The COVID-19 crisis has profoundly shaken the global oil and gas industry. With the medium term picture for LNG prices likely to heavily impact PNG’s economy and government finances, Business Advantage PNG looks at the sector’s prospects.

Liquified Natural Gas (LNG) carrier. Credit: DevPolicy

The oil and gas majors are re-assessing their assumptions about value and prices in the wake of the COVID-19 pandemic. Shell, for instance, has warned it may write down assets up to a value US$22 billion.

Angus Rodger, a Director at resource analyst firm Wood Mackenzie says that the major oil companies are going through a process of re-examining long-term oil price assumptions and investment hurdle rates as a result of lower oil prices and the coronavirus.

‘The corporate landscape is changing, and the majors are changing with it.’

‘BP and Shell are just two of the companies that have announced recent changes,’ Rodger says. ‘Cutting long-term price assumptions will generally result in a lower valuation for certain assets to below the accounting value held on the balance sheet.’

Luke Parker, Vice-President, Corporate Analysis at Wood Mackenzie, says the write down indicates that ‘fundamental change’ is hitting the entire oil and gas sector.

‘Just a few years ago, few within the oil and gas industry would even countenance ideas of climate risk, peak demand, stranded assets, liquidation business models and so on,’ he says. ‘Today, companies are building strategies around these ideas. The corporate landscape is changing, and the majors are changing with it.’

The future of LNG

Capital expenditure is being slashed globally in the oil and gas sector, according to the consultancy McKinsey & Company. Their report, Resetting Capital Expenditure in the wake of COVID-19, found that the oil and gas and transportation sectors have announced the largest capital reductions of any industries. ‘Freeing up cash by deferring capital expenditures is one of the fastest and most substantial ways’ to cope with the downturn, it said.

The medium term picture for LNG prices will heavily impact PNG’s economy and government finances. The picture looks mixed.

According to a report by Fitch Solutions, LNG supply growth will be heavily constrained this year because of the collapse in global demand and prices. ‘Investment in 2020 is set to slump, as COVID-19 exacerbates underlying weaknesses in the global LNG market. ‘

Fitch says supply will ‘post a recovery’ in 2021, but forecasts that ‘growth has peaked and will not recover to the previous years’ highs until 
the next wave of capacity is brought online in the mid-2020s.’

Fitch adds that ‘the pipeline of projects currently under development is healthy,’ including the likely additions from PNG, Papua LNG, P’nyang and Twinza Oil’s Pasca-A. ‘The bulk of this capacity is set to role on stream over 2023-2025, with additions declining sharply thereafter.’

According to Fitch, last year ‘marked the peak in liquefaction Final Investment Decisions.’ Prices for LNG may also be weak.

‘The global market glut will further skew prices and contract terms in favour of the buyers,’ a Fitch report says. ‘This, combined with the swing in demand growth from Emerging Market to Developed Market buyers will limit access to traditional project financing.’

Fitch notes that LNG projects in PNG ‘enjoy lower cost structures’ but represent a higher sovereign risk.

‘In Papua New Guinea, the government is pushing to renegotiate contracts on terms more favourable to the state, but has failed to reach agreements with the projects’ sponsors.’