Get the balance right ■ A delicate balance? Last week, the...

Get the balance right
■ A delicate balance? Last week, the Australian regulator AEMO published a
report forecasting a balanced gas market in the near term. We would argue
demand destruction forecasts of 150PJa really doesn't count as "balance" but
also that the number is too low. We don't understand the underlying data –
AEMO forecasts for Cooper production and Otway sit above company guidance,
GLNG is still looking to contract additional gas and cost assumptions are too
optimistic. No change to our forecasts made here.
■ Cooper rocket unlikely: Backing out the reserve drawdown numbers for the
Cooper, we estimate AEMO is forecasting 165PJa production from 2017. Santos,
in its 2012 forecasts, was guiding to gross SACB JV capacity of 130PJa from
2015. Since then, reserve upgrades targets have disappointed every year and
cost-outs have not materialised. This week's site trip to the Cooper may shed
light on any change in Santos forecasts. Otway forecasts also sit 15PJa above
capacity with no expansion committed (four-year reserve life).
■ Demand pull will not stop: AEMO demand assumes that the LNG plants will
run only at contracted volumes (capacity is 50–100PJa higher). Unless LNG
sales are uneconomic, excess export capacity will mean there is always excess
demand. The market wide balancing approach used by AEMO also does not
distinguish between uses and ownership of gas; GLNG is still short 50–90PJa to
meet contracted volumes but that does not mean APLNG or QCLNG will pitch in.
Others have argued a delay in LNG ramp will help the market balance – we don't
understand this, LNG facilities will only ramp slowly if there is insufficient gas.
■ Cost still seem too generous: The cost profile has been re-done but may still
be too optimistic (although substantially higher than the 2012 estimates). If
Ironbark and Cooper basin gas resources can be developed at ~A$5/GJ then
why is anyone holding back? Talking about multi-tcf resources is irrelevant if the
economics do not stack up. One interesting snippet is that GLNG's Roma fields
are estimated as the most expensive in the East at A$8.5/GJ wellhead – if that is
true, surely GLNG is looking to contract more third-party gas rather than develop.
■ The math should be simple enough, market is still short: Some 250PJa of
demand is being diverted from the domestic market - demand destruction of
150Pja and 30Pja increase in Cooper supplies are simply not enough. A higher
production level at Gippsland, which we assume and AEMO does not, also
doesn't quite get there. The big unknown is CSG well performance at plateau
and economics of lower margin fields – but collectively, reserves are short for the
life of projects and at least one near-term gas hungry LNG exporter remains via
GLNG, constantly looking for gas cheaper than its expensive resources.