Short-Term Contracts Threaten New LNG Plants, Origin’s King Saysby
Asian buyers increasingly demanding more flexible deal terms
New pricing terms favor existing projects with excess supply
Origin Energy Ltd. said new liquefied natural gas facilities are less likely to be approved as buyers across Asia favor short-term contracts that threaten the financial modeling underpinning export plants.
A plunge in the price of oil means LNG buyers are increasingly demanding more flexible terms amid a global glut of the super-cooled fuel, according to Origin’s outgoing Managing Director Grant King.
"Buyers are increasingly buying in smaller volumes and lesser duration and what that does is make it much more difficult for new greenfield projects to get up in the current environment," King told reporters after the company’s annual general meeting in Sydney on Wednesday.
Origin owns a 37.5 percent stake in the ConocoPhillips-operated Australia Pacific LNG export plant in Queensland state, which last week shipped its first gas from the development’s second production line. When the project was approved in 2011, the companies agreed a long-term 4.3 million metric ton annual contract with Sinopec Group and Kansai Electric Power Co.
Suppliers have historically relied on locking in buyers to 20-year agreements to help with the financing of LNG projects. King said negotiating such deals in the current LNG market would be much more difficult.
"When we committed to APLNG in 2011 it was clear to us that there was a declining number of customers willing to write foundation contracts," said King. "I think for a period of time customer behavior will make it difficult for greenfield LNG projects to get up in the current environment. There are very, very few customers now willing to write those big, long-term foundation contracts."
Origin is among oil and gas producers struggling as a decline in prices and weaker demand growth crimp revenue, while new projects from Asia to North America expand an LNG glut. Origin’s debt ballooned to fund construction of APLNG and King said in retrospect it should have cut its stake in the venture to a level closer to 30 percent from its current 37.5 percent holding.
"The market knows we diluted from 100 percent to 50 percent to 37.5 percent," said King.
"Maybe 30 percent, which we did attempt to do three or four years ago, might have been a better place. Perhaps 37.5 percent was a bit challenged, but we’ve achieved it now."
King, who steps down as managing director at the end of October, said LNG ventures producing above capacity were well placed to offload excess supply using short-term contracts.
"Smaller volumes on shorter duration suits the existing projects and it particularly suits incremental capacity that comes out of those existing projects," he said.
Origin fell 0.9 percent to close at A$5.62 on Wednesday, compared with a 0.5 percent rise in the S&P/ASX200 index.