Analyst calls peak for LNG prices
The Citi oil and gas analyst Mark Greenwood has called the top of the LNG market, with competitors in the US and Africa posing a threat to "traditional Asian pricing" that underpinned Australian developments such as the North-West Shelf in Western Australia.
While big falls were unlikely, Mr Greenwood downgraded earnings forecasts and valuations of Woodside Petroleum, Oil Search and Santos based on the lower long-term LNG price assumptions.
Australia has traditionally sold LNG to Asian markets such as Japan and Korea on long-term contracts struck at a proportion of the oil price - known as the "slope" - typically about 14.85 per cent. Citi said these prices would be difficult to achieve in a more competitive global LNG market, and lowered its long-term slope projections from 14.5 per cent to 14 per cent.
This was higher than some forecasts of slopes as low as 11 per cent to 12 per cent. However, recent deals, including Woodside's May sale of LNG from its Browse project to Japan's MIMI - struck in line with traditional Asian pricing - showed Asian customers continued to support Australian suppliers. North American LNG from unconventional fields had a lower calorific value than Australian LNG, Mr Greenwood said.
But Asian customers were also increasingly vocal about the gap between the price of Australian LNG - typically north of $US14 ($13.3) per million British thermal units (mmbtu) - and lower US gas prices at the Henry Hub, recently above $US3/mmbtu.
As a result, Henry Hub linkages were creeping into Asian LNG contracts, Mr Greenwood said.
Citi estimated BG Group's recent LNG sale to China's CNOOC, including gas sourced from its Queensland Curtis project in Gladstone, was 25 per cent Henry Hub-linked and 75 per cent oil-linked.
Chevron's LNG sales from its Wheatstone project in Western Australia to Chubu Electric and Tohoku Electric were largely oil-linked but included a small Henry Hub linkage - estimated at 10 per cent.
Mr Greenwood said Australian greenfield LNG projects such as Browse at James Price Point and Arrow LNG would require prices in excess of $US14/mmbtu to achieve a 12 per cent return and this would be difficult to achieve.
But a third train at PNG LNG, a floating development at Sunrise, a fourth train at Gorgon, and development of Browse via the North-West Shelf or a floating plant, have more attractive economics and a better chance of proceeding.
Mr Greenwood said declining LNG prices did not mean investment would stop. "I do think we will see more investment in Australian LNG, most likely in expansion projects and floating LNG projects," he said.
Frequently Asked Questions about this Article…
Citi oil and gas analyst Mark Greenwood said LNG prices have "peaked for now." He expects increasing global competition from US and African suppliers to pressure the traditional Asian pricing that underpinned Australian projects, leading Citi to lower long‑term price assumptions and downgrade some company earnings and valuations.
Citi downgraded earnings forecasts and valuations for major Australian exposure to LNG including Woodside Petroleum, Oil Search and Santos based on its lower long‑term LNG price assumptions.
The "slope" is the proportion of the oil price used to set long‑term Asian LNG contract prices (historically around 14.85%). Citi cut its long‑term slope assumption from 14.5% to 14% to reflect more competitive global LNG markets, though some forecasts anticipate slopes as low as 11–12%.
Yes — Citi noted Henry Hub linkages are creeping into Asian contracts. For example, BG Group's sale to China's CNOOC was estimated at 25% Henry Hub‑linked and 75% oil‑linked, while Chevron's Wheatstone sales to Chubu and Tohoku were largely oil‑linked but included an estimated ~10% Henry Hub linkage.
The article cited Citi's view that greenfield projects such as Browse at James Price Point and Arrow LNG would require prices in excess of US$14 per million British thermal units (mmbtu) to achieve about a 12% return — a level Citi said would be difficult to achieve in a more competitive market.
Citi suggested expansion or alternative‑format projects have more attractive economics, including a third train at PNG LNG, a floating development at Sunrise, a fourth train at Gorgon, and developing Browse via the North‑West Shelf or a floating plant.
No. Mark Greenwood said declining LNG prices do not mean investment will stop. He expects continued investment in Australian LNG, most likely focused on expansion projects and floating LNG developments rather than large greenfield builds.
Citi noted North American LNG from unconventional fields tends to have lower calorific value than Australian LNG. Asian customers have also highlighted the price gap between higher Australian LNG (typically north of US$14/mmbtu) and lower US Henry Hub prices (recently around US$3/mmbtu), which is encouraging some buyers to seek Henry Hub linkages in contracts.
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