Matt Chambers and Adam Creighton should know better:
If there is any doubt over the viability of the $US200 billion ($277bn) worth of LNG export plant construction since 2007 in the wake of the global commodity price rout, the answer can be found buried in US oil giant Chevron’s latest annual report.
Under calculations required by US accounting laws, Chevron has reported that at $US55 a barrel of oil (the 2015 average), its 47 per cent stake in the Gorgon project and 64 per cent of Wheatstone are expected to deliver healthy future cashflows of almost $US50bn after $US22.4bn of costs — half of which is ongoing construction.
“We see the Australian LNG projects as very high cash margin, even in a low oil price environment, as costs and taxes are very low,” Anish Kapadia, an analyst at Houston energy investment bank Tudor Pickering Holt, says of the cash Chevron can generate.
As we all know, cash margin is the stuff that spruiking journos and investment banks love. But it’s not the measure of a project’s profitability. For that, one has to include the cost of building the plant and that pushes the WA projects towards $11-12mmBtu break even versus today’s $5-7mmBtu LNG price. Had the project owners forecast correctly they would never have built these huge white elephants in the first place. Instead they’d have stuck their money in the bank and enjoyed a stellar 2.5% return on investment.
Our poor reasoning pair go on:
The LNG boom isn’t all good news for Australian gas consumers, either. Before the construction of huge new gas export capacity in the wake of the global oil price surge, the Bass Strait and Moomba gas plants provided the isolated eastern Australia market with cheap gas.
“Contracts are confidential, but the prevailing wisdom was wholesale gas in the eastern states was being contracted at around $2-$4 a gigajoule,” Ziebell says.
The convoy of tankers to Japan from the three new plants in Gladstone is changing all that, forcing Australians to compete with Japanese households. Long-term contracts are already being renegotiated at prices potentially three times higher, sparking inevitable political interest.
The Labor Party has announced a gas reservation policy for Australia, if it wins government in July, ignoring the mixed success of such policies in Western Australia. There, since 2006, the government has required LNG producers to reserve 15 per cent of gas from each project for domestic use. The state’s Economic Regulatory Authority has recommended it be rescinded as soon as possible, arguing artificially cheaper gas prices discourages development of new supply.
Does the above greatest supply capacity boom in history look like “discouraged new supply” to you? Maybe the Economic Regulatory Authority of WA should take a look outside of its window, though judging from the above I’m pretty sure it does not have one.
As I said last week, the ruinous gas debate has nothing whatsoever to do with economics or the Australian national interest. It’s about supporting dumbed-down economic platitudes that are badges of honour for the two political parties. In this case, successful “free markets” represented in the Coalition versus failing “regulation” in Labor.
