CS slams AEMO gas balance outlook

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From Credit Suisse:

A delicate balance? Last week, the Australian regulator AEMO published a report forecasting a balanced gas market in the near term. We would argue demand destruction forecasts of 150PJa really doesn’t count as “balance” but also that the number is too low. We don’t understand the underlying data – AEMO forecasts for Cooper production and Otway sit above company guidance, GLNG is still looking to contract additional gas and cost assumptions are too optimistic. No change to our forecasts made here.

■ Cooper rocket unlikely: Backing out the reserve drawdown numbers for the Cooper, we estimate AEMO is forecasting 165PJa production from 2017. Santos, in its 2012 forecasts, was guiding to gross SACB JV capacity of 130PJa from 2015. Since then, reserve upgrades targets have disappointed every year and cost-outs have not materialised. This week’s site trip to the Cooper may shed light on any change in Santos forecasts. Otway forecasts also sit 15PJa above capacity with no expansion committed (four-year reserve life).

■ Demand pull will not stop: AEMO demand assumes that the LNG plants will run only at contracted volumes (capacity is 50–100PJa higher). Unless LNG sales are uneconomic, excess export capacity will mean there is always excess demand. The market wide balancing approach used by AEMO also does not distinguish between uses and ownership of gas; GLNG is still short 50–90PJa to meet contracted volumes but that does not mean APLNG or QCLNG will pitch in. Others have argued a delay in LNG ramp will help the market balance – we don’t understand this, LNG facilities will only ramp slowly if there is insufficient gas.

■ Cost still seem too generous: The cost profile has been re-done but may still be too optimistic (although substantially higher than the 2012 estimates). If Ironbark and Cooper basin gas resources can be developed at ~A$5/GJ then why is anyone holding back? Talking about multi-tcf resources is irrelevant if the economics do not stack up. One interesting snippet is that GLNG’s Roma fields are estimated as the most expensive in the East at A$8.5/GJ wellhead – if that is true, surely GLNG is looking to contract more third-party gas rather than develop.

■ The math should be simple enough, market is still short: Some 250PJa of demand is being diverted from the domestic market – demand destruction of 150Pja and 30Pja increase in Cooper supplies are simply not enough. A higherproduction level at Gippsland, which we assume and AEMO does not, also doesn’t quite get there. The big unknown is CSG well performance at plateau and economics of lower margin fields – but collectively, reserves are short for the life of projects and at least one near-term gas hungry LNG exporter remains via GLNG, constantly looking for gas cheaper than its expensive resources.

Not much to add other than CS is absolutely right in slamming the AEMO for couching the destruction of manufacturing as “market balance”.

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.