“The spread has narrowed recently, even going negative, European gas prices being above Asia; but as long as the spread is less than the shipping cost to Asian markets, Europe will be favoured.”
Another possibility is that oil prices rise, rendering Queensland’s LNG too pricey. When – or if – oil prices rise, the contract price for LNG from Australia will rise with it.
“Various studies have concluded that when Henry Hub is $US4-4.50 [per thousand cubic feet] and the oil price is $70/barrel, the landed price of LNG in Tokyo is the same from both locations,” Cann said.
“Once oil is above $70 or domestic US gas is below Henry Hub averages – and there are signs it can be extracted for as low as $2.50-3/Mcf, the market will want to source gas from the US.
“When oil is below $70, Australia’s gas is favoured, assuming it could be produced economically.
“If we assume that the Saudi’s action to balance the market naturally will curtail high cost shale oil from the market permanently, then the price of oil will likely settle in at the marginal cost of shale oil in the US, which is in the range of $40-50/bbl – which is way off $70.”
Another possibility is OPEC sources of gas emerge that boost supply. The biggest gas exporter is Qatar, which has ample supplies, but has ownership issues of its gas fields with neighbouring countries.
Until those border discussions settle Cann says it’s unlikely that gas will get to market.
“Other Arab states including Iran have gas resources available, but are motivated to use it for domestic purposes and shift more of their oil to export markets,” he said.
Another possibility is that more US LNG projects are sanctioned, which also boosts global supplies. At the moment the US has four LNG projects under construction – some 68MMtpa – with another 20 waiting for favourable export conditions.
Of that 68MMt, much of the liquefaction capacity is already contracted, and at least a third is headed to Europe.
“Low oil prices have certainly caused delays in moving forward in the US – at least one has been halted and another will delay final investment decision until conditions improve,” Cann said.
“If Queensland’s gas costs fail to come down and the gas producers have options to source gas by, say, buying from the US to fulfil their contracts, then they could mothball the plants in favour of US LNG.
“Costs are coming down, though, and with some vigour, and there are much more savings to come if my experience in the field is any guide – at least a 40% reduction in well delivery cycle time.
“Many of the field companies have yet to grasp the significance of manufacturing thinking in gas field work, lack even basic systems like ERP, do not use any mobile technologies in the field and contract only on a cost-plus basis.”
However, all said and done, Cann was relatively reassuring that the industry faces the same kind of risks that any other industry, and prudent management would do what’s needed to create a sustainable industry.
