The news today for LNG is good and bad. Fitch released a new report confirming what we already know, that Australian LNG projects are facing stiff headwinds:
Fitch Ratings says that the increased costs and risks for Australian upstream liquefied natural gas (LNG) projects together with likely lower gas prices over the medium-term can result in a more challenging environment for upstream projects. We believe these factors can affect the viability of some projects under consideration.
Australian exploration and production or upstream companies face rising competition for many of the same resources, and higher development costs – with increasing cost-overruns and schedule slippages. We expect further announcements of project cost-blowouts and schedule delays – as occurred in 2012 – with more projects moving towards completion.
Rising execution and development risks will force project sponsors of these LNG projects to dilute equity stakes or undertake sales of infrastructure and reserves. We also expect a slowdown in further capacity additions – across both greenfield projects and brownfield expansions. There has been growing investment by global majors in Australian shale gas acreage. However, the low domestic gas prices and market size, infrastructure availability and access, relative cost and locational disadvantages, all provide effective barriers to significant uptake of this resource in the medium term.
Australian LNG export pricing will come under pressure over the medium term due to a potential increase in gas supplies from North American fields – driven by the wide price differentials and surplus stock available in North America, as well as rising gas exports from Russia to Asia in the medium term. An escalation of US LNG exports to Asia will moderate buyer appetite for Australian supplies – and result in a cancellation of some of the proposed projects.
All true with the added risk that currently considered long term contracts may be forced into renegotiation. On the upside, however, comes this from the AFR:
ExxonMobil has lodged formal plans for a huge floating liquefied natural gas project at its Scarborough gas field off the Western Australian coast owned jointly with BHP Billiton.
The 6-7 million tonnes per year project could move into early design and engineering work this year, targeting the start of production in 2020-21, Exxon said in a document lodged on Tuesday with the federal environment department.
As we know, Browse is also under consideration as an FLNG project.
These FLNG projects are neat symbol for the contemporary mining boom. They sail in from Korea (where they are built), extract the gas, and ship it out again (often to Korea), never once seeing landfall in Australia: a giant, mobile, extractive machine neither Australian owned nor operated.
In the case of Browse that is some 6,000 jobs that will not be created because the terrestrial development never happens.
That is not to say they should not go ahead as FLNG projects. They are a welcome tail on the boom and should proced. But let’s face it, the economic benefits are largely reduced to tax receipts for the Federal government, as well as a few local profits. That’s OK but in the long run is it actually generating economic activity that equips you produce into the future? Sure, it will enable us to keep leveraging the national balance sheet for property investment. But wouldn’t it make more sense to tuck away the windfall, lower the dollar and create other industries?
