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
- Part 1: Worker Shortages Seen in Australia's Energy Sector
- Part 2: Australia 'Well Placed' to Meet Global LNG Demand
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