”

Project pipeline

The low oil prices will create a long term problem, however.

EnergyQuest warns the cashflow in the years ahead may not be enough to fund backfill projects to keep existing LNG trains running at capacity.

Woodside and Santos have already delayed a combined $60 billion of projects, including the Browse development intended to backfill North West Shelf’s Karratha trains.

Woodside had warned last year that some trains would need to be shut down by the middle of next decade if sufficient gas could not be found.

Not only would WA miss out on a potential capital investment boom, but it means gas production would begin to dry up.

That would have an ongoing impact on the nation’s export revenue.

“At the time of the GFC in 2009 Australia was just starting an LNG development boom,” the report said. 

“Between 2009 and 2015 the oil and gas industry spent $273 billion on development projects, mostly LNG. 

“This was instrumental in Australia avoiding the worst of the GFC.”

Capital investment at oil majors across the world is being cut, with BP, Chevron and Saudi Aramco among those trimming budgets up to 25 per cent.

Woodside 

Revenue at Woodside Petroleum fell 23 per cent in the March quarter compared to the three months to December.

Prices were 20 per cent lower than the March 2019 quarter and production was up 12 per cent.

The impact of lower oil prices has not yet fully flowed through, however.

As example, Woodside’s realised price of LNG was $US47 per barrel of oil equivalent in December 2019, where it had remained in the March quarter.

Woodside did, however, move forward with the Greater Western Flank 3 development and Lambert Deep, making a final investment decision in January.

That will involve 4 wells and upgrades to the Angel platform.

Chief executive Peter Coleman said the COVID-19 crisis had a big impact on the company.

“Nevertheless, revenue for the quarter was impacted by reduced trading activity and lower realised prices due to COVID-19 and an unprecedented combination of oversupply and short-term demand destruction,” Mr Coleman said.

“Of course, most of the quarter was overshadowed by the growing threat of the COVID-19 pandemic, which has required us to take swift and decisive action to protect our workforce, communities and operations.

“We’ve also had to make tough but prudent decisions to ensure the financial integrity of our business, and these mean our spending in 2020 will be reduced by 50 per cent and a targeted final investment decision on our Scarborough and Pluto Train 2 developments has been deferred from this year to next.”