Origin set to take flight with LNG

With the agreement to go ahead with a second train following on from Sinopec's decision to invest, Origin is now nicely placed to reap the rewards from its Queensland gas project.

It was virtually a foregone conclusion that the Australia Pacific LNG partners would make a positive final investment decision on a second train for their $23 billion Queensland coal seam gas-fed export LNG plant, which they did today.

Once China’s Sinopec signed up in December, conditionally, to increase its contracted purchases of LNG from an initial 4.3 million tonnes a year to 7.6 million tonnes a year for 20 years and increase its equity stake in APLNG from 15 per cent to 25 per cent the foundations for an approval of the second train were in place. Origin and its original partner, ConocoPhillips, each have a 37.5 per cent interest, while Japan’s Kansai Electric Company has committed to taking one million tonnes of LNG a year, also for 20 years.

The economics of a second train and a doubling of its planned output to 9 million tonnes a year have always been compelling. APLNG’s first train was budgeted to cost about $US14 billion but the second train only about $US6 billion. The disparity in the costs of the two trains is because the consortium always planned, in building the first train, to put in place the infrastructure for a two-train plant.

Underscoring how robust the economics of the project are expected to be, Origin said today that a $US35 a barrel oil price in real terms over the life of the project would cover all of the project costs and debt servicing obligations. At an oil price that averaged $US50 a barrel in real terms over the project’s life Origin would recover its weighted average cost of capital on the cash it will commit to the project.

Origin said today that the project was on schedule and on budget to deliver its first LNG in mid-2015, with initial production from the second train in 2016.

In Australian dollar terms the project remains on budget. When the project costs were originally announced a year ago Origin said a two-train project would cost $US20 billion, which at the time translated to $A23 billion. Today it said the estimate project costs remained at $A23 billion, but today that converts to $US23.7 billion. The original budget did have a $US2.5 billion contingency element built into it.

All the projects off Gladstone have been experiencing cost pressures and the impact of the stronger Australian dollar.

BG Group announced earlier this year that the cost of its LNG had blown out from the original estimate of about $US15 billion to $US20.4 billion, with currency a significant factor, while Santos recently upped its estimate of the cost of its project by $US2.5 billion to $US18.5 billion, although it attributed the increase to the bringing forward of an expanded drilling program originally scheduled post-2015.

Origin said today that while there had been cost increases in some upstream gas fields in which it was a non-operating participant its own cost estimates had allowed headroom for costs increases of that type and therefore they were not expected to materially impact its own cost estimates.

One of the benefits of Origin’s sector-leading resource position is that it has been able to contract to supply gas that is surplus to its own joint venture’s needs to both the rival BG and the Santos-Petronas-Total-Kogas consortia, giving it early access to international gas prices, which are about twice the level available in the domestic market, and APLNG a boost to its initial revenue streams.

The approval of the final investment decision helps reduce Origin’s own funding commitment to the project, with Sinopec subscribing for $US1.4 billion of extra equity in APLNG and paying $US700 million as its share of capital expenditures since the start of this year.

With a $US8.5 billion project finance facility locked in (at very attractive rates) earlier this year, that would reduce Origin’s remaining funding requirement for its share of the project to about $A3.6 billion.

Origin has undrawn debt facilities and cash of about $4.6 billion and says it has more than sufficient capacity to meet its APLNG and other commitments while retaining a prudent liquidity buffer.

Origin said today, however, that it had agreed with ConocoPhillips to start a joint process to dilute their interests below their current 37.5 per cent levels, which would reduce their funding requirements further. Origin said it wants to retain a stake of about 30 per cent in APLNG in the longer term.

With the locking in of the extra Sinopec commitment, and consequent reduction of its own exposures, a sell-down/dilution to that level would assuage the market’s concerns that the scale of Origin’s funding requirements for the project could force it to conduct an equity raising. Origin shares rose sharply in response today’s news.

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