The current slump in crude oil prices will not negatively affect Fitch-rated oil and gas projects as they generally benefit from contractual structures or exceptionally strong economics that provide stability. North American gas-fired generating projects may directly benefit from higher electricity prices if natural gas prices rise in reaction to lower oil prices. However, integrated liquified natural gas (LNG) plants that have recently come online or are under construction (particularly in Australia) are reliant on higher oil prices.

Some Fitch-rated oil and gas projects primarily rely on strong contractual structures that insulate projects' financial performances from price and volume volatility. Others have high contracted volumes, conservative debt structures, and low operating costs that raise the likelihood that they will meet debt service commitments if the hydrocarbon market conditions become more challenging.

Rated US LNG projects (for example, Cameron LNG [A-/Stable]) are not exposed to price and volume risk through tolling agreements with fixed-price availability payments. The allocation of price risk away from the projects results in a Stable Rating Outlook despite the erosion in their competitive price advantage. Fitch-rated LNG projects that are directly exposed to market dynamics (including Qatari RasGas 2 & 3 [A+/Stable]) were financed and built when oil prices were much lower than they are currently, resulting in breakeven commodity prices below USD30/bbl for Brent or approximately USD3/mmbtu for LNG.

Integrated LNG plants that have begun operations more recently or are still in construction, particularly in Australia, have higher cost bases due to increased capital costs, more complex gas extraction techniques, and logistical costs. These projects are more reliant on sustained high oil prices to generate adequate equity returns. Their ability to breakeven under current prices will depend primarily on the pricing formulas in their long-term, oil-linked LNG supply contracts. The current price environment will result in projects not yet sanctioned being delayed.

Lower oil production may put downward pressure on associated natural gas production and lower oil prices reduce the prices for natural gas liquids, which could result in moderately higher natural gas pricing. Most Fitch-rated gas-fired generating projects operate under tolling agreements that mitigate any potential increase in prices. The impact of higher electricity prices due to higher gas prices would be limited to those few projects with some exposure to merchant price risk. Dual-fuel projects that can use oil or diesel (like Astoria Energy LLC series A, [BBB- Stable) may have more frequent arbitrage opportunities if gas prices spike relative to oil prices. Some projects in California may benefit from a higher gas price through short-run avoided cost contracts that increase revenues if gas prices increase. However, margins for merchant commodity facilities may be reduced with higher gas prices unless protected by price hedges (like Iowa Fertilizer [BB-/Stable]).

Lower oil prices could push down transportation costs for solid fuel projects with variable fuel transportation costs (Colver Power Project [BB+/Stable]). Solid fuels are often shipped via trucks and rail that largely utilize diesel fuels.
Source: Fitch Ratings