Oil Slump Threatens Future Australian LNG Projects

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Researched by Industrial Info Resources Australia (Perth, Australia)--The future of Australia's liquefied natural gas (LNG) industry is threatened by declining oil prices. Traders use oil to benchmark LNG prices. The oil price plunge has reduced the profit margins for Australia's three operating LNG developments and the projected profits of the seven LNG projects that are under construction. Many believe that falling oil prices are threatening the $70 billion worth of proposed LNG projects in Australia, which are considered to be the second wave of the country's energy boom.

The fall in LNG prices have followed the slump in oil. The price of Brent oil peaked in June at $115.71 per barrel. Within the space of six months, the price of Brent oil has fallen to just more than $60 a barrel. If they remain at the current level, oil prices will take a big bite out of Australian LNG project profits. Lower profit margins will be particularly painful for the owners of the seven new LNG projects in Australia, which have spent nearly $200 billion on construction costs. According to Nick Burns, an analyst at UBS (NYSE:OUBS) in Melbourne, most Australian LNG projects require an oil price of $75 to $90 per barrel to generate a 10% profit.

While Australian exporters will ride out the low prices, the main problem for Australia is that the declining oil price is threatening the future development of its LNG industry. The oil slump has occurred at a time when Australia is desperate to find an industry to replace its iron ore production, which has stumbled in the wake of declining Chinese demand.

LNG is seen as a hopeful driver of economic growth in Australia. If prices don't improve soon, investment in future LNG projects in Australia will be "put to sleep for a number of years," according to Fereidun Fesharaki, chairman of Facts Global Energy.

Industrial Info is tracking the LNG projects under consideration in Australia. Projects like Woodside Petroleum's (ASX:WPL) (Perth, Australia) proposed, $40 billion Browse LNG venture are at risk of missing financial approval if oil prices don't improve. Industrial Info's research has revealed that Woodside already has postponed the date of its final investment decision from mid-2015 to mid-2016. Woodside Chief Executive Peter Coleman recently warned that a prolonged oil price slump would pose an imminent threat to future LNG developments like Browse.

Exxon Mobil Corporation (NYSE:XOM) (Irving, Texas) and BHP Billiton Limited's (NYSE:BHP) (Melbourne, Australia) Scarborough Floating Liquefied Natural Gas (FLNG) joint venture proposal is also at risk of missing financial approval. The two companies are in the process of evaluating the viability of installing a 4 million-tonne- to 6 million-tonne-per-year FLNG facility in Carnarvon Basin, off the West Australian coast.

The $10 billion project would provide a big boost for the Western Australian economy through royalties and the provision of jobs to contractors, who will find themselves out of work when the first wave of the LNG construction boom comes to an end. ExxonMobil hopes to reach a final investment decision by September 2015.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.