Lower oil and gas prices and the changing LNG landscape

Abstract

The recent uptick in oil prices from multi-year lows reflects growing anticipation of a tightening of supply and demand fundamentals in global oil markets. Price recovery is expected to come through most notably in the second half of 2016, as the extended period of low oil prices takes its toll on global oil supply growth, and oil demand growth holds up as prices recover. Rising oil prices will eventually flow through to higher realised LNG revenues in Australasia's long-term oil-linked term contracts. This would provide welcome respite to project economics, many of which have been hit hard by cost escalation and schedule overruns throughout the build phase, and compounded by the collapse in oil price just as these were starting up. But even with a more favourable oil price environment, the outlook for LNG prices remains weak in the medium term. Lower Asian LNG demand growth and an impending wave of new LNG supply raises the potential for an over-supplied market. With spot prices low, Asian LNG contracts may come under pressure from over-contracted customers. Demands for volume rescheduling and price reductions could become more common. With demand growth less than anticipated, and faced by competition from new entrants, buyers could look to place excess LNG into the international market. They risk competing for market with sellers, trying to secure customers for their own LNG while cutting costs through optimisation. These changes are forcing all companies to consider the benefits of a portfolio approach to their business. These dynamics, in light of low commodity prices, and the implications for the industry are considered in this extended abstract.