Collapsing energy price affects LNG

 Falling oil prices are likely to put pressure on the profitability of the LNG projects in development in northern Australia.

Last week, companies associated with energy prices took a hammering on the stock market due to a fall in global oil prices. It led to a 2% fall in the ASX200 on Monday that effectively put the stock market back where it was 12 months ago. 

The falls hit those companies involved in oil and gas projects and brought into sharp relief the challenges for Australia’s LNG industry. 

Santos lost 9.8% on Monday and finished the week nearly 17% below what it had been the previous Friday.

Oil Search, a company which explores and develops oil and gas deposits in Papua New Guinea, fell 8.5% last Monday, though it recovered slightly and by the week’s end had lost only 3.5%. The annual gas market report released by the Bureau of Resources and Energy Economics (BREE) two weeks ago highlighted the cost pressures Australian gas producers’ face. 

BREE noted that while “Australia is on track to become the world’s largest exporter of LNG before the end of this decade”, there will be increasing competition from new entrants” – namely from the US.

Currently exports to Japan from the US south or east are hampered by the constraints of the Panama Canal, but the Panama Canal is due to be expanded by 2016. By 2030, BREE estimates Australia and the US will export roughly the same amount of LNG to Japan.

Collapsing energy prices show the uncertainty of future riches from LNGFalling oil prices are likely to put pressure on the profitability of the LNG projects in development in northern Australia

Currently the price of LNG in Japan is kept in line with the oil price. 

Even with the drop in oil prices causing a fall in the price of LNG in Japan to US$13.86 (K35k) per million British thermal units, it remains well above the US price of US$4.10 (K10). 

Once the US is able to export to Japan, however, the Japanese price is expected to be linked more to the US gas price rather than the world oil price.

BREE suggests a price for the Japanese market of the US price plus around US$6 (K15) would be set – meaning the prices for LNG in Japan would be about 25% lower than it is now.