https://www.hellenicshippingnews.com/up-to-42-of-australian-gas-resources-uneconomical-at-current-lng-netback-prices/Up To 42% Of Australian Gas Resources Uneconomical At Current LNG Netback Prices
inGeneral Energy News06/04/2020
With global oil markets in turmoil, gas markets have also fallen victim to the double whammy of the Covid-19 demand destruction and an OPEC-Russia crude price/supply war. Asian gas prices have tumbled from highs of more than $11 per million British thermal units (MMBtu) in late 2018 to just $2.7 per MMBtu in March 2020. Though the decline in prices began before the Covid-19 outbreak as a result of oversupply in the market, the virus has also had a devastating effect on global gas demand, which is expected to worsen as lockdowns ramp up globally. This leaves operators in countries with relatively expensive gas supply – like Australia – in a precarious position. If today’s low prices persist, Rystad Energy has estimated that nearly 42% of Australian gas resources would be rendered uneconomic – a scary thought for the world’s largest gas exporter.
Global gas prices were already struggling before the Covid-19 virus took hold due to a combination of a mild northern hemisphere winter and a flood of new supply entering the market. With the added virus-related hit to demand, prices are now at a level that threatens the economics of not just new projects, but also existing gas production. The problem is particularly pronounced in producing nations with a relatively high-cost gas supply, such as Australia, where close to 30% of gas production is derived from unconventional sources.
Though gas prices on Australia’s east coast historically have been high, from late 2019 they began to converge towards LNG netback pricing. With LNG prices now so low, Australian east coast gas prices have tumbled from over US$6 per MMBtu in 2019 to US$2.30 per MMBtu. This represents a big issue for east coast producers, as Rystad expects prices below US$4 per MMBtu are insufficient to support long-term coal seam gas (CSG) production.
The CSG producers have been protected from low gas prices up until recently, as much of their production was sold as LNG and indexed to the US$60+ Japan Crude Cocktail (JCC) marker, which provided sales prices of over US$8 per MMBtu. However, with the recent oil market crash, the JCC May-2020 futures have been hovering around US$30 per barrel (bbl), signaling that this price support might soon evaporate. Rystad Energy has estimated that at US$30 per bbl JCC pricing, the CSG-to-LNG exporters will average a sales price of about US$4.60 per MMBtu, with the country as a whole averaging about US$4.65 per MMBtu. When converted back to netback pricing at Wallumbilla, a major gas trading hub for the east coast market, the resulting prices would be about US$2.65 per MMBtu available to cover the upstream costs of these oil-indexed LNG operations. Figure 2 shows where this pricing point sits on various Australian cost curves, highlighting the volumes of production at risk if the low pricing environment persists.
As can be seen in figure 2, approximately 15% of Australian gas assets that are currently producing are uneconomic at today’s JCC-linked netback prices. When we break this down into east and west coast supply, we see that the west coast fares better with just 13% of its production uncommercial at the JCC linked price level, while 18% of east coast production would be at risk if the current pricing continues. The above numbers are based on point forward breakeven costs, meaning that they do not consider sunk costs other than as depreciation. As these assets in the curves are already producing and have minimal additional capital expenditure, they have relatively low breakeven prices. Figure 3 shows the breakeven prices of Australian gas supply that is currently under development or in the discovery phase, as well as the cost curve for all of Australia’s remaining gas resources as of 2020.
Figure 3 highlights two alarming statistics. At current JCC-linked netback gas prices, 42% of Australia’s gas resources as of 2020 would be marginal or uncommercial, while an incredible 67% of Australia’s discovered but undeveloped resources are at risk under the current pricing levels.
Fortunately, Rystad Energy does not expect the current low-price environment to persist. Our Gas Market Analytics forecast long-term gas prices in Asia to converge around US$7.8 per MMBtu, which is the long-run marginal cost of importing LNG from the US into Asia. At this price point, Australian operators could expect the gas price to be around US$5.30 per MMBtu to cover their upstream costs, enough to support the production of over 95% of Australia’s gas resources. However, this commentary highlights just how vulnerable Australian operators would be in a lower-for-longer price scenario.
Source: Rystad Energy
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