Coronavirus and oil is sending LNG prices down, down, down
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The impact of lower demand for LNG across Asia, caused by coronavirus shutdowns, is beginning to be felt in Australia in lower volumes and lower prices.
Even local gas use on the east coast was lower by 1.1 petajoules (PJ) on a year earlier but up 1.2PJ compared with January, according to the March report from EnergyQuest, an energy consultancy.
Furthermore, the collapse in oil prices is likely to see global oil-linked LNG prices fall by 25-30 per cent.
In March, EnergyQuest said LNG was already suffering from the ramp-up in global supply, and new projects were being impeded by travel restrictions, even then.
The most pronounced disruptions so far have been to cargoes destined for Chinese customers.
The report said Australian projects delivered only 29 cargoes to China in February, down from 40 in January. Deliveries from Gladstone in Queensland, the port that services CNOOC and Sinopec, fell from 17 a year ago to 14 in February.
Thirty-one deliveries were made to Japan in February, down from 45 delivered in January and 40 in February 2019.
Yet despite the slowdown — caused by demand, the closure of the Port of Dampier as a result of Cyclone Damien and lower East Coast production, total LNG deliveries still hit 6.1 million tonnes, or 90 cargoes, a figure than on an annualised basis is just below Qatar’s nameplate capacity of 77 million tonnes per annum (mtpa).
In early March oil prices were crushed when Russia refused to accede to new production cuts, to cope with the coronavirus-created demand slowdown, tearing the OPEC+1 (Russia being the +1) accord on cuts down.
Energy consultancy S&P Global says this could cut oil-exposed LNG prices by 25-30 per cent. About 70-75 per cent of the global LNG market is still under long-term oil-linked contracts.
“While this is bad news for countries like Australia, it will be beneficial to buyers in North Asia who had been paying high oil-linked prices, despite the oversupply and the warmer weather,” the EnergyQuest report said.
The impact of lower oil prices on LNG pricing “will have a marked effect” in Australia in the second quarter of 2020, the EnergyQuest report said.
At a 12 per cent slope to the oil price (when oil prices rise or fall fast, prices are based on a “slope” once oil has reached a pre-defined level), the LNG price is $US7.80 ($12.63) per million British thermal units (MMBtu) at an oil price of $US65/bbl. But at $US35/bbl LNG prices fall to $US4.20/MMbtu.
The impact will be on Australian LNG exporters’ revenue in the second quarter of 2020, as the combined effect of the oil price crash and COVID-19 are fully felt.
As an example, Origin Energy (ASX:ORG) has a distribution breakeven oil price of $US29-32/bbl for LNG from its APLNG project, and an assumed oil price of $US68/bbl over 2019-20 when estimating how much cash it will receive from the project.
Santos (ASX:STO) has a free cash flow breakeven of $US29/bbl but requires a price of $US60/bbl to fund projects while maintaining debt levels, if it doesn’t start selling assets.
Oddly, east coast gas prices — a constant bugbear for manufacturers and other local gas users — were lower in February than in January and significantly lower than February 2019, despite production on that side of the country dipping.
In Queensland, short-term domestic gas prices in February averaged $5.82/GJ (gigajoule) at the Wallumbilla hub and $5.46/GJ in Brisbane. In Sydney they averaged $5.87/GJ and in Victoria $5.95/GJ.