Australian LNG projects
A crowded train
John Hirjee
Research Analyst
(61) 3 9270 4318
john.hirjee@db.com
Hugh Morgan
Research Analyst
(61) 3 9270 4385
hugh.morgan@db.com
Fundamental, Industry, Thematic, Thought Leading
Deutsche Bank Company Research's Investment Policy Committee has deemed
this work F.I.T.T for investors seeking differentiated ideas. Here our Australian
energy team reviews the plethora of proposed Australasian LNG projects in light
of falling energy prices and a narrowing supply shortfall, and identifies the leading
LNG names.
Deutsche Bank AG/Sydney
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factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at http://gm.db.com or by calling 1-877-
208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
FITT Research
Companies featured
Origin Energy (ORG.AX),AUD17.09 Buy
2008A 2009E 2010E
P/E (x) 20.1 26.3 25.3
Div yield (%) 2.5 5.2 2.4
Price/book (x) 3.5 1.4 1.3
Woodside Petroleum (WPL.AX),AUD36.90 Buy
2007A 2008E 2009E
P/E (x) 25.2 10.4 14.6
Div yield (%) 2.4 3.6 4.9
Price/book (x) 6.8 3.9 3.1
Santos (STO.AX),AUD12.95 Buy
2007A 2008E 2009E
P/E (x) 15.2 15.8 24.5
Div yield (%) 3.2 3.3 2.7
Price/book (x) 2.5 1.7 1.7
Oil Search (OSH.AX),AUD4.75
2007A 2008E 2009E
P/E (x) 26.2 – –
Div yield (%) 2.4 – –
Price/book (x) 3.9 – –
BG Group (BG.L),GBP848.50 Buy
2007A 2008E 2009E
P/E (x) 15.4 9.8 12.3
EV/EBITDA (x) 8.37 5.26 6.37
DB EPS (GBP) 52.26 86.82 68.76
ConocoPhillips (COP.N),USD44.54 Sell
2007A 2008E 2009E
EPS (USD) 9.13 10.89 5.01
P/E (x) 8.4 4.1 8.9
EV/EBITDA (x) 5.2 2.4 2.2
Chevron (CVX.N),USD67.28 Hold
2007A 2008E 2009E
EPS (USD) 8.00 11.00 6.81
P/E (x) 10.3 6.1 9.9
EV/EBITDA (x) 4.8 3.0 4.4
Royal Dutch Shell plc (RDSa.L),GBP1,618.00 Buy
2007A 2008E 2009E
P/E (x) 9.3 5.0 8.1
EV/EBITDA (x) 11.20 3.10 7.05
DB EPS (USD) 4.04 4.88 3.01
Total SA (TOTF.PA),EUR40.50 Buy
2007A 2008E 2009E
P/E (x) 10.2 6.6 8.8
EV/EBITDA (x) 4.93 3.33 4.69
DB EPS (EUR) 5.37 6.12 4.58
ExxonMobil (XOM.N),USD68.93 Hold
2007A 2008E 2009E
EPS (USD) 7.20 8.53 6.74
P/E (x) 11.6 8.1 10.2
EV/EBITDA (x) 6.2 4.0 5.4
Fundamental: Regional demand – 20-30mmtpa, potential supply – 70mmtpa
We estimate a 20-30mmtpa supply shortfall by 2015 in the Pacific LNG market,
based on forecast demand and current contracted supply. However, this shortfall
is quickly overcome when proposed Australasian LNG projects are considered.
We estimate 70mmtpa of LNG could achieve first cargoes by 2015 based on
current proposals. Clearly there must be winners and losers, and in this report we
identify the names investors should follow.
Industry: Key hurdles to LNG sanction - who is clearing them?
In 2007 only two LNG projects were sanctioned globally, demonstrating the
significant industry challenges facing major LNG projects. Significant capital costs,
reserve uncertainties, protracted permitting and approval processes, partner
alignment and cost inflation all conspire against LNG aspirants. We believe these
hurdles, and the ability to overcome them, will dictate which project are
successful, and which will remain mired in delays.
