Australian LNG writedowns loom as weak oil market erodes gas returns

By JAMES PATON
Bloomberg

BG Group’s move to write down the value of its Australian assets after a slide in oil prices signals further impairments in the country’s natural gas export industry.

“There will be more impairments to come,” said Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co. “It’s a reflection of the over-exuberance that we’ve seen over the last few years in Australia” with liquefied natural gas projects assuming higher crude prices would remain, he said.

A seven-month oil rout threatens to erode the returns of Australia’s LNG producers, whose contracts with Asian buyers are linked to crude. The outlook for Australian commodity export revenue has deteriorated significantly, with price declines estimated to lead to a potential loss in LNG earnings of about A$200 billion ($156 billion) by 2025, according to a report today from Goldman Sachs Group Inc.

Companies including Santos, Origin Energy, ConocoPhillips, Chevron and Inpex are building six Australian LNG plants to meet Asian demand, putting the nation on course to surpass Qatar later this decade as the world’s biggest exporter of the fuel. Those developments will follow the start of shipments late last year at BG’s $20.4 billion LNG project in Queensland state.

“Logic would state there should be” more writedowns for companies including Santos, said Mark Samter, a Sydney-based analyst at Credit Suisse Group. They should be important to investors because “it’s an implicit read on what the future cash generation will be on the real dollars spent yesterday,” he said.

BG Impairment

Most LNG projects in Australia need an oil price of $45/bbl to $50/bbl to be cash flow break even, Samter said. Brent crude, the international benchmark, rose 5.8% yesterday to $57.91/bbl.

Oil fell today after rallying amid speculation that producers will trim output to reduce a glut that drove prices almost 50% lower last year. It will be a “long time” before crude returns to $100, according to Bob Dudley, the CEO of BP.

Santos, developer of the $18.5 billion Gladstone LNG project, is reviewing the potential for writedowns due to the decline in oil prices, the Adelaide-based company said last month.

“The company tests the carrying value of all of its assets as part of its usual full-year accounts process,” Santos said today in an e-mail response to questions.

Santos is scheduled to report full-year earnings on Feb. 20.

Sydney-based Origin, which is building another LNG plant in Queensland with partner ConocoPhillips, declined to comment before its half-year results set for Feb. 19.

While “LNG revenues are markedly lower under our new base case for oil prices,” they’re still expected to increase about four-fold from today’s levels, according to the Goldman report by Tim Toohey and Andrew Boak.

BG, the UK.’s third-largest natural-gas producer, posted a record quarterly loss after writing down the value of its Australian assets and lowering price assumptions.

Of BG’s $6.8 billion pretax impairment charge in Australia, $4.1 billion was related to commodity prices and $2.7 billion was a writedown on the company’s pipeline assets. The latter will be offset by a pretax profit of about $3.3 billion when the sale of its QCLNG Pipeline unit is completed in the first half of this year, the company said.

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