Australian Liquefied Natural Gas (LNG)

It is clear to even casual observers that growth in Asia is sucking in many of Australia’s resources.  If the future develops roughly as we expect, the region will soon be a major consumer of Australian Liquefied Natural Gas (LNG).  Our view is that the demand will be great, how great though, is currently unknowable. 

Recent years have seen a rush of LNG developments announced in Australia.  Woodside Petroleum and its partners in the North West Shelf project have long dominated the export of LNG, exporting since 1989 and providing 83% of Australia’s current LNG capacity.  Woodside plan to increase equity LNG capacity from below 3 mtpa to 20 mtpa before 2020. 

Enabling the economic extraction of coal seam gas (CSG) has potentially spawned an unconventional source of LNG supply.  Local producer companies (Arrow Energy, Origin Energy, and Santos) have all partnered with multinational oil and gas companies (Royal Dutch Shell, ConocoPhillips, and Petronas) and are aggressively proving up reserves to support a case for building LNG production facilities.  British Gas, following its takeover of Pure Energy, is also a CSG to LNG hopeful.  Cumulatively, LNG exports from the Gladstone region could be between 15-20 mtpa by 2020.

However, it is difficult to assess, with certainty, the likely supply from the Australian projects (The track record of projects reaching the production stage is not a good one) and there are a number of factors at play. 

These projects are dependent on the nexus between gas and oil prices remaining strong.  Recently that link has weakened with gas prices falling.  A high oil price is needed to underpin these projects.  Additionally, the capital costs of construction are difficult to predict given the volatility of inputs like steel and cement, but seem to be headed higher.  And finally, the case for gas becoming a bigger portion of the fuel mix is largely reliant on a global reduction in carbon emissions.  Failure to get a commitment from the world’s heavy emitters to reduce their carbon output at the Copenhagen Summit on Climate Change may have an impact on their plans for greater use. 

Predicting long-term demand is made similarly difficult by the uncertainty in the legislative framework.  However, there is also strong evidence to suggest substantial growth in the industry.

A recent report from Wood Mackenzie indicates demand for LNG in Asia Pacific doubling by 2025.  Supporting this forecast is the 4 new LNG receiving terminals under construction in China, and the plan to build 7 more (CNOOC).  Wood Mackenzie’s indications could significantly underestimate the demand, according to Santos, who have made large allowances for additional demand coming from China and India, as well as the emerging markets of Singapore, Thailand, Vietnam, Philippines, and Malaysia.

With the number of uncertainties on both demand and supply forecasting the best we can hope for is to be approximately right is our assessment of the market for LNG.

Elton Doyle, November 2010