By Ross Kelly
SYDNEY--Investors in giant gas-export terminals from Australia
to Canada are facing the prospect of losing billions of dollars
plowed into the projects as plunging oil prices darken the outlook
for the industry.
Unless they recover, weaker oil prices could wipe out returns
for companies such as Chevron Corp. and Royal Dutch Shell PLC,
which have committed nearly $250 billion combined in
liquefied-natural-gas projects over the past seven years to meet
rising Asian demand for the cleaner-burning fuel. LNG is natural
gas compressed into liquid form inside huge refrigeration units,
enabling it to be shipped on tankers to places unconnected by
pipeline.
To fund their expensive build-out plans, the companies have
typically agreed to sell most of the gas upfront ahead of the
completion of their projects at rates linked to oil prices. But the
oil-linked pricing means LNG producers stand to get much less
revenue on delivery of their first shipments than if crude had
remained nearer its peak of $116 as recently as six months ago.
Already, the tumbling price of Brent crude, the global oil-price
benchmark, to around $64 a barrel has claimed a casualty in Canada,
where developers led by Malaysia's Petroliam Nasional Bhd., or
Petronas, last week indefinitely delayed starting construction of a
$32 billion LNG plant on Canada's Pacific coast.
At the same time, oil prices have fallen so low that U.S.
shale-gas producers with plans to export the usually cheaper
commodity into Asia in LNG form suddenly find themselves facing a
much tougher competitive environment.
Crude futures started weakening once again last month following
the decision by OPEC to shrug off oversupply fears and maintain
current production targets. To break even, most Australian LNG
projects would need to sell the commodity for at least $12-to-$14
per million British thermal units, according to estimates from
Credit Suisse and Wood Mackenzie, a resource-industry consultancy.
The price would need to be even higher for some of the more
expensive developments.
LNG prices in Asia have sunk below $10 per million British
thermal units, meaning many of the projects may struggle to turn a
profit. "OPEC's come along and burst the bubble," said Mark Samter,
a Sydney-based analyst at the brokerage. "Project returns are awful
at these prices."
To be sure, most experts believe demand for LNG will soar over
the coming decades as Asian economies such as China attempt to
drive their rapid modernization using fuel that burns more cleanly
than coal, which scientists says contributes to global warming.
Demand for LNG will also likely remain high in more-developed Asian
economies, such as South Korea and Japan, which lack their own
fossil-fuel reserves. Japan has added more LNG to its energy mix
since the 2011 Fukushima nuclear disaster.
Typically, LNG is sold through contracts spanning up to 30
years, and so a swift recovery in the oil price may allow projects
eventually to make money--if stretched company balance sheets can
withstand the pressure long enough. Santos Ltd., a big investor in
Australian LNG, has been forced to cut spending across its business
after a failed attempt to strengthen its balance sheet through a
hybrid debt issue.
Adding to their woes, Australian LNG projects have suffered from
a spate of cost blowouts caused by everything from unfavorable
currency swings to labor shortages, leaving them far more exposed
to the oil-price plunge. The challenges are different for producers
in Middle Eastern countries such as Qatar, which uses a lot of
cheap foreign labor.
On the east coast of Australia, U.K. oil and gas company BG
Group PLC is running last-minute checks before switching on a vast
new facility that cost more than $20 billion to build, having
overcome budget overruns of more than a third of the original price
tag. The project--clustered on an island alongside two other giant
plants owned by rivals including Santos, Total SA and
ConocoPhillips--is due to ship its first LNG cargoes to Asia this
month.
BG said it remained optimistic about the prospects for its
Queensland Curtis LNG project, which counts China's Cnooc Ltd. as a
minority investor and a key customer. "The economics for QCLNG are
sound and competitive across a wide range of oil prices," a
Brisbane-based BG spokesman said. The company also bolstered its
balance sheet this week by selling the project's main pipeline to
Australia's APA Group Ltd. for $5 billion.
On the country's west coast, the cost of building the Gorgon LNG
project, operated by Chevron with backing from Shell and Exxon
Mobil Corp., has already swelled by around 45% to $54 billion since
building started in 2009. The work is expected to be completed
sometime next year, when the project is also supposed to come
online. A California-based spokesman for Chevron declined to
comment on the weakening oil price, but Chief Financial Officer Pat
Yarrington said in October that four major projects it is building,
including Gorgon, would rapidly turn from being "cash consumers" to
"cash generators."
Australia has found itself at the sharpest end of oil's fall
with the construction of seven export terminals across the country
that have cost more than $160 billion to build--a sum close to the
gross domestic product of Vietnam. It is on course to overtake
Qatar as the world's biggest LNG exporter before the end of the
decade, made attractive by its proximity to Asia and stable
political environment.
"Clearly, many Australian projects are at risk of delivering
inadequate returns," said Ian Ashcroft, a U.K.-based gas analyst at
Wood Mackenzie. "Some are already suffering due to cost overruns,
but the impact of the oil price on early cash flow is also critical
to project economics."
Elsewhere, companies that haven't yet started building dozens
more planned LNG terminals in Canada and East African countries
such as Tanzania and Mozambique will likely be questioning the
timing of hundreds of billions of dollars in proposed new
investments.
U.S. shale-gas producers looking to export their product are
affected less by the multimonth drop in crude oil because they
typically signed contracts overseas linked to U.S. domestic-gas
prices, which are low due to the boom in the local production of
shale gas. But on the flip side, thanks to crude oil's fall, LNG
producers offering oil-linked contracts will be able to compete
better in the international market against their U.S. shale-gas
rivals.
Currently, there are two LNG terminals under construction in the
U.S., alongside several more that have received the go-ahead from
regulators. Construction of the Sabine Pass project in Louisiana,
operated by Houston-based Cheniere Energy Inc., began two years ago
and is expected to be completed late next year. Freeport LNG
Development LP last month began building a project in Texas that it
expects to ship cargoes from by 2018.
Both projects involve converting previous LNG import terminals
into export facilities, making them cheaper to build than the
Australian ones, since a lot of the infrastructure such as
pipelines and storage tanks is already in place. Cheniere declined
to comment, while a spokeswoman for Freeport said it had already
signed contracts that would absorb its plant's projected output for
decades.
Daniel Gilbert in Houston and Mari Iwata in Tokyo contributed to
this article.
Write to Ross Kelly at ross.kelly@wsj.com
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