AUSTRALIAN LNG HEDGING
Chevron and Origin Energy are moving to insulate their Australian liquefied natural gas businesses from plunging commodity prices as analysts warn a surge in LNG supply in 2016 will put further pressure on spot prices in Asia.
US oil major Chevron said on Tuesday it planned to sell up to 1m metric tonnes of LNG a year to China Huadian Green Energy from 2020, ensuring 80 per cent of gas from its Gorgon and Wheatstone projects is committed in long-term contracts.
In a separate announcement, Australia's Origin Energy said it was hedging its exposure to low oil prices by purchasing put options on oil for the 2017 financial year and forward-selling LNG cargoes at fixed prices.
"The risk for these big gas producers is what happens next year to LNG prices when you get a ramp-up in Australian and US gas supply," said Dale Koenders, energy analyst at Citi. "There is a chance LNG prices could decouple from oil prices and fall to levels around US$4 per million British thermal units (mmbtu)."
Australia is forecast to surpass Qatar to become the world's biggest exporter of LNG in the next few years following the completion of a $200bn pipeline of projects that include Gorgon, Wheatstone and a number of other LNG plants.
But the economics of the industry are challenging due to delays, cost overruns and tumbling gas prices in Asia, where LNG prices have historically been linked to oil prices.
LNG spot prices in Asia have halved to about US$7 per mmbtu over the past 12 months, reflecting the slide in global oil prices.
Origin, which is a shareholder in the Australia Pacific LNG project in Queensland, is committed to paying an extra A$1.8bn towards completion of the project.
Grant King, managing director, said buying the put options at a cost of A$82m meant Origin's additional exposure to the Queensland LNG project would be about A$200m if oil were to fall to US$20 a barrel in 2017.
But even a recovery in oil prices would not be guaranteed to lift LNG prices in Asia, according to Citi, which forecasts that supply will outstrip demand until 2023, keeping prices under pressure.
Mr Koenders said Chevron's decision to lock in a long-term sales contract suggests the company believes LNG prices have further to fall over the next few years.
Gorgon, which is based on a remote island off Australia's west coast, has cost US$54bn so far to build and is slated to begin production early next year. Its shareholders include Chevron with 47 per cent, and ExxonMobil and Shell with 25 per cent each. The remainder is held by three Japanese utilities.
Roy Krzywosinski, managing director of Chevron Australia, said the agreement with China Huadian, which is yet to be finalised, shows that its Australian gas projects were well-placed to meet growing demand in Asia.
But Asian demand for LNG has not met expectations. Energy consultancy Wood Mackenzie recently cut its China gas-demand forecast by almost a third to 290bn cubic metres by 2020, from 420bn cubic metres.
"Asia demand has definitely slowed and the outlook is not very positive in China, South Korea and Japan," said Chong Zhi Xin, Wood Mackenzie analyst.
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