Australia: LNG Front and Centre

Australia: LNG Front and Centre

As various new LNG production facilities come online

over the next two years, Australia should become

the world’s largest supplier of LNG – a vision outlined

in the Australia Government’s 2012 Energy White

Paper. Estimates vary, but it looks likely that this status

will have cost somewhere between USD180bn and

USD200bn in LNG infrastructure investment.

In the immediate term, the Australian LNG industry

faces a couple of major challenges. The first is that

many of the long term LNG supply contracts agreed

with customers, the bulk of whom are in Asia, have

pricing linked to crude oil (typically JCC - Japan

Customs-cleared Crude). In view of current crude

prices, this doesn’t make economic sense, so there is a

push to switch the linkage on these contracts to Henry

Hub as the most recognised natural gas spot price

index. The other challenge is that many companies

have a long term commitment to LNG infrastructure

investment that is still ongoing despite the fall in LNG

prices. This, combined with the low returns currently

achievable for capacity that is already online, is placing

considerable liquidity pressure on Australian resource

companies.

Improving liquidity efficiency

This pressure looks unlikely to abate in the near future,

partly due to reduced Chinese demand and partly due

to increased competition from the US as a result of it

lifting its export ban on oil and gas. Therefore, apart

from a general need to cut costs, there is also a need

to maximise efficiency - especially in areas such as

liquidity management.

Several of the largest Australian resource companies

have substantial generating assets overseas and their

focus is to centralise liquidity into Australia to re-deploy

Lance T. Kawaguchi

Managing Director

Global Sector Head - Resources

and Energy Group Payments and

Cash Management

in other parts of the business that have funding gaps or pay

down debt. This is driving considerable interest among these

companies working with international banks to identify cross

border liquidity techniques and treasury processes used by

global multinational oil and gas corporations and how they

might best apply them in the Australian context. Treasuries

looking to implement such structures however will need to be

cognisant with potential time-zone issues as moving monies

“against the sun” or from west to east could be problematic for

some banking institutions in terms of value dating and meeting

funding cut-off times.

Whilst some Australian resource companies are starting

to automate sweeps and have stationary pools of cash,

full confidence should be gained from US & European

Headquartered companies who operate multi currency end

to end liquidity management solutions around the world.

Nevertheless, the previous emphasis on outright growth in

a higher energy price environment has meant that for many

this has not until recently been a major priority, so there is

significant scope for efficiency improvements.

While industry-standard ERP systems are in many cases

already installed at Australian oil and gas companies, the next

step is leveraging these systems to the maximum through

effective process consulting and deploying niche ERP expertise

to implement any required changes efficiently. There is also

still considerable scope for taking advantage of bank agnostic

technology, such as SWIFT.

Additional opportunities

Resource companies are generally known as good payers or

“blue chip customers” from the lens of a supplier but as the

price pressures prolong, so is the working capital strain more

felt as payments get delayed or in worst cases defaults on

contracts occur. The industry is interlinked so that any delay

in one side of the oil and gas equation normally means a delay

down the chain. A particular area of opportunity for Australian

oil and gas companies to extend the time taken to pay suppliers

without impacting supplier relationships so much is using

techniques such as supplier financing and adopting wider use

of purchasing cards. These techniques are widely used by

multinational resource companies. As yet, neither approach

has been aggressively deployed by even the largest Australian

resource companies. Now that working capital is a primary

focus for companies, treasury needs to play a more active

role in what has historically sat with procurement departments

in Australia.

The decline in energy prices (and the consequent decline in

oil and gas sector profitability) means that supplier financing

is likely to be available to only the larger Australian oil and gas

companies. The series of credit downgrades endured by the

oil and gas sector means that only these larger players will

probably still have adequate credit ratings to be acceptable

as anchor credits in any supply chain financing structure.

However, the use of procurement cards would be applicable

to companies irrespective of whether they have the means to

establish a supplier financing program or not.

A further credit-related point worth noting is that there is a

significant difference between Australian oil and gas companies

and their Asian counterparts when it comes to choice of

banks. While Asian oil and gas companies appear relatively

unconcerned about their banks’ credit ratings in relation to

liquidity management and deposits, Australian firms are far

more conservative. Their minimum standard for any bank they

might use for global liquidity management is the same as for

their domestic business: A Rated.

Published: February 2016

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