shell prelude flng

LNG Export Surge Has Significant Implications for Australian Economy

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January 10, 2014

shell prelude flng
Shell’s Prelude FLNG facility will tap into and export natural gas reserves offshore Australia

Jan. 10 (Bloomberg) — Australia’s natural-gas buyers are poised to pay more even as supply more than doubles in the next five years because higher prices in Asia are spurring exports.

Wholesale purchasers in eastern Australia, who paid A$3 ($2.67) to A$4 per million British thermal units on average over the past decade, are being asked for more than twice as much when they sign new supply contracts or renew existing ones, says Wood Mackenzie Ltd., an energy research company.

The government forecasts gas output will jump to about 100 million metric tons by 2018, or about as much as Japan and Taiwan use in a year. While exports may boost revenue for suppliers including Santos Ltd., Australian consumers such as Incitec Pivot Ltd., the nation’s biggest fertilizer maker, are paying more just as economic expansion slows.

“Australia’s east-coast gas market is now linked to Asian markets through its LNG export projects,” said Chris Graham, a Perth-based analyst at Wood Mackenzie. “There’s an immediate window in 2014 to 2018 when the market is quite tight.”

Buyers in eastern Australia signed new supply agreements last year at A$9 to A$10 per million Btu, according to Graham. Santos, based in Adelaide, said last month that contracts were signed at costs exceeding A$8.

Prices in Australia and Japan, the biggest LNG buyer, are converging once liquefaction and shipping costs of A$5 to A$6 are included, according to the Grattan Institute, a Melbourne- based research group. LNG for delivery to Northeast Asia over the next four to eight weeks cost $18.40 per million Btu, New York-based Energy Intelligence Group said Jan. 8.

Fukushima Fallout

Asian spot prices peaked at $19.40 last year as LNG replaced nuclear energy as Japan’s primary source of power following the meltdown at Tokyo Electric Power Co.’s Fukushima Dai-Ichi plant in March 2011. The country imported a record 87.3 million tons in 2012 and paid 6 trillion yen ($57 billion), double the amount in 2011, according to customs data.

Australia is increasing gas output as fast as suppliers in the U.S., where shale extraction is driving a production boom that has led to prices falling from as much as $13.69 a million Btu in July 2008 to $4.03 today. Australia will surpass Qatar and Malaysia as the largest exporter of LNG before the end of the decade, the government in Canberra forecasts. LNG is gas cooled to minus 160 degrees Celsius (minus 256 degrees Fahrenheit) so it occupies about 600 times less space and can be shipped by tankers.

Producers say more supply would better help curb surging prices than favoring domestic consumers over export markets.

No Incentive

“If you regulate or force suppliers to accept prices that are lower than what is feasible, there’s no incentive to produce,” said Chandran Vigneswaran, an Adelaide-based spokesman for Santos. “The way to bring prices down is to bring on more supply.”

Letting producers tap more reserves, including coal-seam gas in New South Wales, the most-populous state, would help avoid shortages, the government said in a report last month.

Forcing producers to supply gas at a specified volume and price domestically is likely to diminish Australia’s economy, Sydney-based Origin Energy Ltd., a partner in the A$24.7 billion Australia Pacific LNG project, said in an e-mailed statement.

“There’s no shortage of gas reserves in eastern Australia,” said Graham of Wood Mackenzie. The issue is regulation, such as a New South Wales ban on new coal-bed methane exploration within 2 kilometers (1.2 miles) of residential areas, he said.

Australia’s gas exports will rise to 81 percent of its total production by 2018, from 53 percent in 2012, Graeme Bethune, chief executive officer of Adelaide-based EnergyQuest, said in a report for the government this month.

New Projects

Chevron Corp., the second-largest U.S. energy producer by market value, and BG Group Plc, the U.K.’s third-largest oil and gas explorer, are among those investing about $180 billion in seven new export projects.

BG’s Queensland Curtis venture is scheduled to start gas exports this year, adding to three LNG projects already operating. Santos, operator of the $18.5 billion Gladstone LNG project, and a venture between Origin and Houston-based ConocoPhillips plan to start exports in 2015.

Australian manufacturers, who use gas to make plastics, chemicals and electricity, will be hurt by “unrestricted” LNG exports, according to Manufacturing Australia, an industry group with members including BlueScope Steel Ltd., the nation’s largest steelmaker. The government should set aside supplies for domestic use or set up a “national interest test” before allowing more exports, the group said on its website.

Government Policy

Incitec faces A$50 million a year of additional gas costs at its Phosphate Hill plant in Queensland in 2015 and 2016, the Melbourne-based fertilizer producer said in a statement last month. The company is building an $850 million ammonia plant in the state of Louisiana, partly to take advantage of lower U.S. gas prices.

“We survived the global financial crisis, low fertilizer prices and an extraordinarily high Aussie dollar,” said Stewart Murrihy, an Incitec spokesman. Now the industry is threatened by a gas price that’s climbing, he said. “We’d like to see government intervention to assist industries such as ours through this immediate period when supply is tight.”

The government will discuss setting aside gas from new projects to supply the domestic market, Industry Minister Ian Macfarlane wrote in an e-mailed response to questions. It won’t introduce a “blanket, retrospective gas reservation policy,” he wrote Dec. 24.

The country’s LNG boom will boost government revenue by A$11 billion a year starting in 2015 to 2025, according to a report from McKinsey & Co. Inc.

Export Growth

LNG will displace iron ore as the main source of Australia’s export growth this decade, according to the Bureau of Resources and Energy Economics, the government forecaster. LNG export earnings will increase fivefold to more than A$60 billion through June 2018, the bureau estimates.

Prime Minister Tony Abbott faces an unemployment rate that’s climbed to a four-year high and falling consumer confidence as the mining boom fades. The jobless rate rose to 5.8 percent in November, matching the highest level since 2009, government data showed last month.

Economic Growth

The economy expanded 2.4 percent last year, from 3.6 percent in 2012, according to the median of 34 economist estimates compiled by Bloomberg. While growth is projected to reach 2.7 percent this year, that’s still less than the past decade’s average of 3 percent.

One gas buyer isn’t waiting for the government to act on supply. Orica Ltd., the Melbourne-based maker of industrial explosives, agreed to fund exploration and development by Strike Energy Ltd. as part of a gas-supply agreement reached in July.

Others may shift manufacturing to locations with lower energy costs, Geoffrey Cann, the national oil and gas director at Deloitte LLP, said in an interview.

“Some domestic gas users are unprepared for this price swing,” Cann, based in Brisbane, said on his blog last month. Australians will view the domestic gas market in two phases, “before LNG and after LNG. The implications for the economy are rather significant.”

– Chou Hui Hong and James Paton, Copyright 2014 Bloomberg.

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