Wood Mackenzie says Gladstone’s three LNG mega-projects are “cheap to run” despite being expensive to build.
JP Morgan warned last month that Santos was “unlikely to be cash flow positive” at spot commodity prices given GLNG is still very capital intensive, estimating that the mega-project is costing about $A900 million a year between now and 2020.
Yet Wood Mac said in the report commissioned by the Queensland Resources Council: “Queensland LNG producers are covering their cash costs, but clearly they would like the oil price to recover so they can start paying off the tens of billions of dollars invested in building the LNG trains on Curtis Island,”
“The pricing of natural gas contracts tends to be linked to the oil price, but with a complex structure of lags, caps and collars to adjust the contract price.
“The short term marginal cost shown [as seen in the graph published in this article] is a proxy for the variable or cash costs of running the plant.
“It is important to understand that these short-term curves are very different to the long term curves, given the capital intensive nature of building an LNG plant most of the cost is fixed.”
QRC’s State of the Sector report just released revealed that 1.6 million tonnes of LNG was exported over November and December to South Korea (40%), China (20%), Japan (20%), India (12%), Kuwait (4%) and Singapore (3%).
While Santos said in its guidance when first cargoes were sent from its $18.5 billion Gladstone LNG project in October that it was cash flow positive at $US40/barrel and an exchange rate of $A0.70/US dollar, the Adelaide-based oiler said last month it was revising its oil price calculations ahead of expected impairments and lower asset carrying values and reserves.
Santos could update its cash flow estimates for GLNG when it announces its 2015 full-year accounts on February 19.
Origin Energy appears to be in better shape with the Australia Pacific LNG project it operates with US major ConocoPhillips having re-affirmed in November that APLNG’s operating breakeven is $23-35/bbl – also converted at an average AUD/USD exchange rate of $0.70.
An Origin spokesperson told Energy News that oil put options that the vertically integrated company purchased in December limit the impact of any additional contributions that it may be required to make as a result of further falls in the oil price.
The oil puts provide Origin with the right to sell 15 million barrels of Japan Customs-cleared Crude at a strike price of $A55/bbl for 75% of the volume and $US40/bbl for 25% of the volume.
If, for example, oil prices fall to US$20/bbl for the entire 2017 financial year, with the benefit of the oil puts, the additional net contribution that Origin would have to make to Australia Pacific LNG is expected to be around $200 million.
While Morgan Stanley said Origin would struggle to keep funding its share of APLNG of oil prices stayed below $US40/bbl, the oiler’s managing director Grant King leapt to its defence last month.
In a move the company called “providing clarification of misunderstandings in the market” around some of its financial arrangements, King said Origin had more than $A6.5 billion of committed undrawn debt facilities and cash, and had no material refinancing requirements until 2018-19.
He said this was “more than sufficient” to support Origin’s remaining contributions to APLNG.
King added that Origin’s earnings from existing businesses had “minimal exposure” to oil prices and give the vertically integrated oiler “significant headroom” on its debt financial covenants.
The low-cost nature of Queensland’s LNG megaprojects has certainly benefited UK major BG Group, which assumed operational control of QCLNG’s Train 2 in November.
BG, which is in the midst of a takeover by Royal Dutch Shell, said last Friday that the project’s start-up, along with higher volumes across its upstream and LNG shipping and marketing segments, offset BG’s overall 2% revenue drop to $US4.3 billion.
Those two factors also partially offset the 12% drop in earnings before interest, tax, depreciation and amortisation to $1.072 billion, which was part of the UK major’s overall 22% fall in EBITDA.
The Office of the Chief Economist estimates the landed LNG prices in Japan – Australia’s largest LNG market – in 2015 was about $US10.30/gigajoule.
Prices are forecast to decline further in 2016 to around $8/GJ, as the effects of the relatively low oil prices in late 2015 flow through.
Spot prices are also expected to remain subdued due to increases in global supply to which the Queensland LNG mega-projects contributed outweighing increases in global demand.
