Credit Suisse Not So Bullish On Qld Gas Prices

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By Chris Shaw

With a number of LNG projects now on the drawing board in Queensland there has been increased focus on the outlook for the gas market along Australia’s East Coast. Much of the analysis has been bullish on the price outlook (see Qld Appears Ripe For LNG Development, FNArena 7/2/08) given a large quantity of reserves has effectively been quarantined on the basis of a number of proposed LNG projects.

Broker Credit Suisse takes a counter view, suggesting the existence of significant undeveloped coal seam gas reserves will keep a lid on prices as this offers sufficient reserves to stop the market tightening sufficiently to push prices significantly higher.

On its numbers, and the broker admits measuring coal seam gas reserves accurately is difficult, there could be as much as 20,000PJ of potential incremental reserves among the coal seam players, which is greater than its estimate for total gas demand in eastern Queensland through to 2025 of around 12,260PJ.

This means the tightening of the market some suggest is likely may not occur in the broker’s view, which increases the risk some or all of the proposed LNG projects don’t make it to completion.

These projects have been proposed on the basis gas prices will increase in coming years as demand increases and LNG steps in to fill the need, through the broker notes the past couple of years has seen flat prices even as large contracts with the likes of Rio Tinto ((RIO)) and AGL Energy ((AGK)) have been signed.

On the broker’s numbers there is a natural cap on the upside to gas prices of around $4.00-$4.50/GJ, as this price would be required to generate the same internal rate of return on investment.

But with prices for Cooper Basin gas now around the $3.50-$3.70/GJ mark and coal seam gas prices closer to the $3.00/GJ level it suggests price increases of 50% or more would be needed for the economics of all the LNG projects to stack up.

As a result the broker sees little chance all four projects will be completed, which would mean the gas producers would have to look for alternative markets for their ouput.

This Credit Suisse expects would put downward pressure on prices (after some upward pressure this year and into 2009), meaning a return to contract prices of closer to $2.50/GJ level remains a distinct possibility.

Even if a clear leader in LNG project development emerges, and the broker suggests the UK’s BG Group would be an early favourite to take such a position, it estimates prices would only settle somewhere between current contract levels and its estimate of LNG netback of $4.00-$4.50/GJ.

In terms of how this plays out on the market the broker suggests concerns over short-term gas supply may see some merger and acquisition activity in the sector, with ongoing reserve delineation to highlight the best targets for such an outcome. At present the broker likes Sunshine Gas ((SHG)).

Longer-term the broker takes the view those controlling the gas will retain market power, which means Origin Energy ((ORG)) is well placed given its near monopoly position on new long-term domestic gas supplies in the state.

As Babcock & Brown Power ((BBP)) and AGL Energy ((AGK)) both need more gas to fuel new gas-fired generation capacity but don’t control gas reserves the broker suggests their growth plans will be somewhat limited in the future.

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