Will Low Oil Prices Kill the LNG Party?

abarrelfullabarrelfull wrote on 17 Dec 2014 09:37
Tags: apache australia canada lng

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One of the biggest pieces of news in the last few days is the sale by Apache of stakes in Kitimat LNG Terminal and Wheatstone LNG Terminal to Woodside.

Apache's net proceeds upon closing are expected to be approximately $3.7 billion for the transaction, a major cash infusion. Its a big turn around in strategy though, as these are important projects, at very different stages of development.

For Woodside, it represents a big punt on the LNG sector at a time when they have had to postpone their Browse LNG Terminal Project over cost concerns.

My question is does this herald the start of a trend? With low oil prices, LNG projects begin to look less attractive, especially those with a high investment cost.

Back in 2009, trains 6 & 7 of the Rasgas LNG Terminals, Yemen LNG Terminal & Tangguh LNG Terminal came on stream, followed in 2010 by Qatargas 3 Ras Laffan LNG Terminal, at a time when demand had slumped due to macroeconomic problems and growing US gas supplies. Prices slumped.

The low prices of that period generated renewed interest in LNG usage, and led to a number of import project announcements. This is especially true of China, whose state owned companies have invested heavily in supply projects as well as import terminals. (for more details see LNG Terminals And Trade In China )

Now some of this activity seems a little bubble like.

So what happens next?

I think we will see a number of more projects postponed, or even abandoned. However, for those who go ahead, the costs are going to be lower. Engineering, construction and equipment companies are not going to have the full order books of recent times, and will have to be more competitive. Their costs will also be lower.

So in a few years time, when another bull market is upon us, those companies whose project economics were good enough to go ahead, will gain twice, once from higher prices and secondly from less competition.


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