Weak crude prices and rising liquefaction capacity in 2015-2016 are likely to lead to lower Asian liquefied natural gas prices in the second half of 2015, Fitch Ratings says.
This will put pressure on the earnings of European oil majors operating in the sector and weaken their credit metrics. Fitch Ratings expect most already approved LNG projects, including those in Australia and the US, will go ahead but others planned may not materialise. Russian projects are also more likely to be put on hold, due to limited access to international financial markets.
LNG prices under long-term contracts in Asia, the largest LNG market by volume, are mainly oil-linked through the Japan Crude Cocktail price mechanism and follow crude prices with a three-to-six months lag. In January, Japan’s import price averaged USD14.3/mmbtu, down 15% year-on-year, compared with a more than 50% yoy decline for Brent crude. Fitch Ratings believe Japan’s LNG import price could fall below USD10/mmbtu later in 2015 under the base case modelling assumption that Brent will average USD55/bbl this year. This price is lower than break-even prices of Australian LNG plants due to start up in 2015-2017 (on average, USD11-13/mmbtu, including capital costs).
Most European oil majors have Asian LNG operations, but BG Energy and Total are the most exposed. In 2014 BG sold 11 million tons of LNG, around 5% of global LNG volumes. Its LNG shipping and marketing segment generated an operating profit of USD2.5bn in 2014, 39% of the group’s total. BG guided the segment’s profits will not exceed USD1bn in 2015, reflecting the lower forward commodity price curves and slightly lower Atlantic basin supply. BG brought its Australian QCLNG project on stream in December, which should add 8mtpa of capacity to the market by mid-2016. While Fitch Ratings believe the project’s cash costs would be covered at USD10/mmbtu, 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’s LNG business represents a smaller share of total profits but is similar to BG’s in absolute terms. It sold 12mt in 2014 and this will increase as two Australian projects, GLNG and Ichthys, 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 has a 20% stake in Russia’s Yamal LNG, led by Novatek. Yamal is due to start producing in 2017, but financing is uncertain due to sanctions effectively 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 upstream companies have sizeable exposure to LNG. Woodside Petroleum generated approximately 64% of its revenues from LNG in 2014. Its credit profile benefits from revenue and operational diversity and from lower growth capex. But 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.
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.
Image: BG Group