From the FT's Lex blog
When politicians describe projects requiring billions of development dollars as a “golden age”, investors should be wary, even when it is about something as strong as the market for liquefied natural gas. This week Sinopec finalized a $1.1-billion deal to increase supply and raise its equity in one Australian LNG project.
Earlier this month, Japan’s Inpex and France’s Total finalized agreement on Ichthys, their own $33-billion (Australian) plant in Darwin.
For Martin Ferguson, Australia’s resources minister, things do look golden; some $200-billion is being invested by ExxonMobil, Shell and Chevron, among many others, which should boost the country’s LNG production nearly sixfold to 120 million tons per annum, surpassing Qatar. Global demand for LNG will rise by 70 per cent by 2020, estimates Sanford Bernstein. Australia’s own producers are also involved; Origin Energy is an equal partner with ConocoPhillips in Australia-Pacific LNG, the deal in which Sinopec now holds a quarter. Woodside Petroleum’s Pluto should begin production this year.
But the projects’ costs are also rising. According to Fitch Ratings, Ichthys will cost $4,000 per ton of LNG produced. That is up nearly 70 per cent from its owners’ initial 2008 estimates. Australia-Pacific LNG will cost about $3,000. Historically, this is high. Stretched labour markets, resulting cost-overruns and the risk of tighter environmental or safety regulation could push this higher still. Then there is the oil price. Its strength (Asian LNG is priced off crude) has encouraged the projects, but now success in turn depends on oil holding at or above these levels.
Woodside underperformed the ASX 200 by 11 percentage points in the past year. Cost overruns of nearly a quarter on Pluto, and a year’s delay in first delivery were a factor. Origin underperformed the index by 5 percentage points.
The outlook for LNG is still strong, and the oil price may remain high. But a lot of optimism has already been factored in. Golden ages should only be labelled in hindsight, and not by politicians.