(The following statement was released by the rating agency)
Link to Fitch Ratings' Report: Australian Oil & Gas - Eroding Competitive
Advantage from Project-Execution Risks
SYDNEY, April 01 (Fitch) Fitch Ratings says that the increased costs and risks
for Australian upstream liquefied natural gas (LNG) projects together with
likely lower gas prices over the medium-term can result in a more challenging
environment for upstream projects. We believe these factors can affect the
viability of some projects under consideration.
Australian exploration and production or upstream companies face rising
competition for many of the same resources, and higher development costs - with
increasing cost-overruns and schedule slippages. We expect further announcements
of project cost-blowouts and schedule delays - as occurred in 2012 - with more
projects moving towards completion.
Rising execution and development risks will force project sponsors of these LNG
projects to dilute equity stakes or undertake sales of infrastructure and
reserves. We also expect a slowdown in further capacity additions - across both
greenfield projects and brownfield expansions. There has been growing investment
by global majors in Australian shale gas acreage. However, the low domestic gas
prices and market size, infrastructure availability and access, relative cost
and locational disadvantages, all provide effective barriers to significant
uptake of this resource in the medium term.
Australian LNG export pricing will come under pressure over the mediumterm due
to a potential increase in gas supplies from North American fields - driven by
the wide price differentials and surplus stock available in North America, as
well as rising gas exports from Russia to Asia in the medium term. An
escalation of US LNG exports to Asia will moderate buyer appetite for Australian
supplies - and result in a cancellation of some of the proposed projects.
Significant growth capex, long project lead times to revenue generation, and
substantial project-execution risks, will result in a weaker financial risk
profile of upstream companies over the medium term and a narrowing rating
headroom for rated entities. Borrowings should remain high as Australian
upstream companies commit to new liquefied natural gas (LNG) projects. Free cash
flow should remain negative over the medium term from high debt-funded capex.
However, we see growth in Australian gas liquefaction production capacity,
benefitting from contractual arrangements across LNG projects under development.
There are additional 61million tons per annum (mtpa) of production capacity
under development across seven projects. Further, upstream producers' operating
performance benefits from higher realised oil and gas prices. The current
high-price environment also provides some funding support in managing any cost
overruns for projects that are under execution. Woodside Petroleum Ltd's
(BBB+/Stable) credit profile has benefitted from improved revenue and
operational diversification following the start of and strong ramp-up of its
Pluto LNG facility in April 2012.
The report, 'Australian Oil & Gas - Eroding Competitive Advantage from Project
Execution Risks', is available at www.fitchratings.com. The report details the
above challenges facing the Australian upstream sector. The report also
examines major project equity and sales agreements announced in 2012 and lists
of major LNG projects under development and consideration.
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Fitch Australia Pty Ltd. Level 15, 77 King Street, Sydney NSW 2000
Head, Energy & Utilities, Asia Pacific
+65 6796 7223
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