2 MARCH 2016 - PCM REG THOUGHT LEADERSHIP ARTICLE #3 - AUSTRALIA FRONT and CENTRE
Transcript of 2 MARCH 2016 - PCM REG THOUGHT LEADERSHIP ARTICLE #3 - AUSTRALIA FRONT and CENTRE
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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