Deeper oil slump a ‘disaster’ risk for Australian LNG projects

Deeper oil slump a ‘disaster’ risk for Australian LNG projects

JAMES PATON

SYDNEY, Australia (Bloomberg) -- An extended slump in oil prices threatens an expansion of the LNG industry and risks cutting returns for project developers in Australia, poised to become the world’s biggest supplier of LNG.

The nation’s exports of natural gas converted to liquid are linked to the oil price, which has declined from a June peak. Brent crude, the global benchmark, reached an almost four-year low of $82.60/bbl last week.

Australia’s natural gas industry is already facing high costs as companies from BG Group to Chevron build seven export ventures to meet Asian demand.

Developers across the nation are studying further investment of as much as $160 billion (A$180 billion).

Weaker oil prices may put proposed LNG projects “to sleep for a number of years,” Fereidun Fesharaki, chairman of Facts Global Energy, said in a phone interview. “For the projects that are already under construction, it hits their pocketbooks seriously.”

Prices below $80/bbl may be a “disaster” for some projects, said Fesharaki, who forecasts Brent may decline to $60/bbl before the end of the year, then rebound to about $80 by the end of 2015.

In a 2012 presentation, he cited lower oil prices as a bigger concern for Australia’s LNG industry than supply competition from the U.S.

Origin Energy’s long-term view of the economics of its project with ConocoPhillips is unchanged, the Sydney-based company said last week in an email. In a November presentation, Origin said it needed a $55/bbl price over the life of the project to recover its costs.

Protect Suppliers

BG’s Australian project, due to start by the end of the year, is profitable “at a wide range of oil prices,” the company’s local unit said Oct. 20 in an email.

Australia’s export developments typically have 20-year contracts. Some have a floor price of $40 to $60/bbl and a ceiling of $80 to $110/bbl, according to a report last month by the Oxford Institute for Energy Studies.

That’s designed to protect suppliers and buyers from severe moves in the oil price, Geoffrey Cann, Australian oil and gas director at Deloitte in Brisbane, said by phone.

If developers lower their oil forecasts, “expansion of the natural gas industry in Australia will be very difficult because Australia is a high-cost environment,” he said.

About $190 billion in LNG projects are under construction in Australia. Woodside Petroleum's Browse and Sunrise LNG ventures and Exxon Mobil’s Scarborough development are among additional LNG projects under consideration.

Total, InterOil

In nearby Papua New Guinea, Exxon is looking at a potential expansion of its venture, while Total and InterOil are planning a second gas export development.

Brent may drop to as low as $78 in the next three months, UBS said last week in report, while Bank of America and BNP Paribas predict prices will hold above $80/bbl. Societe Generale has cut its forecast for 2015 by $12 to $91/bbl.

Oil has slipped 22% this year and collapsed into a bear market as shale supplies boost U.S. output to the most in almost 30 years and global demand growth weakens. Brent traded at $86.46 at 9:35 a.m. Sydney time. A decade ago, the price was around $50/bbl.

“There’s no doubt if we were to see the type of crude oil prices we’re seeing now continue they would be looking at lower LNG prices,” Daniel Hynes, senior commodity strategist at Australia and New Zealand Banking Group, said by phone. “On face value, it would put pressure on margins.”