Australian LNG Players to Feel Pressure of Sliding Oil Prices, Says Fitch

Declining oil prices and rising liquefaction capacity in 2015-2016 are likely to lead to lower Asian LNG prices in the second half of this year putting pressure on LNG projects in Australia, Fitch Ratings said in a note last week.

“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. This will put pressure on the earnings of European oil majors operating in the sector and weaken their credit metrics. We 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,” Fitch said.

Fitch believes Japan's LNG import price could fall below $10/mmbtu later in 2015. This price is lower than break-even prices of Australian LNG plants due to start up in 2015-2017 (on average, $11-13/mmbtu, including capital costs), according to Fitch.

With Australian upstream companies have sizeable exposure to LNG, lower oil prices are expected to hit 2015 earnings of companies such as Woodside Petroleum which generated approximately 64 percent of its revenues from LNG in 2014, Fitch added.

“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,” it said.