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Will Low Oil Prices Shatter LNG Hopes?


As 2014 draws to a close, the oil markets are in free fall, leaving energy investors with few good options. Oil prices are now at five-year lows with no indication that they will recover in the short-term.

Even worse, the pain from low oil prices is rippling through other markets, including the global liquefied natural gas (LNG) trade. In fact, LNG investments are looking worse than they have in years.

That is because prices for LNG in Asia – where much of the global growth is expected to come from – are linked to the price of crude oil. So, as crude oil prices have collapsed, so has the LNG market. A huge backlog of LNG projects are expected to finish construction and come online in 2015, horrific timing considering the oil price collapse already underway.

Led by oil majors Royal Dutch Shell (NYSE: RDS.A) and Chevron (NYSE: CVX), companies have put an estimated $250 billion on the line building LNG projects over the last several years, investments that could turn sour if crude oil prices don’t rebound.

Moreover, there are two big bear trends underway in the LNG market. The first is supply. There is an excess volume of LNG set to hit the market in the coming years, with the majority coming from Australia. The second trend, which comes as more of a surprise, is the slowing economic growth in China. China’s once-insatiable appetite for all sorts of commodities now looks to be somewhat quenched.

China’s state-owned Sinopec (HKG: 0386) wants to sell off some of its LNG import deals as they no longer need the capacity. In a development that up until now was probably unimaginable to the average investor, China could be in a situation where it has more energy in the form of LNG than it needs and is now is looking to offload some LNG contracts on the international market. “We talk about China choking on LNG. There's just too much coming onto the market,” Gavin Thompson, the head of Asia Gas Research at Wood Mackenzie, told Reuters.

The implications of such a development are hard to overstate. Companies have dumped $10-$20 billion into the average LNG project, expecting robust Chinese demand to provide a healthy return.

Adding to the problems, Japan is set to restart some nuclear reactors in 2015, sapping even more demand from the market. What was once a sector that was thought to grow like gangbusters for years to come is set to become overly saturated in 2015.

LNG Market is Deflating

LNG prices have collapsed, falling by about 50% so far in 2014. Prices are now below $10 per million Btu (MMBtu) in Asia, down from peaks of around $19/MMBtu in the aftermath of the Fukushima crisis.

While there are seasonal fluctuations in LNG pricing – spiking in winter as the major LNG consumers in Asia keep warm – we are heading into a winter with prices dramatically lower than in previous years. LNG prices could fall by an additional 30% by the end of 2015.

Crucially, many projects in Australia need LNG prices in the range of $12 to $14 per MMBtu to break even. That means that a few of the largest LNG projects set to come online soon in Australia are facing some painful economics.

Take for example, several LNG terminals on Australia’s east coast. Sinopec hopes to unload parts of the 4.3 million tons per annum (mtpa) of LNG that it contracted from the Australia Pacific LNG project (APLNG), in which it owns a 25% stake. The APLNG project is led by Origin Energy (ASX: ORG), a diversified Australian energy company, and ConocoPhillips (NYSE: COP), each with a 37.5% stake. The $24 billion APLNG is already the largest coal seam gas producer in Australia, and supplies gas to power plants in Queensland. It is set to ramp up gas production when its export terminal enters into operations, expected in mid-2015. But it may not be nearly as profitable as once thought, now that Sinopec has indicated it does not need the gas.

Sinopec also wants to rid itself of about 2 mtpa of contracted LNG from ExxonMobil’s (NYSE: XOM) Papua New Guinea LNG facility.


APLNG is situated near two other massive LNG projects, also feeling the sting from lower prices. BG Group (LON: BG) is set to kick off operations this month at its Queensland Curtis LNG (QCLNG), a $20 billion facility. But low prices forced BG to look for a buyer for a major pipeline that was part of the project. BG will sell the $5 billion pipeline in order to offset a $2 billion impairment charge it expects to post from QCLNG.

Then there is Gladstone LNG, the third facility in Queensland. Run by Total (NYSE: TOT), with partners Santos (ASX: STO), Petronas, and Kogas (KRX: 036460), Gladstone LNG (GLNG) is also expected to come online in 2015 and ship 7.2 mtpa. The high costs ($18.5 billion) and falling oil prices are already raising concerns among investors. Santos, whose stock has fallen by half since September, was forced to reassure investors at the end of November that all was going according to plan and the project would not suffer from cost inflation.

But the project with the biggest price tag is the mammoth Gorgon LNG project on Australia’s west coast. Led by Chevron, with smaller positions held by Shell and ExxonMobil, Gorgon symbolizes the crushed dreams of the explosion in LNG demand in the last few years. Dragged down by delays, high labor costs, and unfavorable currency swings, the costs of Gorgon have ballooned beyond the worst case scenarios. Coming in at $54 billion, the project is 45% over budget.

Taken together, Australia alone has $160 billion tied up in the construction of LNG export terminals, a massive sum that could fail to pay off unless oil prices rebound.

Given the high risk that these LNG developers are facing, some companies are shelving projects before it’s too late. Petronas, the state-owned oil company from Malaysia, decided on December 2 to put its $32 billion LNG project in British Columbia on ice because of high costs and lower LNG prices. Many of the biggest oil and gas companies have already begun trimming spending on gargantuan energy projects, but now with low oil prices, they are much more actively slashing capital expenditures on projects that no longer look viable.

Nevertheless, some are still moving forward, despite the poor economics. Cheniere Energy (NYSEMKT: LNG), the company furthest along in building an LNG export terminal on the U.S. Gulf Coast, is hoping to add another terminal. Cheniere is in good shape relative to its Aussie competitors with its Sabine Pass facility, because it has low cost natural gas as a feedstock, and is building out a brownfield site that will help it keep costs low.

However, Cheniere is seeking another terminal at Corpus Christi, Texas. The terminal could cost $16 billion and have the capacity to export 13.5 mtpa. It still has the same advantages over Australian LNG, but the problem with this site is that it would not be entering into operation until the market is well saturated. Moreover, Cheniere hopes to tap high-yield markets for debt financing, using the funds to pay back several major banks for the money it intends to borrow. If the terminal doesn’t make a good return, not only will Cheniere be in trouble, but so will some major banks getting in on the action.


The LNG market is about to undergo fundamental change in 2015. Global supplies are expected to expand significantly as the several projects noted above – particularly in Australia – begin operating. Global LNG liquefaction capacity is expected to jump by 36% by 2018.

But with slowing demand in China and Japan, the market is highly uncertain. Bank of America is predicting a multiyear bear market for LNG. A separate analysis from Berkeley Research Group finds that supplies could exceed demand by 10% by 2020, which is a very bad sign for LNG exporters.

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