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Australia’s LNG export surge fuels domestic supply concerns

Financial Times, 13 December 2018
Australia overtook Qatar to become the world’s biggest exporter of liquefied natural gas last month following a $200bn decade-long investment to ship the fuel to Asia. But the export boom has come at a cost. The country is now facing a looming domestic gas shortage in its most populous states, leading prices to skyrocket and concerns over security of supply to increase.

The problem prompted the government last year to legislate for export control restrictions on east coast LNG exporters when domestic supplies of gas run short. Now it is spawning a new surge — a race to build LNG import terminals capable of receiving and distributing gas sourced from as far away as the US and Middle East to Australian customers.

US oil major ExxonMobil, Marubeni Corp of Japan and Australia’s AGL Energy are among the backers of five consortiums aiming to spend more than A$1bn building floating storage and regasification units (FSRU) at several ports in New South Wales, Victoria and South Australia.

The projects are part of a wave of LNG import terminals being deployed worldwide to meet surging demand for gas, with more than 40 FSRUs either in service or under construction. These facilities receive LNG fuel in supercooled liquid form from bulk carriers, store it and turn it back into gas through a heating process, which enables it to be piped to customers.

“Some people say it is crazy that there are several projects vying to import gas into the world’s biggest LNG exporter. But most of Australia’s gas is on the west coast and it is too expensive to build pipelines to transport it to the east,” said James Baulderstone, chief executive of Australian Industrial Energy, which wants to build an A$250m import terminal at Port Kembla, about 60km south of Sydney.

AIE is backed by Japan’s Marubeni and Jera, the world’s largest buyer of LNG, and Andrew Forrest, an Australian billionaire and founder of iron ore miner Fortescue. It is the most advanced of the planned import projects in terms of seeking government approvals and negotiating with LNG suppliers. AIE wants to start shipping LNG into Port Kembla in 2020 with a target of importing 100 petajoules per year, enough gas to meet 75 per cent of New South Wales’s entire gas demand.

“FSRUs are like virtual pipelines, which can be put in place quickly and provide us with flexibility to choose the cheapest LNG suppliers from the US, Middle East, Asia or Australia’s west coast,” said Mr Baulderstone. “It will provide energy security for our buyers.”

Australia’s gas conundrum is not unique. Egypt and Oman have both previously been forced to import LNG to meet domestic gas shortfalls caused by an increase in their own LNG exports. However, it is turning a spotlight on a widening energy crisis in Australia, where the government is also threatening to intervene in electricity markets to cut prices.

Security of supply and stable pricing is something east coast gas and electricity consumers have not experienced since 2015 when three big LNG plants in Queensland operated by Royal Dutch Shell, Santos and Origin Energy began shipping gas to Asian customers.

These facilities are part of an LNG export boom that enabled Australia in November to surpass Qatar as the world’s biggest supplier of the fuel, shipping 6.5m tonnes to Asian customers. But their development linked domestic prices to international LNG market prices, which were significantly higher. The start-up coincided with weaker than expected domestic gas supply in eastern states due to depleting offshore reserves, a moratorium on onshore exploration and the diversion of Queensland coal seam gas (CSG) from domestic users to exports.

As a result, east coast gas prices have doubled since 2015 to above A$16 per gigajoule, according to data from EnergyQuest, an independent research group, which forecasts that a worsening supply crunch by the mid-2020s could cause prices to double again by 2028. Energy consultancy WoodMackenzie predicts a shortfall in 2023 while Australia’s energy regulator forecasts it in 2030.

Incitec Pivot, a fertiliser manufacturer, is one of hundreds of industrial companies struggling to cope. Last month it warned it might have to close a plant in Queensland employing 450 people if it could not source cheaper gas, due to a surge in prices that is costing it about A$50m a year.

“Demand for gas has tripled since the Queensland LNG projects started up and this has coincided with reduced supply from offshore gasfields off the Victorian coast that historically produce cheap gas,” said EnergyQuest’s Graeme Bethune.

Offshore fields in the Bass Strait owned by ExxonMobil and BHP Billiton have provided Australia with cheap gas since 1969 and supplied about a fifth of Australia’s east coast gas demand in 2016. However, the fields are becoming depleted and output is forecast to fall by a quarter over coming years. Hopes of fresh discoveries have so far failed to materialise with ExxonMobil revealing last month a A$120m drilling programme at its Dory prospect had come up dry.

An effective moratorium on onshore development of CSG in New South Wales and Victoria, combined with the poor performance of existing CSG wells in Queensland, is causing many analysts to pinpoint LNG imports as the best near-to-medium term solution.

“God help Australia if at least one of the import terminals doesn’t happen,” said Mark Samter, analyst at MST Marquee, an independent research provider.

“In my mind within a few years there is a 95 per cent certainty there won’t be enough gas to honour the existing LNG export contracts and the domestic market in eastern states.”

He warns a future supply crunch could leave Canberra with the unpalatable decision of intervening further in the market to force LNG exporters to break long-term contracts with their Chinese, Korean and Japanese customers or leaving local gas users short-changed.

Last year, Canberra legislated a gas security mechanism, which can force LNG producers to limit exports when there is a domestic shortage. So far it has not been implemented but the policy lever raises questions about sovereign risk for the LNG industry, which has invested hundreds of billions of dollars in new facilities.

AIE’s Mr Baulderstone said at least one LNG import terminal would be required to ensure security of gas supply, noting even if new gas reserves are proved they would take years to deliver.

“You can’t just hope that gas will come in — hope is not a strategy,” he said.