LNG growth to be stunted in near-future

LNG producers with exposure to the oil price are likely to continue to face headwinds for some years according to global ratings agency, Standard and Poor’s Ratings Service (S&P).

The LNG outlook guidance was proffered today by S&Ps London-based Director Commodity Ratings Simon Redmond.

“LNG global revenues per tonne currently are low, and geographical price differentials, trade flows and market dynamics are more volatile than for many years as global LNG supply capacity increases,” said Mr Redmond.

“For established LNG producers, lower oil-linked prices for contracted volumes and less certain returns on uncontracted volumes, imply slower debt repayments or lower dividends.

“For new LNG volumes, the current and future price and market outlook is likely more in line with stress scenarios considered at the time of Final Investment Decisions (FID).”

Mr Redmond warned that it would take a material event to shift market expectations in 2016 for LNG and bring higher returns back into the sector.

“Given the volume of new LNG supply, mostly contracted, the LNG market will likely remain a bit like the proverbial oil or LNG tanker - slow to change direction,” said Mr Redmond.

“Even with Henry Hub prices at record lows currently, the arbitrage with substantially reduced landed Asian prices doesn’t allow the kind of trading margins that had become normal just a few years ago and as a result, this is seeing the balance swing back in favour of the utilities and off-takers during contract negotiations.”

On just how the global and Australian LNG players would be rated by S&P this year, Mr Redmond said that for many upstream producers, the oil price remained a more important ratings driver than their respective LNG businesses alone.

“We recognise, however, that some pressures may arise where cash flows from a material LNG project are likely to fall short of our previous assumptions,” said Mr Redmond.

“This may not be the case where the commercial arrangements are on a fee or tolling basis, as long as the project actually starts up.

“From a credit perspective, the location of an LNG plant and its main off-takers are relevant factors in 2016 and beyond, especially for uncontracted volumes where transport distances are more important.

“However, the overall stand-alone and comparative economics of a project can ultimately be more important for ratings, unless sovereign risks are material.”

Mr Redmond is due in Perth next week to provide a more detailed LNG market overview to delegates attending the global LNG 18 conference.

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