For LNG export project developers, this is a tough market to sign-up binding long-term purchase contracts, especially if your project has a relatively high cost of supply. Thus, it is not surprising to see the Chinese and Indian buyers, traditionally considered less ‘blue-chip’ than the North Asian and European LNG customers, take full advantage of the current ‘buyers market’ conditions to sign opportunistic purchase deals. This was evidenced by the recent LNG purchase deals announced by ExxonMobil. Together, these deals for deliveries from the Australian Gorgon LNG project, totalled 4 MTA beginning in 2015. In 2008, Petrochina announced a similar deal with Shell for 2 MTA of Gorgon LNG. Thus, at least 6 MTA of the projected 15 MTA has been spoken for by Chinese and Indian buyers, along with a number of less binding agreements previously announced with other potential customers. Gorgon project should now have the base contracts it requires to move forward with sanction and construction. Very significantly, the price of the LNG has not been revealed in any of these deals, and thus we can assume the price is likely to be lower than previous deals signed during the boom years.

The implication of Gorgon in the global LNG market is significant. If the expected construction schedule can be maintained, first LNG production could begin in 2015. This is the same target date as many competing projects in the region. The key difference is that Gorgon is being sponsored by the largest players in the business (Exxon, Shell, Chevron) who can afford a potential loss-leader LNG price in exchange for an opportunity to book large reserve volumes. These companies are also betting that natural gas liquids produced will provide upside revenue, enough to offset the carbon dioxide disposal costs. There is also a matter of ‘face’...Gorgon has been in the books for twenty years and the credibility of the sponsors has suffered as they have been unable to commercialize the resource.

The announcements are bad news for the multitude of high cost LNG projects being proposed, especially for the gaggle of coal seam methane LNG projects in Eastern Australia. These projects are targeting first LNG production for 2013 onwards (though this might be ambitious) but do not have the benefits of liquids production or cheap production costs. In addition, they are considered ‘unconventional’ by LNG buyers who would rather buy from a more traditional project promoted by a known group of companies rather than those dependant on smaller CSG producers piggy-backing on larger companies with very limited CSG experience. CSG LNG projects have targeted prices around $7 - $8/MMBtu to breakeven – possibly realistic prices in a high-demand high-price environment, but tough to achieve in today’s environment. Buyers will be extremely reluctant to sign binding agreements until sufficient reserves are proven (in the 1P category). To achieve this milestone for CSG LNG projects requires project sponsors to drill hundreds (or thousands) of wells upfront..even richly funded consortiums such as BG and ConocoPhillips may be reluctant fund this if the prospects of signing a high-priced LNG sales deal in the near-term are elusive.

The overhang of large volumes of uncontracted Gorgon volumes looking for a home beginning in 2015 will be tough competition for other regional projects. Demand volumes have shown to be notoriously difficult to predict, even for mature economies such as US, Japan and Korea. In this volatile environment, the cheapest priced project has the natural advantage. The Gorgon venture may be willing to underprice their remaining gas to ensure that all volumes are sold. If a race to the lowest priced supplier does develop, many potential projects may never get off the ground. Things are going to get interesting...