From Credit Suisse:
APA declared last week that “we are all finally in agreement that there is sufficient gas forecast to be produced to satisfy both the LNG and domestic demand…so there was no gas crisis after all, which is what APA had said all along”. We are living proof not everyone agrees sufficient gas will be produced. Indeed with such comments, we fear industry frustrations and regulator attention already targeted at APA could be exacerbated (note here). Whilst we may be prone to hyperbole, we see things only getting worse. With no new volumes sanctioned (or close), large reserve downgrades in the past 18 months, a paucity of capital amongst resource owners, potential upstream challenges at GLNG and other assets, the situation couldn’t be more critical.
Annual shortage could be ~120-300PJa by 2019/20 There isn’t enough information, nor a crystal ball on corporate behavior/ well performance, to definitively pin down the supply shortage. However, updating our views on both supply and demand, we believe that the East Coast of Australia, all else equal, could be short 120-300PJa by 2019/20. By its very definition all else can’t be equal, so supply and/or demand will need to adjust.
Spreadsheets still don’t build gas reserves…..We remain frustrated by this view that gas in the ground (there is plenty) magically gets delivered by the capital tooth fairy in time to meet demand. We estimate that to catch up the 120-300PJa of missing supply we would need at least A$2.5-6.75bn of upfront capital. On top of that, through cycle to sustain 750PJa supply for the domestic market (and 3rd party for LNG) a further ~A$3-5bn pa is needed (assuming A$4-6.5/GJ F&D costs, which could be generous). We don’t get data for all suppliers, but it is unlikely even A$1bn/yr (ex-LNG) is currently spent in total.
…they do downgrade reserves though Perhaps Microsoft Excel’s only real contribution to the sector in recent times has been to downgrade reserves and resources. Of the disclosed ones that come to mind, Beach downgraded 2P Cooper Basin gas reserves (on top of downgrades in 2015) by ~175PJ gross, 2P at Bass Gas fell 70PJ gross, Otway 50PJ gross, ~755PJ reduction in 2P gross reserves at Narrabri and 155PJ gross of 3P at Ironbark in 2015. For the contingent resource, which is supposed to just magically turn into production, ~1300PJ has gone at Beach’s NTNG, along with many other examples.
So how will the market balance? It is far more likely that demand destruction will be the balancing factor. This could voluntarily come from the LNG projects or involuntarily come from domestic demand. On a 2018-20 view it is simply too late for supply to react materially enough to balance the market. Whatever the balancing factor, there is a set of cash flows being discounted by the market (either in the Energy sector or Industrial/Manufacturing sector) that simply won’t exist. This is before considering the broader, negative multiplier impact on the economy, particularly from unemployment if manufacturing wears the pain.
120-300Pja is the equivalent of 2-5 million tonnes of LNG per annum. That is, one or one and a half LNG trains on Curtis Island. The public could buy STO and direct its gas inwards though that would probably cost $10bn all up.
I just can’t see the $6-10bn coming to produce more gas. Why would it given the extreme risk of community action?
That leaves domestic reservation, which is free and if properly executed will drop the local price below export net back.
Or, floating LNG imports terminals at $200-300mn each which would at least drop the local price to above export net back but below transport costs to other nations, although it will come with the mirth of every half-intelligent gas analyst on earth.
