What’s up down under?: Part two

The oil price downturn

The downturn in oil prices has hit producers around the world and nowhere has escaped completely unscathed. Australia is certainly no exception to this rule with, as mentioned earlier, some US$200 billion worth of LNG projects likely to struggle to break even over the coming years. Exactly why low oil prices are impacting the profitability of Australian LNG is down to the fact that LNG prices in Asia, a key market for Australia, are indexed against Brent crude.

Origin Energy is one company dealing with the downturn. CEO Grant King said in the company’s recent annual report that “While changes in oil price do not have an overly material impact on Origin’s current earnings, should these conditions persist for a longer period of time, earnings from Origin’s investment in Australia Pacific LNG will be lower than previously estimated.” The company has already put in cost-saving measures designed to shave US$1 billion off the Australia Pacific LNG facility, US$650 million of which has been achieved so far, with a further US$350 million to be saved by the end of the 2016 financial year. Woodside Petroleum, operator of the Browse FLNG project, is also facing challenges posed by the low-price environment, and has been pushing hard to sign up South Korea as a potential customer for future LNG supplies from the project. The company has also attempted to lobby the South Korean government for reduced costs, especially as the vessels to be used on the project are being constructed in South Korean yards; Reinhardt Matisons, Executive Vice President of Marketing was quoted as saying, “We value Korea’s support – both in terms of cost reductions and LNG purchases - in achieving a final investment decision.” With Brent crude hovering around the mid US$40s, and no rapid recovery on the horizon, it looks as though the immediate price woes facing the Australian gas industry aren’t likely to disappear overnight. Some analysts looking at future crude prices see it rising to no higher than the mid US$70s over the coming decade, meaning that the long-term financial viability of several major LNG projects could be in jeopardy.

Japan’s nuclear u-turn

Japan has long been one of Asia’s (and the world’s) largest LNG importers, relying on the fuel for a significant percentage of its energy needs. Prior to the Fukushima nuclear disaster, which was to result in the nation shutting down all of its nuclear reactors, this figure was in the region of 29%. By the end of March 2015, it had risen as high as 46% or 89 million t of LNG.

Sadly for the LNG market, this trend now looks set to reverse as Japan begins bringing its reactors back online and gradually cutting back on LNG imports until they reach pre-Fukushima levels by 2030.9 The process is already underway, with the Abe government pushing for nuclear power as a key energy source. Several reactors have already restarted, the first returned to commercial power generation on 10 September. However, it’s not just LNG demand that is expected to take a hit; fossil fuels across the board are likely to see reduced Japanese demand, with oil consumption estimated to fall by 80 000 - 100 000 bpd.

Conclusion

The current outlook for many of the major oil and gas projects in Australia is certainly somewhat bleaker than it was a few years ago. The natural gas and LNG markets of Asia, Australia’s main export destination, are oversupplied and demand growth has slowed. Mega-projects, such as Ichthys and Gorgon, would now be considered uneconomical and be unlikely to get off the drawing board. Operators of those projects that are already in development are looking at ways to cut costs and get through the downturn.

However, the all-important crude oil price is expected to rise over the next few years. Global demand for hydrocarbons continues to grow, and current low prices will likely drive further consumer demand. Like much of the global oil and gas industry, the focus for operators in Australia now is to cut costs, plan for the long-term and endure the downturn.

Read the article online at: https://www.oilfieldtechnology.com/exploration/29122015/whats-up-down-under-part-two/