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
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