Nearly Half Oz Gas Reserves 'Out of the Money': Rystad

At current gas prices nearly half of Australian gas resources will become uneconomical, a report published April 3 by Rystad Energy said.

“If today’s low prices persist, Rystad Energy has estimated that nearly 42% of Australian gas resources would be rendered uneconomic – a scary thought for the world’s largest gas exporter,” the report said.

Global gas prices were already under pressure and have been further squeezed by turmoil in the oil market and outbreak of coronavirus (Covid-19). Asian gas prices have dropped from highs of more than $11/mn Btu in late 2018 to just $2.7/mn Btu in March 2020. “This leaves operators in countries with relatively expensive gas supply – like Australia – in a precarious position,” the report said. In Australia, close to 30% of gas production is derived from high-cost coalbed methane (CBM) sources.

Though gas prices on Australia’s east coast historically have been high, from late 2019 they began to converge towards LNG netback pricing. An LNG netback price is a measure of an export parity price that a gas supplier would expect to receive for exports.

With LNG prices now so low, Australian east coast gas prices have tumbled from over $6/mn Btu in 2019 to $2.30/mn Btu, the report said. This represents a big issue for east coast producers, as Rystad says delivered prices below $4/mn Btu are insufficient to support long-term CBM production.

According to the report, the Australian CBM producers have been protected from low gas prices up until recently, as much of their production was sold as LNG and indexed to the Japan Crude Cocktail (JCC) marker, which led to a  sales prices ex-ship of over $8/mn Btu. However, with the recent oil market crash, the JCC May-2020 futures have been hovering around $30/b, signalling that this price support might soon evaporate.

Rystad has estimated that at $30/b JCC, the CBM-to-LNG exporters will average a sales price of about $4.60/mn Btu, with the country as a whole averaging about $4.65/mn Btu. “When converted back to netback pricing at Wallumbilla, a major gas trading hub for the east coast market, the resulting prices would be about $2.65/mn Btu available to cover the upstream costs of these oil-indexed LNG operations,” it said.

The report said that about 15% of Australian gas assets in production are uneconomic at today’s JCC-linked netback prices. When broken down into east and west coast supply, as per the report, the west coast fares better with just 13% of its production uncommercial at the JCC linked price level, while 18% of east coast production would be at risk if the current pricing continues.

“The above numbers are based on point forward breakeven costs, meaning that they do not consider sunk costs other than as depreciation. As these assets in the curves are already producing and have minimal additional capital expenditure, they have relatively low breakeven prices,” Rystad said.

Also, at current JCC-linked netback gas prices, 42% of Australia’s gas resources as of 2020 would be marginal or uncommercial, while 67% of Australia’s discovered but undeveloped resources are at risk under the current pricing levels.

However, Rystad does not expect the current low-price environment to persist. It has forecast long-term gas prices in Asia to converge around $7.8/mn Btu, which is the long-run marginal cost of importing LNG from the US into Asia.

“At this price point, Australian operators could expect the gas price to be around $5.30/mn Btu to cover their upstream costs, enough to support the production of over 95% of Australia’s gas resources. However, this commentary highlights just how vulnerable Australian operators would be in a lower-for-longer price scenario,” it said.

 NB: all prices are USD