How much trouble is LNG in?

Capture

Hmmm…it really does pay to pay attention to the global economy. From The Australian:

AUSTRALIA’S high-cost liquefied natural gas projects – the investment backbone of the nation’s economy – are under increasing pressure from Asian buyers demanding steeper discounts amid evidence at least $60 billion worth of gas supply deals have fallen over.

Chevron, the builder of the $53bn Gorgon LNG plant on Western Australia’s Barrow Island, said a 2009 agreement to sell $30bn of gas from the project to Korea Gas across 20 years did not get approval from the South Korean government and that the country would not be taking the gas.

Local Chevron managing director Roy Krzywosinski revealed for the first time yesterday the deal fell over in late 2011. At the same time, another Chevron deal with Kogas, a $29bn supply deal from its West Australian Wheatstone project, was also axed.

The prices now being demanded by the big Asian buyers often do not cover the cost of higher-priced Australian projects. The industry has already warned that $100bn of potential LNG investment is at risk as higher labour bills and regulatory burdens push costs in Australia up to 30 per cent higher than competing regions.

As I’ve been arguing for many months, North Asian customers have a strategic incentive to promote all new deals away from Australian projects to give themselves pricing power and to break the oil-linked pricing system. Interestingly, Kogas went instead with gas from Total, from the Prelude FLNG project, so even within Australia’s boom there was more competition that hitherto thought. Of course, Korea builds the ships so it had another incentive.

Here again is the cost curve for Australia’s recent gas boom projects. Most are all at the very expensive end of the cost curve:

Capture

 

Prelude is the cheapest of them. More importantly, by my reckoning, US gas can land in Asia for $10-$12 MMBTU long term:

ScreenHunter_02-Nov.-25-23.20

I have posited before that the LNG boom resembled a bubble with overpaid assets, free-flowing finance and extrapolations of endless demand as well as ever rising prices.

I’m beginning to wonder if the current sound and fury surrounding LNG costs is not about retrofitting the economics of existing projects.

Comments

  1. Is it possible we could see the cancellation of existing projects?

    What a horriffic waste of time, money and resources if they do.

      • Wouldnt there be something in the contracts for them to get out of it if cost blow up to much or something along those lines.

        You have been saying all this for a while……..

      • But the report says Korean Gas had to pull out.. So who’s taken their place and signed the supply contract?

      • There will be provisions to renegotiate. But not even North Asian customers would like to see these projects collapse, I suspect.

        Demand is growing and they’ll need the gas.

        But there is no way we’re getting any more in this cost bracket.

      • The clients (Santos, Chevron, etc.) are able to stall the projects at any time, but they would have to pay out any remaining contractual commitments. Given that a lot of stuff is probably being built overseas and they’ve already booked ships to bring it back (you usually have to book at least 12 months in advance), giving up now would be quite an expensive exercise. The clients could try to screw their contractors and refuse to pay remaining commitments, but then they’d get bogged down in court and it would be fairly easy for the contractor to get their money provided they did appropriate legal due diligence before signing.

        I’ve seen it happen before in 2008 during the GFC – cancelling a project halfway through due to economic conditions only to restart it 2-3 years later is VERY expensive compared to just sucking it up and building it. Provided these guys have strong balance sheets, then they can probably wear lower margins and volumes than they were anticipating. The big players should be okay, but the consortiums could get nasty.

  2. a 2009 agreement to sell $30bn of gas from the project to Korea Gas across 20 years did not get approval from the South Korean government and that the country would not be taking the gas.

    Local Chevron managing director Roy Krzywosinski revealed for the first time yesterday the deal fell over in late 2011.

    What the?! They’ve been keeping this quiet for 18 months? Bloody hell!

    • Like Europe before Australia will suddenly see a flurry of these types of announcements when things are at tipping point. We haven’t heard the last of the sub-prime mortgages either.

      After that, things move quickly, cue Spain, Ireland, Greece…

    • dumb_non_economist

      Would they not have been required to inform their stock exchange? Are continuous disclosure rules less onerous in the US?

      Also, does this mean they went ahead with the project without the contracts being completely committed to? How dumb I would have thought otherwise.

      • notsofastMEMBER

        dumb_non_economist,

        In a globalised world continuous disclosure rules don’t work too well for countries which are the only ones disclosing information continuously.

        The world is going to need lots of gas over the coming decades, if one organisation won’t buy it someone else will.

      • dumb_non_economist

        notsofast,

        My interest was whether they were required to disclose that info to their stock exchange.

        Someone my buy the gas, but at what price? As to needing the energy for decades to come may be they would have been better off developing it then at at cheaper cost.

  3. I bet Woodside is watching with amusement. Browse is probably not going to happen, but they’ve already got a significant capacity to supply while maintaining reasonable margins.

  4. If international LNG prices are de-linked from oil prices, would it undermine the assumptions based on the feasibility of INPEXs Ichthys LNG project ?