Another LNG mega-project bites the dust

Advertisement

Missed this yesterday but it’s important. Santos declared its Bonaparte FLNG project sunk at sea. It is still considering a pipeline option to back fill Darwin LNG but in macro terms it means the following, from Macquarie:.

rw
  • Further evidence Australia’s market window has closed. Against this backdrop, Arrow LNG has been indefinitely deferred, Browse JPP was sent back to the drawing board and now Bonaparte FLNG has been scrapped.
  • Getting tough at the top end of the cost curve: With too many projects targeting finite (albeit growing) demand, we continue to believe LNG priceswill ultimately drift down to the marginal cost of supply and Australia is simply not the marginal producer. What is also clear is that FLNG is perhaps not the industry’s saviour as many had hoped.
  • We expect at least 100mtpa of LNG equivalent supply from US exports and Russian pipelines by 2025, little of which was in consensus forecasts just 3 years ago. This alone represents ~50% of demand growth over the period, to say nothing of E. Africa, Canada or improving prospects for shale gas production in LNG consuming countries.
  • This growing supply-side competition suggests that local projects will increasingly be undercut by international competitors while existing projects may witness downward pricing pressure at re-negotiation time.

Exactly. Look at that cost curve! Most of the magnificently expensive seven are above $14 break even. It means the falls in the Australian terms of trade will continue through most of this decade and that mining and energy have entered an historic period of cost-out deflation.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.