Fitch: Australia Upstream LNG Projects Competitive Advantage Eroding

Fitch Ratings says that the increased costs and risks for Australian upstream liquefied natural gas (LNG) projects together with likely lower gas prices over the medium-term can result in a more challenging environment for upstream projects. Fitch Ratings believes these factors can affect the viability of some projects under consideration.

Australian exploration and production or upstream companies face rising competition for many of the same resources, and higher development costs – with increasing cost-overruns and schedule slippages. Fitch Ratings expects further announcements of project cost-blowouts and schedule delays – as occurred in 2012 – with more projects moving towards completion.

Rising execution and development risks will force project sponsors of these LNG projects to dilute equity stakes or undertake sales of infrastructure and reserves. Fitch Ratings also expects a slowdown in further capacity additions – across both greenfield projects and brownfield expansions. There has been growing investment by global majors in Australian shale gas acreage. However, the low domestic gas prices and market size, infrastructure availability and access, relative cost and locational disadvantages, all provide effective barriers to significant uptake of this resource in the medium term.

Australian LNG export pricing will come under pressure over the mediumterm due to a potential increase in gas supplies from North American fields – driven by the wide price differentials and surplus stock available in North America, as well as rising gas exports from Russia to Asia in the medium term. An escalation of US LNG exports to Asia will moderate buyer appetite for Australian supplies – and result in a cancellation of some of the proposed projects.

Significant growth capex, long project lead times to revenue generation, and substantial project-execution risks, will result in a weaker financial risk profile of upstream companies over the medium term and a narrowing rating headroom for rated entities. Borrowings should remain high as Australian upstream companies commit to new liquefied natural gas (LNG) projects. Free cash flow should remain negative over the medium term from high debt-funded capex.

However, Fitch Ratings sees growth in Australian gas liquefaction production capacity, benefitting from contractual arrangements across LNG projects under development. There are additional 61million tons per annum (mtpa) of production capacity under development across seven projects. Further, upstream producers’ operating performance benefits from higher realised oil and gas prices. The current high-price environment also provides some funding support in managing any cost overruns for projects that are under execution. Woodside Petroleum Ltd’s (BBB+/Stable) credit profile has benefitted from improved revenue and operational diversification following the start of and strong ramp-up of its Pluto LNG facility in April 2012.

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LNG World News Staff, April 02, 2013; Image: Woodside