Oil price crash dents timeline of Australia’s second wave of FIDs

Wood Mackenzie’s latest analysis reveals that Australia’s next wave of LNG projects are likely to be delayed.

Barossa and Scarborough are strategically important LNG backfill/ expansion projects for Santos and Woodside, respectively. Both companies have spent significant capital acquiring and progressing these assets.

For Woodside, Scarborough is a key field that will make up about a third of its production by the mid-2020s. Barossa, on the other hand, is pivotal for Santos to reach its 100 million barrels of oil equivalent target by 2025. More importantly, Barossa will backfill the Darwin LNG facility, which will go empty when the Bayu-Undan field ceases production in 2022.

However, recent events such as COVID-19 and the oil price rout have caused devastation across markets and industries worldwide. Australia’s next wave of final investment decisions (FIDs) will not be spared.

Wood Mackenzie senior analyst David Low said: “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.”

Santos and Woodside will likely take a long-term view on oil prices when assessing the projects.

Wood Mackenzie senior analyst Daniel Toleman said: “We must consider Barossa’s value in conjunction with the Darwin LNG asset. The Barossa joint venture (Santos and SK E&S) have 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.”

Woodside’s sanction of Scarborough will also be delayed to 2021, due to funding concerns and a slower equity farm-down process. The company will require a stronger balance sheet to pursue all its growth projects (Senegal, Scarborough/Pluto Train 2 and Myanmar) simultaneously.

Low commented: “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 US$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.”

Either way, recent events in the global markets have irreversibly changed the industry’s perception of risk. Investors will expect the industry to quickly respond to such uncertainty by moderating spend and cutting discretionary capex. The cuts could be immediate, and deep. As such, if current market conditions continue, only a handful of the most competitive and cost-effective pre-FID projects stand a chance of progressing in 2020.