LNG suppliers cutting budgets amid low oil prices

According to Moody’s, LNG suppliers are curtailing capital budgets amid low oil prices and an imminent glut of new LNG supply from Australia and the US.

In a new report, ‘Lower Oil Prices Cause Suppliers of Liquefied Natural Gas to Nix Projects’, Moody’s Investors Service says low LNG prices will result in the cancellation of the majority of the nearly 30 liquefaction projects currently proposed in the US, as well as 22 in Canada.

"The drop in international oil prices relative to US natural gas prices has wiped out the price advantage US LNG projects, reversing the wide differentials of the past four years that led Asian buyers to demand more Henry Hub-linked contracts for their LNG portfolios," explained Moody's Senior VP, Mihoko Manabe.

Excess liquefaction capacity

However, projects already under construction will continue as planned, which will lead to excess liquefaction capacity over the rest of this decade. Through 2017, Australia will see new capacity come online from US$180 billion in investments, which will result in a 25% increase in global liquefaction capacity. Likewise, the US is poised to become a net LNG exporter after the Sabine Pass project goes into service in Q415.

Moody's expects Cheniere Energy's Corpus Christi project will be the likeliest project to move forward this year, since it is among few projects in advanced development that have secured sufficient commercial or financial backing to begin construction.

Project cancellations

Lower oil prices will result in the deferral or cancellation of most other projects. While some companies like Exxon Mobil can afford to be patient and wait several years until markets are more favourable, most other LNG sponsors have far less financial resources, and some may be more eager to capitalise on the billions of dollars of upfront investments they have made already.

Greenfield projects on undeveloped property are much more expensive, involve more construction risk, and take longer to build than brownfield projects, which reuse existing LNG regasification sites. Greenfield projects are also frequently challenged by local opposition and occasionally by untested laws and regulations. Based on the public estimates of companies building new LNG liquefaction capacity, the median cost to build a US brownfield project is roughly US$800/t of capacity, compared with the more advanced Australian greenfield projects, now estimated at approximately US$3400/t.

Through the end of the decade, Moody's expects LNG demand will grow more slowly versus supply. China will be the biggest variable and most important driver of global LNG in that timeframe, while India will also see rapid growth. Other more mature LNG markets in Japan, South Korea and Europe, which represent the bulk of demand, will have flat growth.

Adapted from Moody's press release by Katie Woodward

Read the article online at: https://www.lngindustry.com/liquefaction/08042015/moodys-on-lng-suppliers-cutting-budgets-553/