Fitch: Limited Domestic Growth for Australian Upstream Oil & Gas Firms

(The following statement was released by the rating agency)

Link to Fitch Ratings' Report: Australian Oil & Gas

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=741375

SYDNEY, March 24 (Fitch) Fitch Ratings says that the Australian oil and gas 
companies involved in exploration and production face lower short-term growth 
prospects, beyond those projects that are currently under development, due to 
high development costs in Australia and modest success in domestic exploration. 
Australian upstream companies are therefore pursuing growth opportunities in 
geopolitically riskier regions such as Africa, parts of south-east Asia and the 
Middle East.

Australian projects face higher development costs, with continuing cost-overruns 
and schedule slippages. Four out of the seven Australian liquefied natural gas 
(LNG) projects under construction have made cost revisions and schedule change 
announcements since their first approval. Further announcements of project 
cost-blowouts and schedule delays are likely as more projects move towards 
completion. Some 62 million tonnes per annum of capacity is presently under 
development in Australia. There has been a considerable slowdown in approval of 
new LNG projects since 2011, with no new LNG trains committed in 2013. High 
supply costs of Australian LNG and increasing prospects of competitively priced 
volumes from North America will moderate buyer appetite for Australian projects. 
We, therefore, expect a slowdown in further capacity additions - across both 
greenfield projects as well as brownfield expansions. 

Project sponsors seeking to mitigate the higher development costs associated 
with onshore LNG facilities have turned to floating LNG technology (FLNG), which 
has a lower environmental footprint, modular design and limited onshore 
infrastructure. For its proposed Browse LNG project, Woodside Petroleum Ltd 
(Woodside; BBB+/Stable) will be using the FLNG design that Royal Dutch Shell plc 
(Shell; AA/Stable) is using at its Prelude FLNG project, which is under 
construction. However, FLNG still presents sizeable technical challenges.  

Australian LNG exports benefit from a stronger link to crude oil prices, 
reflecting the strong medium-term LNG outlook stemming from tight demand/supply 
conditions in Asia. However, significant price differentials have emerged 
between the supply/demand-driven gas prices in the US and oil-driven prices in 
Asia-Pacific. There has been a significant increase in LNG imports by Japanese 
and South Korean utilities in past two years, reflecting increased demand from 
gas-fired generation as nuclear generation is curtailed. As such, there has been 
growing support in Asia to move away from the current oil-linked LNG import 
prices. 

North Asian buyers now have stronger bargaining power due to the expected 
availability of competitive priced supplies from North America and planned 
completion of plants in Africa, Russia, etc over the medium term. Japan's 
announcement of an early restart of nuclear generation will further enhance 
buyers' power in our view. This is likely to suppress material price increases 
in re-negotiations for existing capacity as well as curb future Australian LNG 
capacity additions given the need to secure long-term off-take contracts at 
favourable prices prior to investing in new capacity. 

However, there is increased headroom within the current rating levels for 
Australian upstream companies, reflecting measured capex from limited inorganic 
growth opportunities as well as operational and revenue diversification from 
commissioning of new LNG capacity. However, any upward rating action is unlikely 
given expectations of high dividend payments or increased exposure to riskier 
regions.  

The report, 'Australian Oil & Gas: In Search of Growth as Domestic Opportunities 
Dwindle', is available on www.fitchratings.com or by clicking on the link above. 


Contacts: 

Sajal Kishore 

Director 

+612 8256 0321 

Fitch Australia Pty Ltd., Level 15, 77 King Street, Sydney NSW 2000 

Buddhika Piyasena 

Senior Director 

Head, Energy & Utilities, Asia Pacific 

+65 6796 7223 

Media Relations: Iselle Gonzalez, Sydney, Tel: +61 2 8256 0326, Email: 
iselle.gonzalez@fitchratings.com.

Additional information is available at www.fitchratings.com.

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