Australia’s Mega LNG Projects are in Serious Trouble

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In the US, natural gas is dirt cheap. The price peaked in 2008 and has since collapsed. It remains below the cost of production, even today. Two natural gas drillers have recently buckled and declared bankruptcy.

In the international markets, natural gas is traded as Liquefied Natural Gas (LNG). There was a time, after Japan shut down its nuclear power plants in the wake of Fukushima, when prices, particularly for delivery in Japan and Korea, soared. And during this environment, a number of countries invested heavily into building LNG export terminals that convert natural gas into LNG.

In the US, this has been the story of Cheniere Energy, a company that has barely any sales. It’s mostly famous for always losing a lot of money and then raising even more money. It’s stock has soared from less than $2 a share in 2009 to over $80 a share late last year and earlier this year, giving it a ludicrous market capitalization of nearly $20 billion. And it has a breath-taking $18 billion in debt. But the dream is deflating, and it closed at $52.40 today.

It’s deflating because it’s a dream, and dreams always deflate sooner or later. And because prices in the rest of the world have collapsed as well.

And because in the US, current low prices are sending producers into bankruptcy. This works for a while, until it doesn’t. At some point – when the money runs out – they stop drilling. And they can’t restart until prices rise significantly. Rising gas prices in the US and dropping LNG prices in the international market crimps any possibilities for Cheniere’s math to work out.

Australia is in the same boat, but to an extent that dwarves US efforts. Here’s Mark Hansen in Australia to shed light on just how ugly the LNG debacle is getting down under.

By Mark Hansen, in Australia, MarketCap:

There are currently six LNG export projects under construction in Australia. According to the International Energy Agency, all of these projects would lose money at the current oil price of USD47/barrel (“bbl”), and most would struggle even with oil at USD60/bbl. I suspect that oil would have to approach USD100/bbl again to provide an acceptable return on capital invested.

The outlook for the LNG is poor. Global LNG supply is rapidly increasing, while demand growth is slowing. This means that even if the oil price rises, LNG prices may not follow. Aside from a large increase in LNG supply from Australia; Canada and Papua New Guinea will also add more supply. And the first LNG exports from the US are on the horizon.

New, large natural gas discoveries will also put pressure on prices over the longer term. Last month, Italian gas company Eni announced the discovery of a “supergiant” gas field off the coast of Egypt. They plan to fast track development.

At a cost of AUD200 billion, these six LNG projects are Australia’s largest infrastructure investment. They were planned at a time when the oil price was heading to USD100/bbl and the sky was the limit for commodity prices. There are also three more projects in the pipeline and three projects already in production.

LNG projects usually have long-term contracts with end users. This is necessary to facilitate financing of such capital-intensive projects. However, the contracts are linked to the oil price; Brent crude in the case of Asian markets. Brent is currently USD46 per barrel, down from USD99 per barrel a year ago. The same fall will have happened to contracted LNG prices. Spot LNG prices in Asian are currently in the USD7-8 per MMBtu (“million British Thermal Units”), down from around USD20/MMBtu in early 2014. Even with the Australian dollar at USD0.71, these prices are low.

Most Australian projects use conventional natural gas as a feedstock. However most of these gas basins are located offshore, which adds a further layer of complexity and cost. The Queensland projects use coal seam gas (coal bed methane) as a feedstock. This has its own set of issues, in particular the uncertainty about reserves and environmental resistance to the ever increasing number of wells.

Finally, an example of the financial state of play of the sector: Santos Limited (ASX:STO). The company has a 30% share of the Queensland GLNG project costing USD18.5 billion. This company has a market capitalization of  AUD4.7 billion at the time of writing, and debt of AUD8.8 billion at June 30 2015. Its main sales income is from natural gas and LNG from two existing projects in Australia and PNG. Profit for the first half of 2015, after tax, was AUD37 million on revenue of AUD1.6 billion. Enough said.

LNG projects in Papua New Guinea look much more viable. But Australian LNG is a risky investment space. One of the reasons for project underperformance is that Australia is a very high cost economy. The three main players are Woodside Petroleum Limited (ASX:WPL), Origin Energy Limited (ASX:ORG), and Santos. It is also risky for some industry executives: just ask sacked Santos CEO David Knox. By Mark Hansen, MarketCap

Now there are ominous signs for one of the few bright spots in the weakening Australian economy. Read… What a Million Dollars Buys in Australia’s Housing Market

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  6 comments for “Australia’s Mega LNG Projects are in Serious Trouble

  1. CrazyCooter
    September 22, 2015 at 12:12 am

    Between 20% and 30% of the energy content in CH4 (aka methane or natural gas) is used in refrigerating it to almost minus 300F, depending on the process/circumstances.

