The oil-linked pricing model was always controversial with gas buyers, especially in Japan as oil prices held stubbornly high over the past two years, but LNG was a seller’s market and buyers could only acquiesce.

The pricing model even crept its way into domestic gas markets as local producers sought to cash in on what seemed to be the never-ending good times in global oil markets.

With oil prices more than halving in just a few months and most projections expecting it to average $US60 to $US65/barrel this year, the oil-linked pricing for gas has back-fired in explosive fashion.

EnergyQuest CEO Dr Graeme Bethune told Energy News he had attended many international gas conferences over the years and was always struck by the fact that no-one talked about oil prices.

“They talked about whether gas prices should be linked to oil, but they never talked about actual oil prices,” he said.

Bethune said the effects would be felt by gas producers and buyers everywhere as the impact of the US shale revolution continued to reverberate through the global energy industry.

“First it killed US LNG imports, then it impacted European gas demand through cheap coal imports from the US. Low US gas prices then led to the rise of LNG linked to Henry Hub. Now booming US oil production has hit oil prices,” he said.

Bethune said the east coast of Australia – already facing upheaval as LNG projects came on-stream – was likely to be affected.

“It is a complex picture and too early to really understand how it will play out, but one scenario could see more gas becoming available for the east coast domestic market,” he said.

“The LNG projects in Queensland have contracted most but not all of their cargoes.

“The netback prices have fallen sharply, probably below cost in the current market.

“So rather than lose money on liquefying gas for export, the project operators might choose to sell any uncontracted gas back into the domestic market rather than sell on the LNG spot market.

“How the operators handle lower netbacks remains to be seen.”

The turmoil in gas prices on the east coast is highlighted by the gyrations in the spot prices in Brisbane.

Spot prices climbed sharply in recent weeks to as high as $8/gigajoule, which could be explained by an absence of ramp gas for QCLNG as the first cargo was shipped.

The price has fallen back to $4/GJ in recent days and could be on its way back to zero as ramp gas builds up again in the system.

A clear domestic winner in the new paradigm is Orica, which began taking gas last July from the Gippsland Basin Joint Venture under an oil-linked pricing model.

Orica contracted to buy 42 petajoules from ExxonMobil and BHP Billiton over three years.

Origin is also sitting pretty in terms of gas supplies for the domestic market. The GBJV recently started supplying Origin with 432PJ over nine years under an oil-linked pricing formula.

Bethune said the oil price collapse did have an upside for LNG and domestic gas producers in the form of lower project costs.

“It creates many opportunities to reduce costs among companies and contractors, and could help Australia shed its reputation as a high-cost country for energy development,” he said.

“That will be helped by the fact that we no longer have a development boom and all the cost-push inflation that caused.”

Citibank this week estimated savings in capital and operating costs of 15% for many Australian energy companies.

“Of particular interest, we see a scenario where future projects could achieve similar returns to that anticipated in a $US90/bbl world, with around 15% reduction in long term oil prices offset by around 15% opex and capex saving,” Bethune said.

Citibank rates Beach Energy, Senex and Santos as having the greatest leverage to this cost reduction opportunity because of higher operating costs and/or significant future capex requirements from projects such as Gladstone LNG, Cooper gas and Cooper flank oil.

Woodside had already capitalised by deferring FEED for Browse LNG, and reported it was already seeing a decrease in component costs of between 10% and 50% in its supply chain.

Meanwhile Santos slashed capex by 25%, with at least some of these savings due to a more favourable cost environment.

Bethune added that higher input costs such as labour were not the only challenge for Australian projects.

“Our oil and gas regions are more mature than those of many competitors, so our costs are on the rise simply because discoveries are becoming more difficult,” he said.