Fitch Sees Negative Outlook for Australian Upstream Projects in 2012

This is the third article of a three-part series on "How to Work in Australia".

For 2012, free cash flow for upstream Australian companies is expected to remain negative as companies commit to new LNG projects and continue to face significant challenges with regard to project execution, according to Fitch Rating's 2012 Credit Outlook for the Australian Oil and Gas Sector.

Fitch estimates that future Australian upstream projects – particularly coal seam projects – will face closer environmental scrutiny and further delays in gaining official consent. Funding may become more difficult to obtain with increasing project execution risks, which may result in a deferral or cancellation of some proposed projects.

"There are over 60 million tones per annum of LNG production capacity across 15 LNG trains presently under construction in Australia," said Sajal Kishore, director of Fitch's Energy & Utilities team, in a statement in January. "Managing this significant growth in planned LNG production capacity within budget and on schedule is a major challenge for the project sponsors."

However, strong growth in demand for Australian LNG exports over the medium term and robust pricing in Asia-Pacific area are favorable for Australian operators.

"The oil-indexed pricing prevalent in Australian gas export contracts is benefiting from the current high oil prices and the widening of the demand/supply gap in the Asian LNG market," Fitch said in a statement. "Asian LNG demand has also benefited from the loss of some Japanese nuclear power capacity following the earthquake and tsunami in 2011."

While Fitch expects pricing to remain strong over the short term, pricing will be affected by competing gas from the North American gas fields – driven by the wide price differential between Asia and surplus gas available in North America. Fitch also cautioned that buyer appetite for Australian LNG supplies will be insufficient to commit to contracts which underpin all of Australia's proposed projects.

Current high oil prices provide some funding support in managing cost overruns, but the financial risk profile of Australian upstream companies is likely to be under pressure over the medium term from debt-funded growth capital expenditure and long project lead times to revenue generation.

"There is pressure to fund costs of time-overruns and budget blowouts via fresh equity," Fitch noted in the report.

How To Work in Australia Series


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Phil Eyler | Mar. 6, 2012
The Australian economy is starting to suffer a bad case of Dutch Disease due to an unbalanced economy dominated by natural resource exports. The economy is teetering. Basic industries as well as agriculture are hurting. GM Holden had to be given a $100 million subsidy to keep manufacturing cars in Australia. Other car manufacturers are expected to follow. Wine exports are falling; wine imports are rising. Domestic beer consumption is falling; imported beer consumption is rising. Australians are spending more visiting foreign destinations because it is now cheaper; foreign tourists are staying away from Australia because it is more expensive. Housing prices are slipping and pressure is on the government to subsidize housing through lower interest rates. The last I heard a couple of months ago, Chevron had used a successful Aboriginal court challenge to the land for its new LNG plant as an excuse to back away from the project in the short term; it also noted skyrocketing construction costs as an issue. But, gosh! You guys sure make things look sunny there.

patricia cleary | Mar. 6, 2012
I read this article and I just find it very difficult to believe it. I have been looking to move to australia for over a year. I have 15 years in O&G both upstream and downstream work. I have government and private sector work and three degrees. I have sent over 25 resumes to all the players in mining and oil and gas. I received several phone interviews and ALL of them have said the same thing, " unless you already have a workers visa, we will not sponsor a worker". Despite the article suggesting the willingness to hire people outside the country, I have not found that to be a true statement. Each company has offered me job, but I have to optain my visa with the benefit of a sponsor. That makes it much more difficult to obtain the visa.


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