LNG Port Set to be Developed
As concerns for long term gas supply on the east coast of Australia grow, projects such as the Newcastle LNG project provide some hope for consumers looking for competitive energy prices. Currently consumers in NSW are relying on gas supply from both Victoria and Queensland due to a lack of production within the state. Supply from existing gas developments and those due to be developed in the next 5 years are expected to only meet gas demands until 2023. Given this many companies are attempting to address this shortfall. One of which is Energy Projects and Infrastructure Korea (EPIK) which has teamed with Watpac, an Australian construction company, to carry out construction, engineering and design for the Newcastle LNG project.
EPIK, a liquefied natural gas (LNG) project development company based out of South Korea which operate floating storage and regasification units (FSRU), announced in December that they had entered into a Project Development Option Agreement with the Port of Newcastle to commence work on the proposed LNG FSRU import terminal.
EPIK has continued to make significant steps toward project development by securing a Strategic Partnership Agreement with Hyundai LNG Shipping Co. This agreement provided a framework for the two companies to work together on FSRU projects around the globe including the Newcastle project.
Hyundai LNG Shipping is recognised as one of the largest LNG shipping companies in South Korea with over 20 years experience in LNG transport and the largest fleet of LNG vessels in the country with 8.
Jee Yoon, EPIK’s Founder and Managing Director, said “partnering with Hyundai LNG Shipping marks a key strategic milestone for EPIK, contributing significant expertise and support to the advancement of our flagship Newcastle LNG project”.
Currently prices for wholesale gas supplied to the east coast gas market are between $10-$13 per GJ which is a stark premium compared to Asian LNG prices which tumbled to near three year lows recently and are expected to trade at $5.50 per MMbtu, which is approximately equivalent to a GJ, in May.
In a recent publication by the Australian Energy Market Operator (AEMO) production from Australian gas fields has been projected to be 31 PJ lower than what was projected in 2018. This is due to a 23 PJ reduction from northern states and 8 PJ reduction from southern fields. If we are to meet the forecasts of production by 2022 from northern fields we will require a 17% increase in annual production relative to levels observed in 2018. A significant increase in investment and number of wells drilled will be required to maintain production projections. LNG exports place increased pressure on production demands and will need to be foregone if the current level of production is not increased in order to service local demand.
Concerns continue to rise about the amount of reserves available in southern states in particular. The shift from 2P reserves, those of which there is a 50% likelihood of producing the reserve amount quoted or greater, to 2C resources, which are quantities of gas which are sub-commercial at current market and technological conditions, is most notable. 2P developed reserves have dropped by a considerable 32%. This increases the urgency to develop new resources from southern basins, increase gas imports from northern states or develop LNG imports such as the Newcastle LNG to meet domestic demand.
According to AEMO an import terminal located in New South Wales is projected to hit limitations. The pipeline from Sydney towards Moomba, and the Eastern Gas Pipeline (EGP) will require bi-directional capabilities from Sydney to Melbourne for supply to meet more southern domestic demand. Given this and the strength we have seen in the oil market this quarter which has seen oil sky rocket from $45 USbbl to highs of $66 USbbl, current Australian producers should see some continued and increasing gains over the medium to long term.
Santos, currently trading at A$6.97, has significant interest in both the Bowen and Surat basins which will become increasingly important to supply the east coast gas market. Santos has been performing increasingly well over the past three years following large investments in LNG projects and the Australian onshore gas market. Santos’ share price has continued to rise since hitting a low of A$2.46 in January 2016 on the back of increased sales revenue each year since 2015. Santos has been reducing its net debt from 2014 while improving free cash flow and revenue due to a relentless effort to cut costs. Santos will be a strong performing company going forward.
The Newcastle LNG project represents an exciting opportunity for several companies and spells good news for consumers in the east coast gas market. Increased competition between gas suppliers along with reinforced supply will stabilise prices for consumers and provide local gas suppliers incentive to continue their strong performance.
By Scott Higgs
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