Column: The stampede to exit coal is a worrying harbinger for LNG: Russell

Alma Metals

20/04/2021 13:00

(Repeats item with no changes in text. The opinions expressed
here are those of the author, a columnist for Reuters.)
    By Clyde Russell
    LAUNCESTON, Australia, April 20 (Reuters) - A global
diversified miner paying to exit its coal assets, and a
multibillion-dollar dollar investment by Qatar to reclaim its
status as the world's largest producer of liquefied natural gas
have more in common than might be visible at first glance.
    South32  S32.AX , the Australian commodity producer spun out
of BHP Group  BHP.AX , is effectively handing over up to $250
million to Seriti Resources to take South African thermal coal
operations off its hands.  urn:newsml:reuters.com:*:nL1N2LU040
    While it's not unusual for sellers of mining assets to cover
rehabilitation costs, the sizeable amount involved shows just
how much South32 wanted out of thermal coal - and in effect,
just how little the assets are worth.
    South32 is one of several major coal miners seeking to exit
a business that has become increasingly problematic amid action
by environmental activists, concern among shareholders and the
withdrawal of financing and insurance for mines viewed as
contributing to climate change.
    In short, coal mines, particularly those producing thermal
coal for use in power plants, are increasingly seen as a
millstone around the neck of diversified miners. The latter
would prefer to focus on producing commodities seen as essential
to decarbonising the world's energy systems.
    There isn't a straight line between the rush to exit coal
and Qatar's $28.7 billion plan to boost its LNG capacity 40% to
110 million tonnes by 2026, with a potential second-phase
expansion to a total annual capacity of 127 million tonnes.
    On the surface, such a massive investment in LNG would seem
to be a vote of confidence in the future of the super-chilled
fuel, touted by proponents as a cleaner-burning alternative to
coal. 
    Still, the LNG business is condemned by opponents as
producing enough pollution to still be part of the climate
change problem. And Qatar's push to produce more LNG could be
view through a more cynical prism: the Gulf nation may be
seeking to maximise the revenue from its extremely low-cost
natural gas assets while it still can - before decarbonisation
does to LNG what it's busy doing to coal.
    Qatar is believed to be able to produce LNG at a break-even
cost of about $4 per million British thermal units (mmBtu),
below the $5 to $8 per mmBtu for new projects in Mozambique,
Russia and the United States, and the $7 to $11 for current top
exporter Australia for new projects, according to figures from
the Boston Consulting Group.  urn:newsml:reuters.com:*:nL3N2L229Z 
    This in effect means Qatar can afford to take the view that
even if there is an oversupply of LNG in the future, it will be
the last producer standing, and it can monetise its natural gas
reserves better than its competitors.
    This raises the possibility that the billions of dollars
currently being invested in LNG projects in places from
Mozambique to Russia to North America may end up facing the same
issues coal has right now - writing down the value of assets and
struggling to sell them. 
    
    COAL EXIT STAMPEDE     
    Of course, for buyers of distressed coal assets such as
Seriti, the opportunity remains to run the acquired mines for
many years and sell the coal profitably to South Africa's
state-owned energy utility Eskom.
    The sale of South32's South African energy coal assets to
Seriti is expected to close before the end of the company's
financial year, pending government approvals and an agreement
with Eskom over coal supply.
    The planned sale was first announced in November 2019 with
Seriti, a company owned by Black South African investors,
initially agreeing to pay 100 million rand ($6.7 million)
upfront plus deferred payments based on future cash flows until
March 2024, with a ceiling of 1.5 billion rand per year.
    These terms have now changed, with the deferred payments
scrapped, the purchase price reduced to a token 1 rand and
South32 agreeing to pay for rehabilitation and other costs.
    If the deal does go through, it will be the latest coal exit
by a major mining company, following plans by Anglo American
 AAL.L  to spin off its South African coal assets and exit from
its joint venture in Colombia, something BHP is keen to do as
well. 
    Additionally BHP wishes to sell, or spin off, its energy
coal assets in Australia, and earlier this year cut the value of
its Mount Arthur thermal coal in New South Wales state by up to
$1.25 billion, reflecting the market view that such assets have
plunged in value.
    It's possible the present rush for the exit from coal will
be matched by major oil and gas producers making a similar dash
to get out of LNG in a few years time.

 (Editing by Kenneth Maxwell)
 ((clyde.russell@thomsonreuters.com)(+61 437 622 448)(Reuters
Messaging: clyde.russell.thomsonreuters.com@reuters.net))