    That is right off the bottom line since almost all consumers of energy products compare and purchase on a BTU equivalent basis.

    LNG has almost NEVER made sense – but in some cases it does, just not most of them. Alaska has had a hard on to build a NatGas pipeline from the North Slope to Valdez (or approximate), including a LNG export facility, for years (decades?) … and it doesn’t happen. Why? Well, when they found and proved out Prudhoe Bay they knocked out a F***ING pipeline didn’t they! Read “The Last Alaskan Barrel: An Arctic Oil Bonanza that Never Was” by Miller for a quick concise storyline (and a ton of fun data points). Another tangent is the property tax assessment by Judget Gleason that has court vetted facts (current as of several years ago) regarding the viability of TAPS (the pipeline).

    But a nat gas pipeline can’t get built? Whydat? Because the economics don’t (and never have nor likely will) work. In this situation private enterprise needs someone to be an equity bag holder so they can secure the assets and sell the product. This is the case for most LNG export projects (aside from the dumb money factor which has to significantly be not-zero).

    I figure this is similar math for many LNG projects out there – but not all. Do your homework and happy investing. :-)

    And just wait for US frack gas production to finally crater after the free money bonanza and just watch all these companies, who blew big capital to secure “cheap” chemical/energy inputs, get screwed over a barrel (yuk yuk). Still a couple years out, but it won’t be pretty when it comes home to roost (unless you got conventional gas rights). Coal will be back shortly afterwards.



    • Nick
      September 22, 2015 at 6:45 am

      Disagree, LNG makes more sense than ever. Natural gas is magnitudes less polluting than burning oil or coal, plus there is plenty of it, and it’s dirt cheap. For example, I am here in Egypt, and with the Eni announcement they just about doubled their reserves of natural gas. This will enable Egypt to be energy self-sufficient for at least two decades (not counting future discoveries), which is a huge plus for stability. After all, Egypt is adding 2 million people per year due to population growth, and natural gas is heavily subsidized (some of the cheapest in the world). Access to cheap natural gas is a case of life and death not only for regular people, but entire countries. LNG will help close the gap until renewable tech such as solar and wind become cheap enough for the masses.

      • CrazyCooter
        September 22, 2015 at 9:57 am

        Your comment appears to conflate LNG with NG. Conventional gas is run through a pipeline and stays in a gaseous state. Liquefied natural gas is cooled to a liquid state, shipped to a destination, and turned back into a gas state for delivery. The entire liquification/delivery process is VERY expensive.

        Solar and wind will never replace fossil fuels, but you are welcome to believe as you wish.



  2. VegasBob
    September 22, 2015 at 1:45 am

    I rarely watch CNBC (or, CNBS as I call it) but the CEO of Cheniere (LNG) was busy talking up his book on Cramer’s show on 8/31, at which time LNG stock was $62.15. I see that LNG stock closed today at $52.40, a decline of over 15% in 3 short weeks.

    I really need to make a mental note to short any stock as soon the CEO shows up on Cramer’s show. The only reason for any CEO to show up on Cramer’s show is to try to baffle the masses with bullsh*t.

    I almost feel sorry for all the silly muppets that went out the next day and bought that turkey after Cramer’s little dog and pony show with the Cheniere CEO.

  3. Lee
    September 22, 2015 at 3:45 am

    Don’t worry what the companies lose on international LNG they’ll somehow make up by ripping off Australian consumers of natural gas.

    It is already happening with the price of NG to soar by some 16% or so next year in NSW………………

    Just another example of how consumers get the shaft here in Oz.

  4. davidh
    September 22, 2015 at 12:35 pm

    It makes a lot more sense to take CNG and turn it into some form of nitrate and ship that. Ammonia, urea, ammonium nitrate etc.

    I suspect the conversion energy cost of ammonia conversion is comparable to the liquification energy cost going from CNG to LNG.

    Its fertilizer, in demand the world over.

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