Singapore — Australia's LNG sector is feeling the full impact of the collapse of oil and gas prices as its biggest energy companies cut asset valuations by billions of dollars, big ticket projects face delays, cash flows decline and LNG cargoes are deferred or delayed.
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The pressure on Australian oil and gas has been building since the start of the coronavirus pandemic, but the outlook on energy prices has continued to sour, and asset write-downs by global oil majors meant the rest of the industry had to follow suit.
In the week of July 13, ASX-listed Woodside Petroleum recorded $4.37 billion in post-tax impairment losses and provisions in its half yearly financial statements, while Origin Energy said it would recognize non-cash charges of $1.16 billion to $1.24 billion in its full-year results on August 20.
The devaluation of oil and gas assets includes some of the world's largest LNG projects, on the back of which Australia is competing with Qatar to be the world's largest LNG exporter. These include write-downs at Wheatstone LNG, Pluto LNG and North West Shelf by Woodside, and Australia Pacific LNG by Origin.
The two companies also took provisions on their US LNG contracts -- $447 million for Corpus Christi LNG by Woodside and $440 million-$460 million by Origin for Cameron LNG, citing poor arbitrage economics.
Origin said that since December 31, 2019, "the primary changes in assumptions relate to a reduction in JKM LNG prices reflecting weaker medium-term demand and moderately lower long-term prices driven by expected lower US gas liquefaction fees, as well as lower US Treasury bond rates."
It assumes that Brent crude will average $40/b in FY 2021, $45/b in FY 2022 and $50/b in FY 2021. Woodside assumes $44/b Brent and $4.4/MMBtu spot LNG for 2021, and $55/b Brent and $6.3/MMBtu spot LNG for 2022.
"The impairments are a prudent decision reflecting the fact that our industry is confronted by a tsunami of challenges," Woodside's Peter Coleman said at a conference call on July 15. "Realized prices have dropped dramatically due to global oil oversupply and demand destruction from the pandemic."
The company delayed final investment decisions on two key brownfield projects -- Scarborough and Pluto Train 2 were pushed to the second half of 2021 and the Browse expansion from 2023 -- both of which could delay a ramp-up in Australia's LNG export capacity.
Australian projects also took a hit when oil majors cut valuations recently -- Shell's impairments of up to $22 billion for the second quarter included $8 billion-$9 billion in its integrated gas business covering Queensland Gas and Prelude FLNG. BP and Chevron also have LNG projects in Australia.
Spot market exposure
Woodside said 46% of its LNG sales in the second quarter were on the spot market and 54% were from contracted volumes, but it realized only $2.6/MMBtu from the spot market compared with $7/MMBtu from contracts. This compares with LNG spot sales of 13% in the first quarter, reflecting the scale of price impact on oil-linked LNG exporters in the second quarter of 2020.
"The percentage of spot sales volume was influenced by the challenging market conditions," Woodside said in a clarification issued on July 16.
"Primary drivers for the higher spot sales volume in the quarter included contractual flexibilities exercised by buyers (five cargoes, 16%), additional production due to strong operational reliability (two cargoes, 6%) and additional production due to maintenance deferred because of the COVID-19 pandemic (one cargo, 3%)," the company said.
Woodside said spot sales are expected to fluctuate due to seasonality and cargo timing, and further exercise of downward quantity tolerance by buyers is not expected in the second half of 2020.
Sherry Duhe, Woodside's chief financial officer, said on the conference call that the company's spot market sales will be slightly above the 20% level for the year due to a handful of cargo deferrals, although year-end numbers could be affected by last-quarter activities.
Overall, Australia exported 85 cargos in June, down from 93 cargos in May, mainly due to terminal maintenance, which helped reduce some of the oversupply in the market, according to Adelaide-based consultancy EnergyQuest.
It said a large number of Australian cargoes continued to be delayed during June, reflecting high inventories in Asia and slower downstream demand in many markets.
"Of the 85 cargoes shipped during June, 33 cargoes were delayed by sitting at anchorage or steaming in circles prior to reaching their destination. An additional 20 cargoes shipped in May have also been delayed," EnergyQuest said, adding that delays appear to be declining, with nine delayed cargoes still to offload as of mid-July.
It estimated that Australian LNG export revenue fell sharply in June to $2.87 billion, down from $3.74 billion in May and down 17% from June 2019.