Rystad Energy expects US gas companies to see a large LNG export potential to China opening after US President Donald Trump and Chinese President Xi Jinping reached a bilateral trade agreement last month. 

 

The Norwegian consultancy warned that Australia Pacific LNG equity partner Sinopec's invitation to welcome Cheniere Energy to its offices in China last week clearly underpinned Chinese energy companies' mutual interest. 

 

Since the start of Cheniere's Sabine Pass terminals in 2015, 7% of the exported cargoes have reached China, despite no free trade agreement existing with US.

 

The sales were achieved through spot agreements and intermediaries. 

 

Amid these major moves of the US into Australia's targeted turf, Woodside Petroleum CEO Peter Coleman started off his investor day briefing this week by saying Australia still had the strategic advantage over North American LNG with its geographical position providing an important cost saving for Asian importers.

 

BP Developments Australia managing director Claire Fitzpatrick told the APPEA 2017 ‘Oil and gas in transition' panel in Perth last week that 12-13 years ago regulators like the US Securities and Exchange Commission would have considered projects uneconomic if operators factored in spot prices rather than long-term contracts.

 

Yet the LNG market has evolved today with Singapore rising as a trading hub with two new LNG indexes formed to boost spot market transparency, and more importing companies entering the fray via new floating regasification technologies.

 

"If you didn't have a long-term contract, as far as the regulator was concerned, you were never going to produce them," she said.

 

"Now we do have a spot market. With the volumes the US has released that will be the swing producer, and because that can then go anywhere in the world, we'll start to see a move to an increasingly globalised LNG pricing as a basis for gas and over time that will probably be anchored out of the US Henry Hub."

 

Indeed, Rystad said yesterday that Trump's new agreement will encourage China to buy highly competitive US LNG directly through long-term agreements linked to the Henry Hub.

 

"Henry Hub indexed contracts will out-compete the traditional oil-indexed contracts over the next decade, both in terms of price and flexibility," Rystad gas market analyst Sindre Knutsson said. 

 

"The vast amount of commercial shale gas resources in North America implies a long term Henry Hub price of close to $US3/million British thermal units towards 2025, equivalent to an Asian LNG contract price of around $8-9/MMBtu. 

 

"Given an oil price of $US80/bbl in the early 2020s, oil-indexed contracts will trade around $10-12/MMBtu depending on the percent link to Brent." 

 

The main contributor to growth in North America is the low cost fields in the Appalachian region with new exit pipeline capacity coming on stream towards 2020. 

 

Rystad forecasts that US and Canadian gas production of over 105 billion cubic feet per day could be sustainable at a Henry Hub price of $3/MMBtu in 2025 due to increasing productivity and declining drilling costs. 

 

"Due to a stronger shift towards more complex wells, well costs in gas plays have not been reduced as much as in oil plays," Knutsson said. 

 

"However, switching towards wells that are more complex has generated a significant uplift in well productivity, leading to lower wellhead breakeven prices."

 

 

With all this in mind, Fitzgerald said the key to the next phase of Australian LNG was making the brownfields projects cost competitive - "where any global pricing would be, not just a long-term contract price".

 

Senex Energy managing director Ian Davies told the panel that Queensland's LNG projects now in operations phase were "doing a good job in taking costs out and doing things in a different way, as doing things the same way doesn't work and only leads to losing money in this market".

 

Davies, whose company has struck gas deals with Santos' Gladstone LNG venture from its Western Surat CSG project, said that in this new world order, re-evaluating relationships with partners was critical.

 

"We're seeing that behaviour, and given the smaller end of the market we're in, we have no choice [either]," he said.

 

Another panellist, ExxonMobil Australia chairman Richard Owen, said there was a tendency in the LNG industry to think that "once we've built something to stand with the mission accomplished banner".

 

"We need to think about the 40-50 life, and ensure we now readjust all that thinking to not only operate them safely, reliably and effectively over that time but actually maximise the utilisation of them," he said.

 

"We think LNG will grow to 150% of what is at the moment, so we've had a significant amount of investment in facilities.

 

"The near-term challenge is to get the most of those projects, because the least cost option is getting more through the existing facilities. 

 

"The other thing we're focused on is trying to reduce the development costs, which comes down to research and development in new technologies."