History making Oil price – what it means for Energy in Australia

21 Apr History making Oil price – what it means for Energy in Australia

Overnight the major oil price index, the West Texas Intermediate (WTI) Crude Oil Index fell from trading at USD$20.97/barrel to enter negative price territory for the first time in history, with May 2020 future prices settling at -USD$37.63/barrel on the 20/04/2020, after reaching a low of -USD$40.32/barrel. The event was sparked off the back of increasing storage concerns given excess supply build-up brought on by suppressed demand as a result of COVID-19. The recent announcement by OPEC + to cut demand by 9.7 million barrels a day in May and June months, and the additional 5 million barrels per day to be cut by other nations outside of OPEC and Russia, including the US, Canada and Brazil has done little to quash concerns of an oil supply glut with consultancy firm Rystad Energy estimating demand will be cut by 27 million barrels a day in April and 20 million into May as a result of COVID-19’s impact on global usage.

The market for WTI Crude Oil entered con-tango yesterday (20/04) with spot prices significantly lower than future prices for the commodity, however today (21/04) it has bounced back breaching positive price territory sitting above USD$1.00/barrel at 3:30pm (EST). Brent Crude Oil prices however remained relatively static on the 20/04, ending the day in the mid $USD20/barrel range at USD$26.04/barrel, despite the traditional correlation of trading between WTI and Brent Crude oil prices. So why is the oil price so important to Australia, well as Edge has previously pointed out in the past, a significant number of long-term gas deals are linked to an oil price index, likely Brent but also WTI. This has huge ramifications for Australia who became the largest exporter of liquefied natural gas (LNG) as of January 2020 this year, a commodity and industry which also contributes massively to the Australian economy.

With LNG sales effectively hitched to oil prices, I can only imagine what the contract price for some of the underpinning investment and long-term contracts of domestic and international gas looks like! We have witnessed that domestic gas prices across the NEM and international LNG Spot market prices have both taken a dive off the back of the recent oil price and supply war and the impacts to demand from COVID-19. Currently the ACCC has calculated LNG netback contract prices of gas to the Wallumbilla Hub (domestic gas hub connecting gas from QLD to southern states) at prices of AUD$3.73/GJ and AUD$3.60/GJ for April and May 2020, the cheapest price the commodity has been in the last 4 years, with future prices looking likely to hit $3/GJ. Currently the JKM (Japan Korea Marker) spot LNG market index for Asia – which is a significant demand hub for Australian spot LNG cargoes – is depicting prices of AUD$3.39/GJ for future contracts for June 2020 as of 20/04/202, however given the recent negative price event in international oil prices it is likely these future contract prices could fall further.

With LNG markers like the JKM heavily correlated to movement of oil prices it is likely we will not see a return to the AUD $8/GJ JKM Swap price for some time. The oil price slump is also expected to impact investment decisions, as once again the gas industry and heavily correlated to global oil prices. Majority of the domestic gas players including Oil Search and Senex Energy are gearing up for extended periods of reduced returns and cheaper gas prices due to a significant number of gas sales contracts linked to the Brent Crude oil index. Oil Search indicated to the market its break-even oil price range of USD$32-33/barrel, without funding growth projects, well above the current future oil contract prices; whist Senex Energy’s Chief, Ian Davies stated that “Demand has fallen off a cliff,” and that they were “planning for fairly soft prices for a while.” Even the likes of Santos flagged they are aiming for a free-cash flow break-even oil price of USD$25/barrel in 2020, however needs a price of USD$60/barrel to fund new growth projects, which could see the Narrabri project in jeopardy.

What is incredible to see is investment decisions like Arrow Energy’s Surat Gas Project still going ahead even when energy markets are entering unchartered territory. Arrow Energy’s joint owners, Shell and PetroChina have finally given the go ahead to the $10 billion development of Arrow’s vast gas resources located southern Queensland’s Surat basin, sanctioning the commencement of phase 1 of the Surat Gas Project on 17 April 2020. Arrow’s joint owners have decided to push forward with the expansion despite the recent downturn in oil and gas prices felt across the globe due in part to the COVID-19 outbreak and the recent oil price war. The Surat Gas Project is expected to bring on 90 billion cubic feet (~95 PJ) of gas a year, with 600 phase one wells set for construction this year with first gas expected in 2021, according to Arrow’s announcement.

The Surat Gas Project also comprises some big steps for the industry, with the deal underpinned by significant infrastructure collaborations and gas sales agreements which will see Arrow gas compressed and sent to market via Shell’s existing QGC infrastructure (including existing gas and water processing, treatment and transportation infrastructure). Good news for these gas volumes is that part will be allocated for sale into the domestic wholesale gas markets on Australia’s east coast, and part will be allocated to be converted to LNG via QCLNG’s liquified natural gas infrastructure located on Curtis Island, near Gladstone port. This is welcomed news with manufacturing firms across the east coast screaming for further domestic gas reserves to be developed in order to keep domestic gas prices at reasonable levels and increasingly de-linked from international LNG prices and indexes, such as the Japan Korea Marker (JKM).

In addition, it was also announced the Andrew “Twiggy” Forrest-backed LNG import terminal located at Port Kembla in NSW has been given the tick of approval by the NSW State Government. The Australian Industrial Energy venture which is co-backed by the Japanese firm Marubeni and global trading shop JERA in continuing forward with plans to build and operate the Port Kembla import terminal with a likely final investment decision expected later this year and first gas imports in 2022, with customers and the Australian Energy Market Operator (AEMO) reporting expected shortfalls of the commodity in regions such as Victoria and New South Wales could come as early as 2023, with shortfalls especially apparent into and beyond 2024.  

If you have any questions regarding this article or the electricity market in general, call Edge on 07 3905 9220 or 1800 334 336.