LNG prices could deflate on new fields
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 the "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.
LNG has traditionally been sold from Australia to Asian markets such as Japan or 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 forecasters who predicted slopes as low as 11-12 per cent, but 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 continue to support Australian suppliers. North American LNG from unconventional fields had a lower calorific value than Australian LNG, Mr Greenwood noted.
But Asian customers also were increasingly vocal about the gap between the price of Australian LNG - typically north of $US14 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 of 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.
Frequently Asked Questions about this Article…
Citi analysts say LNG prices have "peaked for now," pointing to a wave of new Australian projects (seven giant export projects worth almost $200 billion) and growing competition from the US and Africa that could put downward pressure on prices.
More supply from new greenfield and expansion projects globally — especially North American and African LNG — makes the market more competitive and threatens the traditional Asian pricing that has supported higher Australian LNG contract prices.
Citi's oil and gas analyst Mark Greenwood has downgraded earnings forecasts and valuations for Woodside, Oil Search and Santos based on lower long-term LNG price assumptions as the market becomes more competitive.
The 'slope' is the share of the oil price used to set long-term Asian LNG contract prices (typically around 14.85%). Citi lowered its long-term slope projection from 14.5% to 14%, reflecting expectations of weaker oil-linked LNG pricing in a more competitive market.
Yes — recent deals show Asian buyers still sign oil-linked contracts. For example, Woodside's May sale of Browse LNG to Japan's MIMI aligned with traditional Asian pricing, and Chevron's Wheatstone sales were largely oil-linked, though both deals included some Henry Hub linkage.
Henry Hub linkage ties part of an LNG contract to US gas prices. Asian buyers are increasingly pushing for such linkages because Australian LNG prices (typically north of US$14/mmbtu) are much higher than US Henry Hub prices (recently above US$3/mmbtu), narrowing the price gap.
Citi estimated BG Group's recent sale to China’s CNOOC was about 25% Henry Hub-linked and 75% oil-linked, illustrating a mix of pricing formulas becoming more common in Asian contracts.
According to Citi's Mark Greenwood, North American LNG from unconventional fields tends to have a lower calorific value than Australian LNG, and US supply usually exerts downward price pressure because of lower cost feedstocks and different contract linkages.
Call 1300 880 160
Start a chat
Schedule a call
