From Bartho at Dad’s Army:
In the past two days Origin Energy’s Grant King and Santos’ David Knox have countered some of the gloomier prognostications about the economics of their massive Queensland export LNG plants.
On Thursday, King said that on current forward curves for the oil price, Origin expected its share of the distributable cash flow from its APLNG plant at Gladstone to be more than $900 million a year on average from 2017.
While that’s less than the $US1bn a year that Origin was forecasting a year ago, it certainly couldn’t be characterised as the financial white elephant that some commentary on the Queensland LNG plants might suggest.
Today Knox told analysts that the GLNG plant that its consortium is building at Gladstone would prove free cash flow at a $US40 a barrel oil price.
I’m guessing I’m the “gloomy prognosticator” given it was I that dubbed the projects “white elephants” so let me mount a defense!
The figures the good executives are quoting as breakevens are for the marginal cost. They do not include the cost of building the thing in the first place.
That means they’re generating plenty of free cash flow at prices above the breakeven, sure, but when you add your cost of capital and debt and other goodies, the all-in breakeven is much higher.
Isn’t that what it’s supposed to be about? Return on capital employed not return on day-to-day costs?
Second, the forward oil curves look too aggressive. $50-60 is a more realistic price for the next 5 years or more given US shale is the new marginal cost producer and is deflating its buns off.
Moreover, achieved LNG prices are going to dislocate from the oil-linkage. The LNG glut is real and its huge and as customers dump contracted volumes on the Asian spot market over the next five years the pressure on contracts will mount to extreme levels. The oil correction may be (largely) over. But the LNG correction has far yet to run.
Add that all together and you get massively overvalued assets carrying too much debt with terrible returns on equity and a constant risk of yield compression as the entire fat, white elephant slowly deflates.
For Australia more widely the picture is even worse. The rising gas price will hit household incomes and tighten manufacturing margins, to the extent that last year Victorian University modelling illustrated that Australian economic welfare benefited the more the gas price fell in the future.
In short, the east cost LNG industry is a world class balls-up with appalling capital productivity, no real profits, bugger all tax take, more hollowing out and falling incomes. Go ‘Straya!
