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China demand is now falling for LNG, one of the big hopes for Australian exports

LNG port at Gorgon. Image: Chevron.

China, supposedly the biggest growth market for liquefied natural gas, saw a shock drop in consumption in 2015, adding to the bearish pressures that are overwhelming the oil and gas sector and driving share prices to fresh multi-year lows.

China’s LNG demand dropped 2 per cent last year, the first ever decline after years of double-digit growth, according to respected energy consultancy Wood Mackenzie.

The reversal in Chinese demand together with a slump in imports by the world’s two biggest markets, Japan and South Korea, combined with an impending supply glut to heap downward pressure on the market, the Edinburgh-based firm said in a report.

Standard & Poor’s, meanwhile, again slashed its assumptions for oil prices, triggering warnings from analysts that credit ratings on companies including Woodside Petroleum and Santos are under threat.

RBC Capital Markets analyst Ben Wilson said Santos was most at risk with its BBB rating, despite the recent $3 billion equity raising, including a $500 million placement to new cornerstone shareholder China’s Hony Capital. Woodside’s BBB+ is also under pressure, he said.

S&P cut its 2016 assumption for Brent crude, the global benchmark, to $US40 a barrel from $US55. It also slashed its assumptions for 2017 to $US45 from $US67, while the longer term price is put at $US50, also down a considerable $US20.

“We think S&P locally will move quickly to review its corporate ratings with a downgrade for Santos to BBB- a distinct likelihood,” Mr Wilson said, pointing to a potential need for another equity raising to preserve investment-grade status.

“On balance we think Santos will retain its investment grade commitment due to the lower liquidity and increasing cost of the sub investment grade debt market,” he said.

“This will again raise the prospect of a follow up equity placement to support the rating.”

Santos plunged as much as 8.7 per cent in early trading on Thursday to $2.84, its lowest since September 2000. Origin shares dropped as much as 5 per cent to $3.97, the lowest since 2004. Oil Search was down as much as 4.6 per cent and Woodside as much as 3.2 per cent.

S&P said its revised prices were based on its view of the marginal cost of oil and gas production.

It now expects a “substantive” response from North America in terms of declining production to “begin to emerge some time in the fall of 2016” as hedges roll off and limited access to capital cuts drilling further. It said the recovery would likely be “more gradual and prolonged”.

Wood Mackenzie also noted “severely” low spot LNG prices amid weak demand, lower oil prices and sinking shipping rates.

Global LNG supply rose 4 million tonnes to 250 million tonnes in 2015, as production from new Australian projects offset the loss of production in strife-ridden Yemen.

The start-up of Queensland’s first two coal seam gas-based LNG projects lifted Australia’s LNG export capacity from 24 million tonnes a year to 31 million tonnes a year.

But future growth in supply in Australia may be slower than expected, Wood Mackenzie said, noting a further delay in the start-up of Chevron’s monster Gorgon LNG project to this March quarter, and a delay in Inpex Corporation’s target date to start its $US37 billion Ichthys LNG project in Darwin to late 2017. Chevron has warned its Wheatstone venture may also miss its late-2016 start-up target.

The commissioning of the Queensland plants “marks the start of [Australia’s] ascent to become the world’s largest supplier of LNG by 2019,” said Giles Farrer, research director for global gas and LNG.

The initial focus in the market early in 2016 will be on the US, with the start of exports from Cheniere Energy’s Sabine Pass venture on the US Gulf coast, said Chong Zhi Xin, principal analyst for South-Eastern Asia and Australasia gas and power research.

But he said the pace of ramp-up of new projects and the threat of a prolonged outage at Yemen LNG “presents downside risk to LNG supply availability.”

“Indeed the reality is that the wave of LNG growth will not hit the market until after 2016,” Mr Chong said.

LNG demand in Japan, the world’s biggest importer, dropped 4 per cent, while South Korean demand slumped 11 per cent. In China, LNG demand dropped to 19.5 million tonnes a year after years of growth of 10 per cent or more. The firm said Chinese demand “is unlikely to rebound immediately due to the current margin between oil and gas prices.”

With Chinese customers underpinning some of Australia’s new LNG projects, including BG Group’s Queensland Curtis venture and Origin Energy’s Australia Pacific LNG, the outlook looks set to bolster concerns about whether the buyers will meet all their contractual obligations to buy gas.

This article first appeared in the Australian Financial Review. Follow the AFR on Facebook.

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