Australia’s LNG boom - Opportunities and challenges

Paul Balfe, ACIL Allen Senior Associate, talks about the opportunities and challenges in the Australian LNG industry.

During 2013 the rapid expansion of the Australian gas industry continued to gather pace with seven LNG projects under construction. In Western and Northern Australia four new projects—Gorgon, Wheatsone, Prelude and Ichthys—will see total production capacity more than double from 24 million tonnes per year to 60 million tonnes per year by 2017. In Queensland the three CSG-to-LNG projects currently under construction in Gladstone will add 25 million tonnes per year of capacity over the same period. The gas market in Eastern Australia now faces an unprecedented period of transition, with a projected three-fold increase in gas demand from 700 to around 2,200 PJ/a over the next four years. In aggregate, the seven new LNG projects represent a capital investment of around A$190 billion.

This massive wave of investment presents great opportunities for industry participants and offers a major boost regional and national economies. However, it is not without its challenges. The simultaneous construction of seven large LNG projects has resulted in a severe shortage of experienced and skilled labour and a rapid escalation in wages costs. In Eastern Australia the anticipated surge in gas demand for LNG has seen domestic users facing tight gas supply and rapidly rising prices. Given the issues involved in ramping up CSG production to the required levels, domestic gas supply in Eastern Australia is likely to remain tight for some years.

2014 shapes as a watershed year for the Australian LNG industry.

Global LNG context

The Bureau of Resource and Energy Economics (BREE) has noted that continuing growth in Asia-Pacific LNG demand through 2013 was offset by flat or declining demand in the United Kingdom and Europe. In Japan, demand for LNG continued to be very strong as a result of the on-going shutdown of the country’s nuclear reactors following the 2011 Fukushima disaster. Similarly, nuclear outages in the Republic of Korea saw LNG demand increase while continued strong economic growth in China saw buyers seeking additional LNG shipments to meet growing demand.

Despite strong regional demand growth, global consumption of LNG has recently faltered. The International Gas Union in its 2013 review noted that after 30 consecutive years of growth, LNG trade in 2012 fell by 1.6% with global flows declining from 241.5 million tonnes in 2011 to 237.7 million tonnes in 2012. The contraction reflected supply-side issues in Southeast Asia (particularly declining Indonesian and Malaysian production) and domestic and political challenges in the Middle East and North Africa region.

On the supply side, most recent additions to liquefaction capacity have been in the Asia-Pacific regions. More than two-thirds of current global LNG investment is located in Australia.

In recent years the global LNG industry has seen considerable diversification of both imports and exports. Over the past five years the number of LNG importing countries has risen from 18 to 29.

Another notable trend has been the increasing importance of spot and short-term trades as well as re-exports—all indicative of increasing depth and liquidity in market. From negligible levels in the mid-1990s, spot and short-term sales now account for more than 70 million tonnes annually or around 30% of global LNG trade

In terms of pricing, BREE notes that a tight global market will support higher spot prices, particularly in Asia, through 2013-14. However beyond this period, increasing supply from shale-gas related LNG projects in the United States and Canada may place downward pressure on prices.

Australia’s role in global LNG production

In 2012, global liquefaction capacity stood at 281 million tonnes per year, with a further 110 million tonnes per year under construction. At that time Australia accounted for around 10 per cent of global LNG production, making it the third largest producer after Qatar and Malaysia.

According to BREE, Australian LNG exports in 2012–13 were 23.9 million tonnes, a 24 per cent increase on 2011–12 reflecting a full year of operation at Pluto LNG as well as increased production at both NWS and Darwin LNG. The total value of LNG exports was A$13.7 billion, making LNG Australia’s fourth most valuable mineral and energy commodity export after iron ore, coal and gold.

By 2017 the IGU expects global LNG liquefaction capacity to reach 366 million tonnes per year. Australia will be the largest LNG producer accounting for some 82 million tonnes per year or about 22 per cent of global production.

Challenges for continued growth

Future challenges relate to factors that affect the global LNG market. For example, the emergence of shale-based LNG producers in the U.S. Gulf Coast region and potentially also in Canada may make it difficult for new Australian projects to secure markets. As at November 2013, the U.S. Department of Energy had received 34 project applications from shale-based LNG proponents. Altogether these applications represent 240 million tonnes per year of LNG capacity. Approvals for exports to non-Free Trade Agreement countries had been granted to four projects (Sabine Pass, Freeport, Lake Charles and Dominion Cove) with a combined capacity of 46 million tonnes per year. The extent to which these projects are able to compete for markets, particularly in the Asia-Pacific region following completion of the Panama Canal expansion which is due to be completed in 2016, is yet to be demonstrated but constitutes a significant risk for new Australian LNG projects.

Future LNG pricing is another significant risk area. Asian buyers are pushing for a shift from traditional oil-linked pricing terms to mechanisms that rely on other markers such as U.S. Henry Hub prices. So far their efforts have gained little traction. However, a major expansion of U.S. Gulf Coast Shale LNG could see that situation change.

Challenges specific to the Australian environment include labour shortages and high wage rates contributing to a loss of competitiveness for new LNG projects. Hays, the international oil and gas recruitment experts found in their 2013 global study that average salary levels in the Australian oil and gas sector to be the highest of the 53 countries surveyed.