The sharp decline in global oil prices is threatening the existence of some of Australia's smaller upstream firms, particularly those with significant projects in the pipeline. Larger producers are deferring major investment decisions until prices recover and market confidence returns.
The slump in crude prices from around $60/bl in late February to a low of $19.33/bl for Ice Brent futures on 21 April, and the resulting impact on Australia's main energy export product LNG, has forced some smaller companies into asset sales.
Australian firm LNG Limited (LNGL) last month agreed to sell its proposed 8mn t/yr Magnolia LNG project in US state of Louisiana for just $2mn. The project was estimated to cost $4.35bn as recently as late last year.
Another small Australian firm with international ambitions, Far, late last month opened its data room to potential buyers of all or part of its 15pc stake in the $4.2bn Sangomar oil field offshore Senegal in west Africa.
Sangomar, which is targeting first oil production in early 2023, requires an oil price of $45/bl to be economic. The field's larger stakeholders, which include fellow Australian independent Woodside Petroleum and the UK's Cairn Energy, may be able to carry the project until prices rise to that level. But almost 100pc of Far's assets are tied to a project that is currently unviable, putting it under pressure from its lenders.
LNG dependence
The fortunes of larger Australian upstream firms are mainly tied to LNG, prices of which are strongly influenced by crude. Oil prices would have to recover to more than $50/bl for the Australian upstream sector to get onto the front foot again, according to analyst estimates. Prices have rebounded strongly from their recent lows to above $40/bl, but are still short of that level.
Producers appear to remain confident in the longer-term outlook for the LNG market. Australian independent Santos late last month increased its exposure to LNG through the purchase of ConocoPhillips' northern Australia assets. The deal gives Santos a larger slice of the 3.7mn t/yr Darwin LNG venture and the Barossa gas backfill project that will prolong the life of the Darwin plant
Santos earlier this year deferred sanctioning Barossa as oil prices fell. But the field remains the most likely of all the deferred projects in Australia to reach a final investment decision (FID). Its joint-venture partners are also offtakers from the project, while the purchase of ConocoPhillips' assets more closely aligns that Barossa and Darwin LNG projects.
Santos has also sold part of its increased stake in Darwin and Barossa to Japanese firm Jera and South Korea's SK E&S, showing continued interest in the project.
Fellow Australian independent Woodside may face a longer wait before sanctioning its deferred Scarborough and Browse backfill projects. A sustained period of lower LNG prices may force the Scarborough project to be reconfigured into a backfill project for the first train at the 4.3mn t/yr Pluto LNG project, with plans for a second train abandoned, analysts said.
Plans by rival LNG producer Qatar for an expansion of exports to 110mn t/yr will put pressure on further capacity additions in Australia, reinforcing the case for Scarborough to become a straight backfill project like Barossa and Browse, analysts said.
There are further challenges at Browse, with the need to align multiple partners at both the field and the 16.3mn t/yr North West Shelf (NWS) LNG venture. Agreement on a third-party processing deal, or the amount that NWS LNG will charge for the Browse gas to be processed at the plant, has yet to be reached.
Browse is also estimated to require higher oil prices, given higher costs to transport the gas from the Browse basin to the NWS LNG plant because of the need for a 915km pipeline. Any further delays to Browse will create another challenge for NWS LNG operator Woodside, as gas from the project's existing fields will start to peak in the coming years and leave the plant with spare capacity.
