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LNG Glut not Oil Price: the key driver of future LNG developments



Oil Economics

Since the doldrums of mid-2016 where oil prices were near their lowest, we have witnessed a 42% increase in prices since 2016 and through quarters 1 and 2 of 2017. Global demand for oil remains high and is increasing, but the driver in the oil price lift has been through production cuts from other OPEC and non-OPEC producers. The nose diving of oil prices in 2016 saw the withdrawal in investment activities in oil across the globe. This withdrawal of new investments helped to contribute to the 42% increases in prices we see today. Estimates have suggested that OPEC has been around 85% compliant with their production cutting targets which is surprising, given their historical lack of meeting their own cut targets during previous troughs in oil prices.

The rising oil price has seen US rig count increase but it still remains way below the pre-oil price crash numbers. Given the number of shale rigs in the US and production capacities, this increase in rig count has not undone the global production cuts from OPEC and other oil producing nations, including Russia. Supply has been reduced and demand is increasing.
Expect commodities beyond oil to rise as global demand surge in the coming decade
HSBC’s oil and gas division has forecast that the price of Brent will increase to around $60 per barrel by the end of 2017 and further increase to a peak of $75 per barrel in 2018. This is obviously good news, as the break even price is high for many oil producing countries outside of OPEC and therefore investment may begin to flow into new developments from the start of 2018 onwards.

The below graph shows predicted oil demand levels over the next 23 years.
During the period 2015 to 2040 global demand is expected to far exceed planned supply of oil
Like house prices, it is imperative to consider the long term outlook for oil supply and demand. In order to meet the demands of 2040 predictions, the oil industry needs to sanction over US$700bn worth of new developments. We may not be sanctioning new oil projects in the next 12 months, but if we look beyond 2018 and into the next decade we can see that demand will again outstrip supply, oil prices will rise and a cluster of new projects and exploration campaigns will be sanctioned.

Increasing oil prices will most likely have an impact on other commodities and we have already seen the price of iron ore surge in the last 12 months, bringing much needed good news to the waning mining industry in Australia. Mining is now picking up across Australia and Fircroft along with its partner OneKey Resources is seeing rapid growth in new contract and staff starters in this industry.

Australia is heavily invested in LNG so what is the outlook for LNG globally and more importantly in Australia?

LNG Forecast

The global LNG market is currently oversupplied and this trend will worsen into 2H 2017. With new LNG projects coming on line in 2018 this trend could be set to continue.  Only a few days ago, Petronas announced their decision to mothball the US$27bn Pacific North West LNG Project citing global LNG over supply as the main reason for its decision.

Globally around 35mtpa of new gas developments will come on line in the next 12 months, only adding to oversupply. It is this oversupply which has led many to comment that Australia will see no new Greenfield LNG projects sanctioned until the mid-2020's. Looking at all the data afforded to Fircroft, we can safely say that this is correct. There is no Greenfield project in design stage in Australia and this, coupled with a distinct lack of LNG exploration campaigns indicates that the Australian gas industry does not look likely to see a new Greenfield mega Project FID until at least the 2020's.

The focus for Australia in the coming decade will be to maintain LNG production levels in line with excepted capacity. Projects of this ilk are currently underway with Chevron, Shell, Inpex, Woodside and ConocoPhillips, all looking at back fill options to their existing onshore LNG infrastructure.

Greenfield projects will then surface once LNG train capacity is reached and global LNG demand dramatically increases. However we don’t envisage this happening until at least the mid-2020's and Peter Coleman, CEO and Managing Director of Woodside Energy, would firmly agree with this statement.

The fact of the matter is that the Australian LNG market, or global market, does not need Greenfield gas developments. But what this doesn’t mean is a panic that the boom is over, just look at the boom years of production, operations and maintenance in the North Sea. There will be plenty of work around for LNG specialists in the new LNG economic environment in Australia, enough to keep most of us employed until demand outstrips supply and a new boom of LNG train, or whatever new technology is floating around at the time construction begins.

We all need to get familiar with brownfield projects, maintenance and plant optimisation scopes.

So, to conclude, let’s stop talking about oil price when it comes to Australian and global LNG markets.
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LNG Glut not Oil Price: the key driver of future LNG developments - Time to read 5 min
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