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EY: Oil price collapse impacts LNG

LNG Industry,

According to the EY Oil & Gas Center’s US quarterly outlook, the oil price collapse will impact LNG and encourage transaction activity.

After more than three years of US$100-110/bbl oil, prices collapsed by almost 50% in late 2014. Combined with modest oil demand growth since 2010, restored production in countries such as Libya and Iraq and the sizeable increase of US light tight oil production, OPEC's refusal to cut production has contributed to a massive supply/demand imbalance and the resulting price drop.

LNG prices?

The sharp decline in prices has also impacted global gas markets, as oil-linked LNG has fallen to levels on par with hypothetical US LNG export prices.

Deborah Byers, Oil & Gas Leader for Ernst & Young LLP in the US, explained: "Five years ago, the worry was 'peak oil' and whether or not we'd have enough oil supply, but now the concern is 'peak demand'. Unless there is an unexpected change in the supply/demand balance, a substantial oil surplus - and hence low oil prices - could continue through the first half of 2015."


Although US natural gas prices have weakened less than oil prices, they are still declining due to continued high production, weak early winter demand, relatively high gas storage levels and the decline in NGL prices. As a result of their link to oil prices, global gas prices also declined in 4Q14.

The oil price collapse has minimised the advantage of spot-priced gas, since oil-linked LNG trading prices are now essentially on par with hypothetical US LNG exports.

Byers continued: "Despite the weakening price spread, US LNG projects are still very competitive due to their low capital costs and the supply is attractive for flexibility and diversity. However, the LNG projects that don't yet have contracts for their outbound gas will face much more pressure, as Asian buyers have less incentive to sign new contracts."


"Looking forward, the oil price collapse will spur increased transaction activity during 2015 for a couple of reasons. On one hand, upstream companies with strong balance sheets operating in low-cost basins will be well-positioned to not only weather the dip in prices, but also scoop up assets from those with less liquidity or more capital intensive assets. At the same time, companies across the O&G segment will be pressured to review and reshape their portfolios to optimize capital and create higher returns," concluded Mitch Fane, Oil & Gas Transaction Advisory Services leader for Ernst & Young LLP in the US.

Adapted from press release by Katie Woodward

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