Prelude; Source: Shell

Australia LNG exports to drop by $17 billion for 2020-21

Australia’s Department of Industry, Science, Energy, and Resources stated in its Resources and Energy Quarterly that the country’s LNG shipments dropped by 12 per cent year-on-year and noted the pressure on the country’s LNG export volumes in recent months.

Prelude; Source: Shell

The wave of LNG investment in Australia saw over $200 billion invested in seven new LNG projects, which all began operating between 2014 and 2019. The ramp-up of these projects saw Australia’s annual LNG nameplate capacity reach 88 million tonnes.

However, the report claimed that Australia’s LNG shipments between June and August were 12 per cent lower year-on-year. As a result, Australia’s average capacity utilisation rate is expected to fall slightly in 2020. According to the report, some buyers exercised their rights to reduce contracted purchases by around ten per cent in 2020, with some of these replaced by cheaper spot cargoes.

LNG Australia
Australia’s LNG projects and LNG basins

Cargoes have also been delayed, several plants have undergone extended maintenance, and two LNG plants have faced technical issues.

More precisely, the Prelude FLNG project — which shipped its first cargo in June 2019, but had not yet reached its full nameplate capacity of 3.6 mtpa — has been temporarily shut since February 2020, due to technical issues.

Shell has indicated that the process to restart operations started, but has not announced an official production restart date.

Gorgon’s production has also been disrupted, with the shutdown of Train 2 extended to October, after cracks were discovered in its heat exchangers.

A shutdown of the whole plant was avoided, with phased shutdowns instead – Train 1 and 3 are expected to be taken offline for inspections in October 2020 and January 2021, respectively. There is a risk of extended shutdowns if further cracks are discovered.

Australian LNG export volumes to drop before recovering

Australia’s LNG exports are forecast to decline from 79 million tonnes in 2019–20 to 76 million tonnes in 2020–21, reflecting the impacts of COVID-19 on demand as well as the abovementioned technical issues.

Australia LNG

LNG exports are forecast to recover to around 80 million tonnes in 2021–22, as the impacts of COVID-19 and technical issues ease and Prelude ramps up towards nameplate capacity.

The Department added in the report that a production halt at the Darwin LNG plant would weigh on export volumes in 2022, as gas from the Bayu-Undan field is exhausted.

It is worth noting that Santos is advancing plans for an infill drilling program, which could extend the life of the field and narrow the time between its depletion and start-up of the Barossa backfill project. An FID for the Barossa project has been delayed from 2020 to an unspecified date.

The Department stated that the outlook for the next wave of investment in Australian LNG projects was still unclear with weak market conditions resulting in capital expenditure reductions, write-downs, and FID deferrals.

For example, the Darwin and North West Shelf projects will require new gas field developments as backfill from as early as 2021.

Earnings forecast to fall from record highs

LNG export earnings in Australia are forecast to fall sharply, from $48 billion in 2019–20 to $31 billion in 2020–21. The decline in export earnings is expected to be driven primarily by weak contract and spot prices and, to a lesser extent, lower export volumes.

The impact of the slide in oil prices is expected to be concentrated in the second half of 2020, due to the several-month lag of the flow-on effects for oil-linked contract prices – at which almost three-quarters of Australian LNG is sold.

Export earnings are forecast to partially recover to $37 billion in 2021–22, tracking an expected rise in contract and spot prices.

The forecast for Australian LNG export earnings in 2020–21 has been revised down by $3.7 billion from the June 2020 Resources and Energy Quarterly. The downward revision primarily reflects lower export volumes and exchange rate revisions.