Fitch: Shifting dynamics favour low-cost LNG producers
By: ICN Bureau
Last updated : March 06, 2018 8:18 pm
Fitch Ratings says in a newly-published report that amid changing global industry dynamics, the credit quality of larger low-cost liquefied natural gas (LNG) producers selling mainly to high-quality customers under long-term oil-linked contracts will
Fitch Ratings says in a newly-published report that amid changing global industry dynamics, the credit quality of larger low-cost liquefied natural gas (LNG) producers selling mainly to high-quality customers under long-term oil-linked contracts will remain strong. By contrast, the ratings of newer, higher-cost producers are likely to be more constrained.
"Most LNG production plants currently in operation were financed and built at times of much lower oil prices meaning they have relatively low breakeven commodity price levels," says Dan Robertson, Managing Director and head of Fitch's Infrastructure and Project Finance team for Europe, Middle East and Africa. "In contrast, plants currently in the development or construction phase, particularly in Australia, are likely to have higher cost bases due to increased capital and operating costs. These projects will be more reliant on sustained high oil prices to generate adequate returns."
Traditionally, the global LNG industry has been driven by long-term (typically around 25 years) sales contracts featuring utility companies in Asia (particularly Japan and South Korea) with strong investment-grade credit quality, and with prices indexed to regional oil markets. The rapid increase in US domestic gas production has decimated anticipated LNG import demand in the US and led to significant amounts of LNG being sold instead to Europe under short-term sales arrangements. Combined with high oil prices, this has also created significant regional gas price differentials, as oil-linked gas prices in Europe and Asia are now significantly higher than hub gas prices in the US.
The current profitable combination of high LNG prices, low production costs for many existing producers and a widening range of customers may be sustained in the short term. Japan in particular is seeking to replace nuclear power with more gas-fired generation. China and India are increasing LNG imports and relatively few new LNG producers are due to come on stream in the short term. However, in the medium term buyers will benefit from a surge in new Australian supply that is planned to come on stream during 2015-2019. This may place some downward pressure on LNG prices, although new producers scheduled to become operational earlier in that period should still be able to negotiate attractive terms.
The report includes a summary of the typical credit profile of an investment grade LNG producer and an indication of the credit factors that often differentiate a 'A' category project from one in the 'BBB' category.
LNG
First Published : October 02, 2011 12:00 am