Opinion

The LNG wars — Will short run marginal costs be the deciding factor?

Saul Kavonic, Principal Analyst, Auststralia

Saul Kavonic

Principal Analyst, Australasia

Saul covers Australasian oil, gas, LNG, energy and renewables and is a leading commentator.

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It used to be all the rage only a few years ago: What the next big new LNG project would be, and its lifecycle cost. But there is little interest in the cost of building brand new LNG plants anymore. Today, amidst a growing market glut, attention has turned to projects' survival — and the short term costs to keep existing projects running at all.

Will prices get so low that LNG plants will even shut down? By 2019, a 24bcm global market oversupply is forecast, and supply will need to be curtailed somewhere. It's all about short run marginal costs now — or the ongoing cost to keep an LNG plant running over the short term.

Australia's seven conventional LNG projects lie very low on the short term cost curve, with most being new, large scale plants of great efficiency. So they will be generating cashflow and maximising production even under very depressed price levels.

However, Australia's three remaining projects in Queensland are different, with high ongoing drilling costs required to maintain production levels. By 2019, while 86% of Queensland LNG production will be from already drilled wells and low cost, the remaining 16% of production is at risk of not being economic to drill. And exports could be further restricted as gas is diverted to the local market which is otherwise short of gas. This reduction in Queensland LNG plant output could account for around a fifth of the 24bcm global LNG overhang forecast for 2019.