Russell: No New Australian LNG Projects Doesn't Mean No New LNG



Reuters

LAUNCESTON, Australia, June 9 (Reuters) - Conventional wisdom in the liquefied natural gas (LNG) sector is that no new projects will be built for several years, given the vast cost can't be reconciled with the current low prices.

This view has led some in the industry to predict that the market will flip back to a structural shortage sometime in the early to mid-2020s, once again sending prices soaring as new supply takes so long to be built and become operational.

The cancellation or deferment of investment decisions on several projects in Australia, Canada, the United States and elsewhere seems to perfectly illustrate the view that no new LNG will be coming to market once the plants currently under construction are completed.

The wave of LNG building in recent years has seen eight projects being built in Australia, with five now operating and the remaining three nearing completion, and five in the United States, the first of which has starting shipping cargoes.

This has helped drive LNG from a structural deficit to a surplus, with the attendant decline in Asia spot prices from a high of $20.50 per million British thermal units (mmBtu) to a record low of just $4 in April this year.

Long-term contract prices linked to crude oil have also suffered as Brent has slumped, further undermining the economics of new plants.

Australia's biggest LNG operator, Woodside Petroleum, shelved plans to build the $30 billion Browse LNG project in Western Australia state in March, citing oversupply and low prices.

Royal Dutch Shell and Malaysia's Petronas have also pushed back final investment decisions on greenfield LNG developments on Canada's west coast, and progress has slowed on planned U.S. projects and those in frontier countries such as Mozambique and Tanzania.

The era of mega-LNG projects appears to be over, at least for now.

This point was underscored by Saul Kavonic, a senior analyst at consultants Wood Mackenzie, who told the Australian Petroleum Production and Exploration Association conference in Brisbane this week that the country's wave of recent LNG projects had failed to meet hurdle rates.

The average breakeven cost for the recent projects, which will see Australia overtake Qatar as the world's biggest supplier of the super-chilled fuel, is $12.60 per mmBtu, a price well above the current spot level and also most long-term oil-linked contracts.

However, while Kavonic said that building new projects is unviable in the current situation, Australian LNG producers can boost volumes if demand warrants increased supply.

Producers Need to Cooperate

The first way to do this is through de-bottlenecking existing plants, a process Kavonic said delivered an average 14 percent boost in capacity at LNG plants that have implemented the efficiency measures in the past.

An additional 4 million tonnes per annum of LNG is probable and a further 6 million possible from de-bottlenecking, Kavonic told the conference.


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