Fitch: Weak crude prices to impact Asian LNG pricing

According to Fitch Ratings, weak crude oil prices and rising liquefaction capacity in 2015 – 2016 are likely to result in lower Asian LNG prices in 2H15.

This will put pressure on the earnings of European oil majors operating in the sector and weaken their credit metrics. Fitch Ratings expects that most already approved LNG projects, including those in Australia and the US, will go ahead, however other planned projects may not materialise. Russian projects are also more likely to be put on hold, due to limited access to international financial markets.

Japanese pricing

LNG prices under long-term contracts in Asia are mainly oil-linked through the Japan Crude Cocktail (JCC) price mechanism and follow crude prices with a three-to-six months lag. In January, Japan's import price averaged US$14.3/million Btu, down 15% y/y, compared with a more than 50% y/y decline for Brent crude.

Fitch Ratings believes Japan's LNG import price could fall below US$10/million Btu later in 2015 under the company’s base case modelling assumption that Brent will average US$55/bbl this year. This price is lower than break-even prices of Australian LNG plants due to start up in 2015 - 2017 (on average, US$11 – US$13/million Btu, including capital costs).

BG Group

Most European oil majors have Asian LNG operations, however BG Energy and Total are the most exposed. In 2014, BG sold 11 million t of LNG, approximately 5% of global LNG volumes. Its LNG shipping and marketing segment generated an operating profit of US$2.5 billion in 2014, 39% of the Group's total.

The company brought its Australian Queensland Curtis Island LNG project on stream in December 2014, which should add 8 million tpy of capacity to the market by mid-2016. While Fitch Ratings believes the project's cash costs would be covered at US$10/million Btu, its overall economics are questionable if crude prices remain depressed. The company's LNG segment performance will be an important rating driver for BG in 2015.

Total

Total's LNG business represents a smaller share of total profits however is similar to BG's in absolute terms. The company sold 12 million t of LNG in 2014 and this will increase as two Australian projects, Gladstone LNG and Ichthys LNG, come on-stream in 2015 and 2017. Unsatisfactory performance in the LNG business could put pressure on Total's credit rating in 2015, especially if upstream production stagnates and CAPEX and OPEX are not reduced.

Total also has a 20% stake in Russia's Yamal LNG, led by Novatek. Yamal is due to start producing in 2017, however financing is uncertain due to sanctions cutting off access to international debt markets. Falling Asian LNG prices could result in further delays to Yamal and other projects, such as Gazprom's Vladivostok LNG and Rosneft's Far East LNG.

Australian projects

Australian upstream companies have considerable exposure to LNG. Woodside Petroleum generated approximately 64% of its revenues from LNG in 2014. The company’s credit profile benefits from revenue and operational diversity and from lower growth CAPEX. However, the acquisition of stakes in two LNG projects from Apache reduces its rating headroom and production from the first project is not due to start until 2016. The impact on operating cash generation from the recent fall in oil prices was limited in 2014 given the lag in LNG pricing to crude oil prices and smaller share of oil in total production. However, lower LNG prices expected later in the year would inevitably hit 2015 earnings.

Asian projects

Gas accounts for over 60% of production for Malaysia's Petronas. Pricing terms in Asian LNG offtake contracts and low operating costs provide near-term protection. While a sustained deterioration in oil prices will reduce earnings, any credit impact should be limited due to its CAPEX flexibility and strong liquidity.

Adapted from press release by Katie Woodward

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