Boy, as if mining taking it in the ass wasn't good enough, now big oil is headed for the toilet too. We're back to the 80's glut market if the price hovers at around $80 per barrel. This prolonged slump is threatening whatever remaining resource jobs left in the ravaged and bankrupt economy:
Oil slump threatens LNG projects
Matt Chambers - The Australian 25 Oct, 3:14 AM The Australian
Lower oil prices could put a stop to the nation’s future LNG projects, even ones that still stack up on paper, and cut up to $11 billion a year from increasingly LNG-reliant export revenue, industry leaders and analysts say.
Brent crude prices that held above $US100 a barrel for most of the past three years have slumped dramatically since June, falling 25 per cent to a four-year low of about $US85 a barrel and, if sustained, hitting the economics of six under-construction LNG plants, whose contract prices are linked to moves in oil.
If prices don’t bounce, industry experts and analysts say returns will be poor on most existing projects and any Australian future LNG projects will be questionable.
Adding to the hurdle of getting a new LNG project into construction at a time when shareholders are demanding greater discipline would be a big overall cashflow hit to the oil majors, which are the most likely proponents of new LNG projects.
Former senior BHP Billiton executive Alberto Calderon, who was a contender to replace chief executive Marius Kloppers last year, says a sustained period of $US80 oil would accelerate an inevitable move to lower LNG prices that would make most Australian LNG projects not return their cost of capital.
“The problem with Australian LNG is it has a break-even price of somewhere around $US14 (per million British thermal units),” Mr Calderon, BHP’s former chief commercial officer, told The Weekend Australian.
“An oil price of $US80 a barrel would translate to $US12 LNG, which is close to spot prices and which would hurt the LNG projects. Anything at below $US13.50 or $US14 means money is being lost.”
Mr Calderon, who was head of corporate strategy when BHP went big into US shale oil and gas when it sold out of the Browse LNG project in WA, said LNG prices would probably drift down to $US12 in the longer term as the US exports up to 100 million tonnes of LNG a year over the next decade and cheaper Russian gas arrives in China.
LNG pricing is kept confidential, but the general assumption is that at $US100 a barrel, LNG prices are $US15 per MMBtu. A 20 per cent drop in oil would be reflected in the LNG price, with contract floors not kicking in until oil prices fall to $US60 or less.
Oil has slumped as global demand falters, the US and Libya have increased supply and Saudi Arabia’s unwillingness to cut production to underpin prices has led to speculation it is happy to leave prices at levels that may hamper US shale oil growth.
Few are forecasting oil will stay at current levels, with long-term analysts forecasts for Brent remaining at just above $US100.
But futures markets, where traders are betting on and hedging oil prices, are indicating that prices are now not expected to rise above $US90 in the next five years.
In March, Australia’s Bureau of Resource and Energy Economics forecast a $US105 oil price would earn the nation $60.5bn a year of LNG export revenue in 2017 and 2018, when the $180bn of under-construction projects should be in full production.
At current prices of $US85 a barrel, and keeping BREE’s currency assumptions of US85c, revenue falls by $11.5bn to $49bn. The lower profits would also substantially extend the wait for the new projects to use up depreciation credits and start paying the Petroleum Resource Rent Tax.
Oil Search managing director Peter Botten said a recent company strategic review had employed consultants to take a close look at global LNG projects.
It found most Australian projects were not profitable at lower oil prices, unlike in Papua New Guinea. “A number of projects across the world become pretty marginal at $US80-$US85 and if you believe the oil price is going to stay in that range of $US80-$US90, that will start to impact future investments for projects,” Mr Botten told The Weekend Australian.
“If you spent your money, you’re still likely to produce but I’m sure that oil price will attenuate new projects.”
He also warned that the game could change for projects that were still marginally economic as big oil companies dealt with falling cashflow.
“Where shareholders are already telling you to demonstrate discipline in investment and instead of putting it in marginal projects, give it back, some of these projects are going to struggle to get boards around the world to commit substantial licks of money,” Mr Botten said.
Neither Mr Botten nor Mr Calderon said they were forecasting oil prices would stay at depressed levels.
The most likely future LNG projects in Australia are three Woodside-operated Browse floating LNG plants off Western Australia, which would use major partner Shell’s technology, and a $US10bn fourth-train expansion of the Gorgon LNG plant being built by Chevron and which has Shell and ExxonMobil as partners.
London-based JPMorgan oil analyst Fred Lucas said the lower oil price was expected to lead to “big ticket” project deferrals.
“The prospect of another potentially prolonged period of much lower than expected oil prices should see big oil’s boards reach for the ‘save cash, preserve value, protect the dividend’ restructuring folder,” Mr Lucas said.
“We expect the first company signals on 2015 upstream capital expenditure to point to lower than prior guidance.”
JPMorgan estimates that a $US25 drop in oil prices to $US80 during 2015 and 2016 would mean $US38bn of lost free cashflow for Shell.
Credit Suisse analyst Thomas Adolff, who covers big oil from London, said many LNG projects were based on Brent staying at $US90-$US100.
In new contracts, the nexus between oil prices and LNG prices is being broken.
If LNG stays around $12, the US will never get to exports of 100MTpa. Right now they have export approvals for about 50 and committed projects for about 35. What they do export will replace Russian gas in Europe and Russia will be scrambling to build pipelines east to sell their gas but have no capital to build them.
The world is swimming in gas, but there are not enough LNG terminals to meet the demand for seaborne LNG. And at current prices, no more will get committed. Meanwhile demand continues to build. Looking good for $20 LNG before the end of the decade. Those that have managed to get investment committed will make out like bandits.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
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