What could falling oil prices mean for Australia's LNG exports?
The dive in global oil prices could wipe more than $30 billion from Australia's export bounty from liquefied natural gas in 2017-18, gouging a huge hole in revenue compared to the projections of just a year ago, according to Westpac economists.
New modelling by the bank on the hit to be taken on LNG revenue from the tumbling oil price has found that if oil prices follow the "forward curve", Australia's export earnings from LNG will total just $36 billion in 2017-18, rather than the $67 billion that could have been expected if prices had stayed at 2013-14 levels.
Commonly used in energy markets, the "forward curve" provides an estimate of future "spot" prices for energy sources such LNG or oil based on existing contracts for delivery of that energy in the future. LNG prices in Asia are tightly linked to crude oil prices via an indexing mechanism based on Japanese prices.
Concerns about pricing come at a crucial time for the local LNG sector, as gas delivered from huge investments in production in recent years begins to hit global markets. But analysts' consensus forecasts for Brent oil prices, which are more optimistic than the forward curve, suggest the impact on LNG export earnings might not be as great as the forward curve suggests, with 2017-18 revenue put at $51.6 billion.
The figures still represent a huge increase from the $16 billion of LNG export revenue in 2013-14 thanks to the start-up over the next few years of the $200 billion of projects currently under construction around the country, which will more than treble Australia's production capacity.
"If current economists are correct in their forecasts and all these projects come to market on the timetable that the key producers are giving us, we're still talking about a material increase in both volumes and values over coming years," said Rob Rennie, global head of foreign exchange and commodities strategy at Westpac Institutional Bank.
According to the modelling, LNG export value for Australia is now likely to treble over the next four years, if the Brent consensus estimates are correct, instead of quadrupling under the 2013-14 pricing scenario. But if the forward curve is correct, LNG export values would little more than double.
LNG prices in Japan, Australia's biggest market for gas exports, closely track the Japanese crude import price, with a lag of four to seven months. Crude oil prices have plummeted over recent months and are now trading near lows not seen since March 2009. The dive in prices accelerated in November and December, meaning the worst of the hit to LNG prices has yet to flow through.
Westpac calculates that the recent slump in prices to lows not seen for almost six years implies that LNG prices in Japan should be less than $US9 per million British thermal units (MMBTU) in May of this year, close to levels last seen in mid-2010 and down about 50 per cent from the highs of mid-2012.
"LNG prices have gone further and faster than I think pretty much anybody would have been out there forecasting," Mr Rennie said.
Regardless, the bank labels recent media reporting suggesting that Australia's new LNG projects may be at risk from the collapse in prices as "sensationalistic", noting that LNG prices would still be about 30 per cent above the average price seen over the last decade.
Crude oil prices are also expected to recover, while lower prices will also boost demand.
Using the consensus of forecasts for Brent crude oil quoted on Bloomberg, LNG prices in Japan will recover to about $US12 per MMBTU by July 2016 from a low of $US8.70 in May this year. But Westpac has a more optimistic view of crude oil, and is forecasting LNG prices in Japan will be above $US12.50 per MMTBU by June 2016, up from a low of $US10.20 this year.
Mr Rennie said that by the time the bulk of Australia's new LNG capacity came on stream, prices should be on the up.
The first of Australia's seven new LNG projects, BG's $US20.4 billion Queensland Curtis project in Gladstone, shipped its first cargo earlier this month. Origin Energy's $24.7 billion Australia Pacific LNG project in Queensland is due to start up about mid-year, while both Santos's $US18.5 billion GLNG venture in Queensland and Chevron's huge $US54 billion Gorgon venture in Western Australia are due to begin production in the December half.
They will be followed by Chevron's $US29 billion Wheatstone venture in WA, which is due to start up in 2016, Inpex's $US34 billion Ichthys venture in Darwin, and Shell's Prelude floating LNG project far off the Kimberley coast.
"We don't know the exact timing of GLNG, APLNG and Gorgon but we're assuming that at some point in the second half of this year we will start to see those projects being commissioned and exports beginning to leave," Mr Rennie said.
"That should be past that trough in terms of prices and we should be beginning – depending on how crude oil prices evolve – to see some signs of stabilisation and improvement."
But Westpac senior economist Justin Smirk said some federal and state budgets could still take a hit as they could assume higher prices for oil and LNG.
"There's probably a bit of a downgrade coming in terms of revenue estimates," Mr Smirk said, noting that the fall in oil prices is also hitting Australia's terms of trade, which hits national incomes seen through profits, wages and taxation revenues.
"Is this potentially likely to be another near-term hit for budgetary conditions? Yes, how much it's hard to say," Mr Smirk said. "The size of the magnitude of the fall in oil prices and the responsive fall in gas prices would have taken most forecasters by surprise."