World's big­gest LNG pro­ject is start­ing in the worst mar­ket in years

The Pak Banker - - MARKETS/SPORTS -

Af­ter years of de­lays, cost over­runs and la­bor un­rest, Chevron Corp's Gor­gon pro­ject, one of the world's most ex­pen­sive liq­ue­fied nat­u­ral gas ven­tures, faces an­other chal­lenge: the weak­est en­ergy prices in more than a decade.

As Chevron pre­pares to start ex­ports from the de­vel­op­ment off northwest Aus­tralia, oil prices -- which tra­di­tion­ally de­ter­mine the value of LNG ship­ments -are lan­guish­ing near 12-year lows. The pro­ject will add to a wave of new sup­ply, in­clud­ing the first de­liv­er­ies from the U.S., amid weak­en­ing de­mand.

Gor­gon high­lights the chal­lenge of in­vest­ing in ma­jor en­ergy projects amid un­pre­dictable and volatile prices. Brent crude has more than halved since Chevron de­cided to go ahead with the de­vel­op­ment in 2009, and its cost has bal­looned to $54 bil­lion from $37 bil­lion. While the com­pany says it's fo­cused on re­turns over four decades, cur­rent mar­ket con­di­tions will re­duce near-term cash flows.

"Fall­ing oil and LNG prices will greatly af­fect the eco­nom­ics of all new projects com­ing on­line now," James Tav­erner, a Tokyo-based an­a­lyst at in­dus­try con­sult­ing firm IHS Inc., wrote in an e-mail. "Gor­gon is one of the most ex­pen­sive LNG projects in the world. Low LNG prices will hurt its mar­gins."

Chevron, which signed a pre­lim­i­nary sup­ply agree­ment ear­lier this week to sell Gor­gon gas to a buyer in China, is con­cen­trat­ing on the long term. The San Ra­mon, Cal­i­for­nia-based com­pany has agree­ments in place with buy­ers cov­er­ing more than 80 per­cent of its LNG from the Gor­gon and Wheat­stone ven­tures in Aus­tralia, it said in an e-mail.

"Legacy as­sets such as Gor­gon will drive long-term growth and cre­ate sig­nif­i­cant share­holder value for decades to come," Chevron said. "Gor­gon will gen­er­ate sub­stan­tial earn­ings over its ex­pected eco­nomic life of 40+ years."

To­day, how­ever, the mar­ket is reel­ing. Spot LNG prices in north­east Asia have tum­bled by more than two thirds since early 2014, slid­ing to $5.65 per mil­lion Bri­tish ther­mal units, the low­est since at least 2010, based on data com­piled by En­ergy In­tel­li­gence Group. A Sin­ga­pore LNG in­dex fell for the sixth con­sec­u­tive week to $5.461, ac­cord­ing to Sin­ga­pore's En­ergy Mar­ket Co. "The real blood­bath for spot LNG" prices will come later, said Jeff Brown, pres­i­dent of con­sult­ing firm FGE in Sin­ga­pore, who es­ti­mates prices may fall fur­ther and trade in the $4 to $5 range be­tween the se­cond half of 2016 and 2018. That could prompt buy­ers in Asia to seek re­vi­sions to their long-term con­tracts, he said. Qatar's RasGas Co. last month agreed to cut the price of gas it sup­plies to Petronet LNG Ltd. by al­most half un­der an ex­ist­ing 25-year con­tract with In­dia's big­gest gas im­porter.

"Will that start to threaten the sanc­tity of con­tracts?" Brown said. "Will buy­ers try to find ways to rene­go­ti­ate? We don't nec­es­sar­ily think that con­tracts will get rene­go­ti­ated across the board, but there will be pres­sure."

The world has changed since 2009, when Brent crude fin­ished the year at about $78 a bar­rel. To­day the costs have in­creased, and crude has tum­bled to near $28. Gor­gon is due to be­gin ex­ports in early 2016, ac­cord­ing to Chevron.

Prices have dropped well below the av­er­age $11 to $13 that Aus­tralian LNG de­vel­op­ments start­ing be­tween 2015 and 2017 need to break even, in­clud­ing cap­i­tal costs, ac­cord­ing to Fitch Rat­ings Ltd.

Aus­tralia, fore­cast to over­take Qatar as the world's largest sup­plier of su­per­cooled gas by 2020, is boost­ing its ex­ports just as those prices sink. The value of Aus­tralia's LNG ship­ments is fore­cast to rise 23 per­cent to al­most A$21 bil­lion in the year end­ing in June as a lower LNG price out­look tem­pers the ex­pected 45 per­cent surge in ex­port vol­umes, ac­cord­ing to a govern­ment re­port last month.

Oil should rise to about $70 a bar­rel by the end of the decade, ac­cord­ing to FGE. Low prices in the first few years hurt the cash flow­ing into a de­vel­op­ment like Gor­gon, but they "do not make a pro­ject bad overnight," given Chevron has sup­ply con­tracts span­ning 25 years, Tav­erner of IHS said. "It is un­for­tu­nate tim­ing to start up a long-ges­tat­ing LNG pro­ject in such a weak mar­ket," he said. Ori­gin En­ergy Ltd. and Santos Ltd. also have started up LNG projects in Aus­tralia in re­cent months. With more than 40 mil­lion tons per year of new sup­ply be­ing added over the next two years in Aus­tralia, Gor­gon isn't alone, he said.

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