As India forces Aussie gas discounts, our price rises 600%

As do-nothing Malcolm and his loser mates attack renewables and champion coal, the real culprit, gas prices, being forced to discount because it has flooded regional markets, via Goldman:

It has been suggested in the press that Petronet may have successfully renegotiated terms with ExxonMobil relating to its c.1.5mtpa 20-year contract with the Australian Gorgon project. In exchange for reduced pricing (lower oil linkage) and significantly improved shipping terms (now delivered; previously FOB), Petronet has reportedly agreed to increase its offtake volume by c.67% (an additional c.1mtpa, taking Petronet’s total offtake from Gorgon to c.2.5mtpa). India’s oil minister Dharmendra Pradhan commented, “…India has yet again been able to address the long term price issue of LNG from Gorgon to suit Indian market.”

Buyer’s market: We see this outcome, if finalised, as reflective of an oversupplied, buyers’ market in which buyers want lower prices and suppliers want to reduce spot LNG exposure through medium/long term volume placement. This substantive re-negotiation may tempt other buyers in the region to more aggressively seek renegotiated terms – particularly those off-taking similar product from similar suppliers at significantly higher prices.

Australia LNG returns already lacklustre: Unfortunately for Upstream investors, on our oil price deck all Australian LNG projects built in the last investment cycle are likely to earn a sub-cost of capital life-cycle return (excluding PNG LNG); renegotiated contracts would detract further from this (with debottlenecking a clear positive from some projects, e.g., PNG LNG, Pluto LNG).

Details of contract price/term changes: Press reports (Bloomberg, Reuters) suggest the following changes have been proposed: (1) oil linkage (slope) for 1.5mtpa existing contract reduced from 14.5% to 13.9%, (2) shipping terms for 1.5mtpa existing contract improved to delivered basis (DES), previously FOB (saving Petronet in the order of c.US$0.50-0.75/MMBtu), (3) additional contract 1.0mtpa at 12.5% oil linkage (DES). The delivered price based on the renegotiated price would be US$7.37/MMBtu (base) and US$6.63/MMBtu (new volume) compared to spot prices currently at c.US$6.20/MMBtu (West India DES).

Implications for other suppliers: Listed Australian LNG exporters did not sign long term contracts with Indian off-takers, and have managed to defend contract terms to this point with China SOE off-takers. Therefore, whilst it is difficult to see any positive in another contract re-negotiation for suppliers, it is also not enough to cause us to alter our earnings/cashflow forecasts for the Australia LNG group. However, for other suppliers with Indian long term contracts, further re-negotiations still remains an outstanding risk (based on the Minister’s comments, and the outcome achieved with ExxonMobil).

Implications for India gas value chain: We believe the re-negotiation in gas prices is on the margin positive for India gas demand. BPCL Gail and IOC are the buyers for Gorgon volume with 40%/30%/30% exposure. We expect respective savings of 1.0%/2.0%/0.5% for FY19 EBITDA based on the renegotiated price for BPCL, GAIL and Indian oil. Petronet LNG has back to back take or pay contracts with the buyers for Gorgon volumes and would benefit from improved visibility for demand. 1 mn tonnes higher LNG volumes imply 8% higher FY19 EBITDA for Petronet LNG.

It remains my view that this is only the beginning. The glut is beyond huge:

And whenever we next hit a global growth shock, there is going to be such a gigantic gas glut that I expect the contract system to virtually collapse.

Yet we’ll see local gas prices rise because the Aussie dollar will fall and the gas cartel will link local prices to the oil price as it diverts volumes.

Remember that by next year we’ll be exporting 4200Pj of gas and the local shortage is 200Pj, just 4% of volumes. Yet that has driven our gas price to $17.50Gj from $3Gj, more or less 600% inflation in a few years, as it fell by 70% in Japan and India to half our rates today.

In any nation with even an ounce of self-regard the pitchforks and torches would be marching on the capital.

Comments

    • Huh
      I went to the Brisbane anti internet censorship demo (following that clown Conroy’s actions). Only a handful of people turned up. If Aus can’t be bothered to defend free speech & blast the likes of Triggs and Conroy (at the time) it won’t turn a hair over getting gouged yet again.

    • People do get it. They get that government policies over the last decade deliberately designed to push coal and gas out of the market with quotas and generous subsidies for renewables have not only jeopardised future energy supply but contributed to escalation of power prices.

      They blame Governments, not companies (AGL should be careful not to buck this trend). Imagine if Seven or Nine included on their nightly news and current affairs programs the distortions Governments have imposed on the electicity markets through these actions. What if Seven and Nine got wind of the fact that Australia exports coal to the world so the world can have cheap reliable power at the same time as coal is progressively excluded from future energy sources here.

      I think energy security and affordabilty for households and industries will gain momentum in the public eye and already you can sense change is afoot. Common sense is making a welcome return.

      There is room for coal, gas and renewables, most likely in proportions discussed in the weekend papers, roughly sixty five, twenty five and ten percent respectively.

      I’m worried that on top of everything, the Andrews’ Government’s energy policy here in Victoria will have deleterious long term impact.

  1. There will be no revolution. The masses are so stultified these days. Worried about the mill stone of a mortgage, worried about keeping the IP(s) fully rented or the negative gearing gets a bit too negative.

    How many thousands running around saying yes or no and not hearing each other, yet they have no interest in how the economy is being literally destroyed via removing gas from the local market.

    I hear japan is quite nice this time of year…..

  2. Stewie GriffinMEMBER

    “In any nation with even an ounce of self-regard the pitchforks and torches would be marching on the capital.”

    If only we had a unified social voice and vision, that wasn’t in the process of being fractured into a million tiny shards in the name of diversity…

  3. Why has domestic gas not gone up by this much? It’s gone up for sure, but is there much worse pain to come for households using gas for heating?

    • Diogenes the CynicMEMBER

      I think…yes but I am sure households were paying an order of magnitude greater than businesses before so it shouldn’t triple.

  4. Can I ask why this isn’t being put in print in the Herald Sun / The Age? Someone needs to be named and shamed. Assuming the technical details of your article are correct, this is a madness situation? Have you considered submitting to MSM?

  5. ceteris paribusMEMBER

    Stop saying “Malcolm is doing nothing”. It couldn’t be further from the truth. Malcolm is working very hard to do what Tony Abbott and the coal lobby want. I say “working very hard” for many good reasons. Malcolm is working against his personal recognition that coal is no longer economically viable, against his belief that it is bad for the planet and against his belief that private companies and CEOs with rational plans should hot be stood over by Government. Malcolm is literally sweating in his labour for Tony and the coal lobby and … just incidently of course, for the numbers, his own neck. To say he is doing nothing borders on defamatory.

    • One view has it that now the role of leader of the Liberal Party has been monetised – and we all now know the price – it provides a reference point for the ongoing monetisation of Liberal Party government policy.

  6. The electricity suppliers have got us by the balls and they know it. Got everyone thinking that they have gone green by not building any new power stations. It’s a simple supply demand situation. Prices are set to go up even further if you leave it up to the greed fuelled businessmen. The LNP is full of slimy know it all wannabe businessman hacks, who in their stupidity trust the “open” market. Regulate now.