International Energy Agency tell us profits are a pipe dream
I have written several times about the major Australian based LNG projects, many of which will be soon be coming on stream, for a combined investment of around $200 billion.
“Australian LNG projects are now costing close to US$1,500/tonne of capacity, compared to US$200/tonne in the year 2000 and US$600-$900/tonne in the US.”
Australian LNG supplied into Asia is locked into long-term (20 year) contracts and are indexed against crude oil prices, meaning a change in the price of oil hits the price of LNG three to six months later. Speculation is mounting some long term contracts could be renegotiated down.
Santos, in partnership with Petronas, Total and Kogas, expect to start producing gas from its US$18.5 billion, 7.8 million metric tonne Gladstone CSG to LNG project in a few weeks. Origin Energy, in partnership with Conoco Phillips and Sinopec, expect to start producing gas from its $US24.7 billion, 9.0 million metric tonne Australian Pacific CSG to LNG (APLNG) project in a few months time.
Both company’s share prices have been hit hard – since 30 June 2014 the Santos share price is down 71 per cent to $4.15 while the Origin Energy share price is down 49 per cent to $7.50 – as the market has become aware of the pressure on each companies’ cash flow and balance sheet.
At 30 June 2015, Santos had net debt of $8.8 billion, and this compares with its current market capitalisation of $4.1 billion. In their latest half-yearly results presentation Slide 15 details a one cent fall in the $A/$US exchange rate adds around A$100million to Santos’ net indebtedness and so the sharp decline from US$0.77 to US$0.69 since 30 June would have taken their net indebtedness to around $9.6 billion. Talk about operationally and financially leveraged!
Origin Energy’s balance sheet is not in the same perilous state. Post the sale of its 53 per cent interest of the New Zealand-based Contact Energy, I estimate net debt is around $7.0 billion versus its current market capitalisation of $8.3 billion.
The massive cost over-runs combined with the severe decline in the price of oil and LNG spot prices will likely see several proposed projects put on “hold”. These include the Arrow joint venture between Shell and Petro China, Woodside’s Browse floating platform (3.6 million metric tonnes) and Exxon Mobile and BHP Billiton’s Scarborough floating platform (6.0 million metric tonnes).