Limits to LNG prices

The Oxford Institute for Energy Studies has an in-depth piece out on the cost of LNG plants, looking in detail at the drop in LNG construction costs and how maintainable the falls are in construction costs:

As you can see, the Australian plants dominate the top of the cost table, with many of the more recent plants in the US being a fraction of the cost of the Australian plants:

The good news for existing LNG plants is that the falls in construction costs are not as steep as they look. Oxford adjusts for the two key factors of (1) whether a new or expansion (2) if the project is for lean gas (without liquids) or rich gas (gas with lots of condensate or LPG) then many of the Australian projects aren’t as bad as they may look above. The Australian projects generate lots of liquids which offset the higher cost of gas production.

The bad news is that the authors (1) estimate Australian operating costs (which are more important once a project is built) are much higher than US, even if you make generous assumptions :

(2) if you combine operating and capital costs, the authors estimate that for new projects, Australian costs are still about 50% higher than the US, and new floating LNG capacity is about half the cost of Australian for lean gas:

What does that all mean?

There are considerable longer term limits to gas prices as US players can still make a decent profit creating new LNG capacity:

  • US gas prices are some of the cheapest in the world at $3-4/mmbtu
  • The cost to turn US Gas into LNG is another $3-4/mmbtu
  • Shipping from the US to Asia is another $1-2/mmbtu

This suggests longer-term Asian gas prices will struggle to stay above $10/mmbtu.

Damien Klassen is Head of Investments at the Macrobusiness Fund, which is powered by Nucleus Wealth.

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Integrity Private Wealth Pty Ltd, AFSL 436298.

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