Plunging oil threatens to spoil Australia’s next gas bonanza

Plunging oil threatens to spoil Australia’s next gas bonanza

JAMES PATON

MELBOURNE, Australia (Bloomberg) -- Tumbling crude oil prices are casting a shadow over almost $70 billion of natural gas projects planned in Australia.

The oil price decline is bad timing for the next wave of projects in an industry shaken already by China’s move to ink gas-supply agreements with Russia, high costs and a shale gas revolution in the U.S. that’s set to hit global markets.

“The oil price environment does have the potential to delay and defer projects because of the uncertainty that the volatility brings,” says John Hirjee, an analyst at Deutsche Bank.

"OPEC took no action to ease a global oil-supply glut, resisting calls from Venezuela that the group needs to stem the rout in prices. Woodside Petroleum is at risk of missing its target of approving the Browse LNG project in the second half of next year," Hirjee said.

Its partners in Browse include Shell , BP and PetroChina. The project is estimated by the bank to cost about $35 billion.

Australia’s first phase of LNG development has resulted in seven LNG projects now under construction at a cost of about $180 billion to supply the Asian market.

Most Australian LNG is sold at prices linked to oil, which has slumped as the U.S. pumped the most in more than three decades and conflict in the Middle East and Ukraine failed to disrupt supply.

Brent crude fell by the most in more than three years after the OPEC decision, slumping 6.7% to $72.58 a barrel on Nov. 26. Prices peaked this year at $115.71 in June.

"The prices have fallen below a key level for the Australian LNG industry. Most Australian projects need an oil price at $75 to $90 a barrel to generate a 10% rate of return, including money they’ve already spent," said Nik Burns, an analyst at UBS AG in Melbourne.

The Scarborough and Sunrise LNG projects have also been proposed in Australia, and are estimated to cost a combined $33 billion, according to a Deutsche Bank's November 2014 report.