PERTH (miningweekly.com) – The global sweep of Covid-19 and the resultant fall in oil prices is likely to delay Australia’s next wave of liquefied natural gas (LNG) projects, advisory firm Wood Mackenzie (Woodmac) said on Thursday.
Oil and gas major Santos has already said that the final investment decisions (FIDs) on its Barossa and the Papua New Guinea (PNG) LNG expansion projects would be deferred until business conditions improved.
Barossa is pivotal for Santos to reach its 100-million barrels of oil equivalent target by 2025, and more importantly, the project will backfill the Darwin LNG facility, which will go empty when the Bayu-Undan field ceases production in 2022.
“We must consider Barossa’s value in conjunction with the Darwin LNG asset. The Barossa joint venture has equity stakes in Darwin LNG, and its gas will be processed at this near fully depreciated facility.
“We think Barossa will still be the first to take FID, but it is likely to slip to 2021. Santos does have some levers to alleviate the capital intensity pressure. With the PNG Expansion still in limbo, we believe the company will delay the timeline of its other key growth projects. This will free up capital to prioritise Barossa,” said Woodmac senior analyst Daniel Toleman.
Woodmac noted that for fellow major Woodside, Scarborough is a key field that will make up about one-third of its production by the mid-2020s.
Woodmac senior analyst David Low said that Woodside’s sanction of Scarborough would also be delayed to 2021, owing to funding concerns and a slower equity farm-down process. The company will require a stronger balance sheet to pursue all its growth projects, which include Senegal, Scarborough/Pluto Train 2 and Myanmar, simultaneously, he said.
“One alternative to maintain Woodside’s preferred 2020 timeline is separating the FIDs of Scarborough and Pluto Train 2 to spread out capital requirements. This would see the $6.2 billion Scarborough developed first, with a delay to Pluto Train 2 construction.
“Scarborough gas would then need to be processed through the North West Shelf (NWS) facility. If the tariff negotiation to allow third-party gas access at the NWS is finalised this year, this could be a real possibility.”
“Right now, operators globally must bolster their balance sheets to survive a prolonged low oil price, and Santos and Woodside will have to follow suit. If prices average US$30 per barrel in 2020, the revenues of Woodside and Santos will fall by 22% and 13%, respectively.
“Delaying discretionary spend and preserving short-term cashflow will become priorities, which means the ability to fund and willingness to undertake new capital-intensive projects will come under scrutiny,” Low said.