GAIL A Risk To Australian LNG
BMI View: GAIL ' s move to renegotiate an LNG import contract priced in 2009 could have serious implications on the profitability of the Gorgon LNG project from which the supply will be sourced . The result of this discussion could also set a perilous precedent for other Australian LNG producers, with companies selling LNG from the region need ing to become more competitive i n an increasingly global gas market.
GAIL announced it is looking to rework a 20-year LNG supply contract agreed with Petronet LNG in 2009. The deal is linked to the supply of LNG originating from the ExxonMobil's stake of the Gorgon LNG project in Australia, with deliveries commencing in mid-2015. The 2009 agreement arranged for a total of 1.96bn cubic meters (bcm) a year of equivalent LNG to be delivered to the Kochi LNG import terminal at a cost of 14.5% of the prevailing crude price. With the average JCC import price around $104$/bbl for H1 2013 (Petroleum Association of Japan), this would translate to a cost of over 15$/MMBtu before shipping and regasification costs.
Such a price starkly compares to the deal GAIL struck in late 2011 to import gas from Cheniere's Sabine Pass terminal in the US. The 3.5 mtpa (4.76bcm annum) 20-year off-take deal will be charged at 115% of the Henry Hub Price, which would currently be priced at 4.28$/MMBtu. Again this does not include shipping and regasification cost which would be greater due to the longer distance from the US to India. However, at current prices there remains a large discount from US LNG over Australian LNG, even when transportation costs are factored in. Furthermore, Qatar is also selling LNG into Asian markets at much lower prices than those negotiated for the Australian projects.
The new Australian LNG projects are thus likely to struggle with competitiveness as Henry Hub linked gas comes online from 2017 and Qatar continues to offer competitive export prices. Further competition from potential East African LNG projects could also hurt Australia as the shipping distance, in particular to India, is favourable. The Australian LNG export projects are among the most expensive in the world and many have suffered a series of cost over runs which drove costs up even further than expected. Conversely, the US projects are benefitting from having the terminal sites already set up for handling LNG, albeit the original intention was for imports, and proximity to quality infrastructure and experienced EPC companies able to engineer the liquefaction projects.
|US LNG Projects More Cost Effective Than Australia|
|Comparison of Select Australian and US LNG Projects, EPC Costs (US$/tonne)*|
Australian LNG producers therefore require the higher LNG sales prices expected prior to the major natural gas developments in the US of the previous few years, in order to make their projects more profitable. US exporters on the other hand are happy to sell at Henry Hub price with a mark up, and there appears to be enough confidence from investors in US liquefaction terminals that this pricing system will remain competitive over the 20 years from when exports are expected to begin in 2017-2018.
The increasing global supply of LNG from Australian, North American and potentially East African export projects is driving competition for the strong Asian demand markets. The rising pressure being put on Australian exporters to lower prices means they may be forced to drop prices or instead face a loss in market share as more competitive LNG sources become available.