A new analysis has dashed hopes of an upturn in liquefied natural gas prices later this year, providing little comfort for new Australian projects poised to begin production.
Subscribe now for unlimited access.
$0/
(min cost $0)
or signup to continue reading
Spot LNG prices in Asia are likely to suffer a fresh bout of weakness as the new Australian plants start up, according to Edinburgh-based Wood Mackenzie, which is forecasting prices below the break-even threshold cited by many analysts for the new local projects.
The firm predicts Asian spot prices will rally in the northern summer as growth in demand in Asia outpaces supply, but then slide again later in the year because of the plant start-ups.
Australia has seven new LNG supply projects under construction and, while they are underpinned mostly by long-term contracts to customers in Asia, some will also rely on the spot market for a portion of their sales.
Three new projects, Origin Energy's $24.7 billion Australia Pacific venture in Queensland, Santos's $US18.5 billion GLNG venture in Queensland, and Chevron's $US54 billion Gorgon venture in Western Australia, are all due to begin production later this year, and BG Group's Queensland Curtis project is due to ramp up production that got underway in January.
Contract LNG prices are also facing a weak outlook because they are directly linked to crude oil prices, which plunged 50 per cent in the second half of 2014 and have since seen only a modest recovery.
Of all the new Australian projects, Chevron had the largest chunk of LNG not committed to long-term contracts. However, it signed up South Korea's SK Group as a medium-term customer in January, reducing its reliance on spot sales. The North West Shelf venture and Woodside Petroleum's Pluto LNG venture also sells some LNG on the spot market.
According to pricing service Platts, spot prices of LNG in northern Asia plunged more than 60 per cent in the 12 months from March 2014 to $US7.436 per million British thermal units, hitting a bottom of $US6.80 in February, the lowest for five years. The weakness is being driven by moderate winter temperatures in north-east Asia, low oil prices and the start-up of a plant in Papua New Guinea.
Fitch Ratings said last month that Australian LNG plants due to begin production in the 2015-16 period require on average $US11 to $US13 per MMBTU to break even and cover capital costs.
However, the ventures in Australia insist their projects will make money, even at low oil prices. Last month Santos chief executive David Knox said the GLNG venture would provide free cash-flow at oil prices down to $US40 a barrel.
Graeme Bethune, principal at Adelaide-based consultancy EnergyQuest, noted that the greater impact of weak spot LNG prices should be on big suppliers of spot LNG such as Qatar, rather than Australia, where projects sell almost all their offtake under long-term contracts.
According to Wood Mackenzie Asia LNG research analyst Yingying Zhou, Asian LNG demand will rise about 6 million tonnes this year, driving up LNG prices through the northern summer, but to a peak of only about $US8.50 per MMBTU before they drop again.