Fiscal Regimes: It's not just costs that drive LNG prices

Abstract

Abstract There is much talk and speculation around the impact of the next wave of LNG due to come onto the market from the US driven by the shale oil/gas revolution over the last few years. This paper examines the competitive position of several alternative sources of LNG relative to the US LNG exports into the North Asian market. Specifically the Area 1 and Area 4 Mozambique LNG scheme and three generic Australian schemes: a conventional deepwater gas source, a coal seam gas source and a prospective shale/tight gas supply. The paper also looks at the fiscal position of each of these non-US projects to examine the impact on the delivered price of LNG. End buyers argue that US sourced LNG delivered ex-ship to North Asia will be less than $11/MMBtu. If these prices are realised, the integrated projects making up the non-US suppliers will struggle to compete for the current round of LNG contracts. However, the volume of US LNG is expected to be limited to 40–50 MMtpa of supply (including currently approved projects). Once this US LNG is contracted, pressure for lower prices or alternative pricing mechanisms should ease as new demand is sourced from higher cost locations. For projects looking to be competitive marketing LNG into North Asia for initial delivery this decade, it seems that the US ‘benchmark’ may prevail. The $11/MMBtu delivered price is predicated on a sub $4/MMBtu feedstock gas price. If and when US gas prices rise above $5/MMBtu and provided LNG carrier rates do not collapse, the longer-term delivered price for US gas will not be materially below the equivalent price for ‘conventionally priced’ oil-indexed LNG from integrated non-US supplies into North Asia. Also, existing oil indexation formulae will be competitive to US supplies if the oil price slips to around $80/bbl. The paper demonstrates that Australian deepwater conventional gas to LNG supply will be competitive to Mozambique's deepwater supplies. This is partly attributable to the higher liquids content in much Australian gas than in the Mozambique gas and to the harsher fiscal terms that apply to the Mozambique upstream investment; the Government take is over fifty percent higher than for a similar Australian project. Australian LNG from unconventional gas sources is predicted to struggle against the low unit cost Mozambique supplies even with a total tax burden of only one third of the Mozambique levels.