(EnergyAsia, May 4 2015, Monday) — Australia’s upstream sector is worried even though it appears to be thriving after producing record volumes of natural gas and liquefied natural gas (LNG) last year, and boosting crude and condensate output by more than 18%.
The sector’s outlook has worsened following the collapse of global oil and gas prices since last June, leading to the write-off of more than A$8 billion worth of assets and a fall in the country’s natural gas reserves, said consultant EnergyQuest. (US$1=A$1.3).
“Australia’s gas reserves replacement – a comparison of how much is produced against how much is found – proved disappointing over 2014,” said the Australian firm’s CEO Graeme Bethune.
“Reductions in the Gunnedah Basin (New South Wales), Cooper Basin (South Australia and Qeensland) and John Brookes (Western Australia) contributed to the decline in proved and probable (2P) gas reserves exceeding production.”
Even during the good times, the industry struggled against budget overshoots on huge multi-billion-dollar projects, severe labour shortages and environmental opposition. Many of Australia’s expensively assembled LNG projects will start up over the next few years, thanks to early investment decisions made before the start of the industry’s boom.
But, now instead of rejoicing, the developers are likely to face tough bargaining from Asian customers who sense an impending firesale in a glutted LNG market in the second half of the decade.
In February, ratings agency Fitch said the credit standings of France’s Total, UK’s BG Group, which is being acquired by Shell, and Australia’s Woodside Petroleum are coming under pressure from their costly exposure to their Australian LNG ventures. Having already borne the brunt of high development cost, the companies now face the prospects of losses from selling into LNG a depressed market.
Linked to crude oil, Asia’s LNG prices have fallen from a range of US$15 to US$20 per million BTU between 2011 and 2014 to less than US$8 today.
Fitch said Australia’s new LNG plants starting up from now to 2017 need Asian LNG prices to hold between US$11 and US$13 to break even.
Dr Bethune said the slump in the oil price along with the slump in demand have cast “widespread uncertainty” over the industry.
“China was seen as the big opportunity for LNG, a bottomless pit of gas demand to reduce pollution. However, the iron laws of economics apply in China as they do everywhere else and higher Chinese gas prices are reducing growth in demand,” he said.
On a more positive note, Australia boosted oil production by 18.1% to 84.3 million barrels. It also raised natural gas production by two percent to a record 1,134 petajoules (PJ) and LNG supply to 24.5 million tonnes last year.
Dr Bethune said Australian oil production has been boosted by contributions from the Vincent, Montara, Balnaves and Pyrenees oil fields in Western Australia and Bass Strait’s Turrum field in Victoria.
The industry invested a total of A$4.2 billion in exploration and A$57 billion in development projects last year.