Sinopec, which is contracted to buy almost all the LNG from APLNG, is said to have suffered delays to the import terminal it is building to receive the gas. Photo: Bloomberg
Serious doubts have arisen over the ability of the biggest customer for Origin Energy's $24.7 billion liquefied natural gas project in Queensland to take delivery of the gas, leading to speculation the Chinese buyer may seek to slow the ramp-up of production, causing a hit to Origin's 2015-16 earnings.
The risks come just months ahead of the long-awaited start-up of the Australia Pacific LNG project, which has been in construction for more than four years and has stretched Origin's balance sheet almost to the limit.
If demand is weak in China and the spot market is also weak it may not be a terrible outcome for offtakers to consider using a take-or-pay provision, waiting for a time that their markets improve.
David Hewitt, Credit Suisse
The problems lie partly in reported delays in the construction by Sinopec of an import terminal in the southern Guangxi province to receive the gas.
But a broader difficulty lies in the unexpected weakness in Chinese gas demand because of high local prices, which means that Sinopec would have difficulty selling it to end-users or finding alternative buyers.
Trade publications in Asia have suggested Sinopec may seek to slow the ramp-up of output at APLNG, or may defer taking commercial deliveries of gas. Otherwise it may seek approval from the APLNG venture to re-sell LNG into Asia, which could result in a loss because oversupply has depressed spot prices.
Production from APLNG, 25 per cent owned by Sinopec, is due to commence next quarter. Some 7.6 million tonnes a year of the 8.6 million tonnes a year capacity is due to be shipped to China, with Kansai Electric taking the rest.
An Origin spokeswoman played down the concerns, pointing to the long-term "take-or-pay" nature of the sales contracts, which mean the LNG has to be paid for by the buyers even if they don't take the gas.
In an analysis of potential outcomes, Credit Suisse energy analyst Mark Samter calculated that if all the LNG had to initially be sold on the spot market instead, fetching a price $US2 per million British thermal units lower than the contract price, then Origin's earnings per share for 2015-16 would be cut by 18 per cent.
Sinopec would need approval from APLNG to be able to re-sell the gas outside of China but that would depress prices in the already weak spot market.
"Logic would seem to suggest that it is not optimal for the project participants – Origin and ConocoPhillips – to relent on destination restriction because it increases price pressure in the spot market at a time when they may be sellers into the spot market because of the ramp-up," said Singapore-based Credit Suisse analyst David Hewitt.
"If demand is weak in China and the spot market is also weak it may not be a terrible outcome for offtakers to consider using a take-or-pay provision, waiting for a time that their markets improve."
Mr Samter said that if the contracts with Sinopec are enforced and honoured then Origin "should feel little pain". It may even benefit as APLNG reduce production and remove some costs but would still get paid.
But he also pointed to a "non-zero" risk that Sinopec may renege on its purchase contract altogether.
In an irony for the stretched gas market on Australia's east coast, the unwanted LNG could have to be sold at low prices on the Asian spot market just as local industrial buyers in Queensland and NSW are unable to source gas at higher prices, Credit Suisse noted.
ORG Price at posting:
$12.92 Sentiment: Hold Disclosure: Held
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