Thematic: Oil parity pricing - who benefits as oil falls?
Oil parity LNG contracts have become the norm in the Pacific Basin, indeed Qatar
has gone beyond on the back of the clean fuel status of LNG. At US$150/bbl, oil
parity clearly favoured the seller, but with our forecasts dropping to as low as
US$50/bbl, will we see a return of the S-curve in LNG pricing, or will sellers take a
longer term view on oil prices?
Thought leading: Even at US$30/bbl oil, some projects still stack up
We see a breakeven price of US$30/bbl for some LNG projects. While Boards may
baulk at committing to project sanction at such low prices, LNG is a minimum 20
year investment and we do not see current oil price declines as a deterrent in the
longer term. At our long term oil price of US$80/bbl, we see the majority of
Australasian LNG projects are economically viable.
PNG LNG and CSG to LNG projects are the front runners
We rate the PNG LNG project as the leader of the Australasian LNG pack, given its
proximity to FID, and strong tolerance to low oil prices. Despite its recent
emergence, and technical challenges, we rate CSG to LNG projects ahead of
conventional West coast peers. BG’s QCLNG, Santos’ GLNG, and the Origin
Energy/ConocoPhillips projects are front runners. Lower capex demands, greater
tolerance to low oil prices, more favourable fiscal terms, and better partner
alignment all combine to favour CSG to LNG projects.

Table of Contents
Executive summary ........................................................................... 3
70 into 30 doesn’t go................................................................................................................3
LNG express – Origin, Santos and Oil Search first to leave the station.....................................4
Valuation and Risks ...................................................................................................................4
Pacific Basin LNG outlook................................................................. 5
The supply shortfall...................................................................................................................5
Who are the buyers?.................................................................................................................5
LNG pricing ........................................................................................ 7
LNG pricing in Pacific Basin – Oil parity has become the base case.........................................7
Can parity last?..........................................................................................................................9
Current LNG pricing dynamics ..................................................................................................9
The impact of low oil prices....................................................................................................10
LNG project challenges................................................................... 12
Access to resources ...............................................................................................................12
Reserves uncertainty ..............................................................................................................12
Permitting and approvals ........................................................................................................12
Shareholder alignment ............................................................................................................13
Domestic market obligations ..................................................................................................13
Australia’s proposed LNG projects ................................................ 14
Ranking the field .....................................................................................................................14
PNG LNG ...............................................................................................................................19
Queensland Curtis LNG ..........................................................................................................19
GLNG .....................................................................................................................................20
Origin / ConocoPhillips LNG....................................................................................................20
Pluto-2....................................................................................................................................20
Ichthys ...................................................................................................................................21
Gladstone LNG........................................................................................................................22
Sunrise ...................................................................................................................................22
Wheatstone ............................................................................................................................23
Browse...................................................................................................................................23
Gorgon ...................................................................................................................................24
Two other CSG to LNG proposals...........................................................................................24
Company overviews........................................................................ 25
Origin Energy (ORG.AX, Buy, PT $19.75/sh) ...........................................................................25
Santos (STO.AX, Buy, PT $22.70/sh).......................................................................................25
Oil Search (OSH.AX, restricted)...............................................................................................25
Woodside Petroleum (WPL.AX, Buy, PT $43.50/sh) ...............................................................26
Appendix A: CSG 101 ...................................................................... 36
How is it extracted? ................................................................................................................36
Comparisons to conventional gas...........................................................................................38
Key issues facing CSG growth in Australia .............................................................................38
Coal seam gas in the US.........................................................................................................39
Comparison to conventional gas for LNG projects .................................................................41
Appendix B: LNG 101 ...................................................................... 43
What is it? ...............................................................................................................................43
Composition...........................................................................................................................43
Liquefaction plants..................................................................................................................44
How is it stored?.....................................................................................................................44
How is it kept cold? ................................................................................................................44
Have there been any serious LNG accidents? ........................................................................45