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Australia: The world’s LNG king?

Hydrocarbon Engineering,


Australia has started channeling its inner Hamlet as it prepares to become the next global king of LNG exports. The thrill over its rapid ascension to hydrocarbon wealth and power is increasingly giving way to doubts and guilt over the uncertain long term impacts of LNG exports on the nation’s environment, health and energy security. Starting with an annual production capacity of 16.3 million t at the turn of the century, Australia has plotted and bulldozed its way to expanding its LNG capacity that will likely exceed 85 million t by 2017. In adding two projects in 2006 and 2012, and completing seven more over the next three years, Australia is expected to brush aside Qatar and Malaysia to top the global LNG pecking order.

For now, the country’s three operating projects have a total annual production capacity of 24.3 million t of LNG, placing it well behind Qatar’s 77 million t capacity, according to the Australian Petroleum Production and Exploration Association (APPEA).

But, over the next three years, Australia will more than triple its LNG capacity despite the rising tide of investor complaints about exorbitant labour and equipment costs, construction delays, and growing supply competition from Russia, Central Asia, the US, Papua New Guinea and Africa.

The new plants will greatly boost Australia’s future export earnings, judging from the impact of previous project start ups in meeting Asia’s energy demand.

According to the Bureau of Resources and Energy Economics (BREE), Australia’s LNG export earnings more than doubled from AUS$ 5.22 billion in 2006 to AUS$ 13.74 billion in 2012, fanning industry ambitions that earnings could easily quadruple by the end of this decade. (US$ 1 = AUS$ 1.05).

In forecasting rapid growth for the sector over the next few years, BREE’s executive director, Bruce Wilson, said: ‘As new LNG production capacity comes online, LNG exports will increase to become one of Australia’s principal exports and support further growth in export earnings.’

LNG export earnings and natural gas output

At current prices of US$ 16 - 18 /million Btu into Asia, consultant EnergyQuest expects Australia’s LNG export earnings to rise from AUS$ 14.7 billion in 2012 to AUS$ 57 billion by 2018 to match the current value of the country’s leading export, iron ore.

Australia’s natural gas production grew 3.1% to reach a record 2214 petajoules last year, said the company’s CEO Graeme Bethune.

Upstream companies invested a record AUS$ 60 billion last year, up from AUS$ 46.4 billion in 2012, mostly on infrastructure to produce and liquefy natural gas. But some of that increase is due to price inflation linked to the rise in building cost and project delays, said Dr Bethune.

He estimates that since 2010, companies have invested more than AUS$ 155 billion out of a committed US$ 194 billion to develop LNG facilities along the western and eastern coasts of Australia.

The threats of rising domestic gas prices

Australians are worried that they will end up paying higher prices for domestic natural gas supplies as LNG export volumes rise and projects continue to face implementation delays.

At the same time that it has built up an export driven world class LNG industry, Australia has also developed an appetite for natural gas. Its eastern, western and northern regions are becoming increasingly integrated with global gas markets through the expansion of LNG exports.

All seven projects under construction now have suffered significant cost over runs and implementation delays brought on by rising labour and equipment costs and shortages, protracted disputes with farmers and environmental groups, disagreements with local and state government regulations, and a Federal carbon tax imposed by the previous Labor Party led government that has since been repealed.

In a recent survey, the BREE said it expects high domestic natural gas prices to slow down the country’s electricity demand growth but will not be sufficient to increase the profit margin of project developers due to rising business and construction costs.

The survey indicated that ‘domestic gas consumption is projected to grow at a more subdued rate than previously forecast into the future reflecting both higher gas prices and lower demand growth for grid based electricity’.

In Eastern Australia, long term prices have held at approximately AUS$ 2 - 3 /gigajoule as the region has been largely shielded from Asia. Traditional supplies from Cooper Basin and Bass Strait fields are being complemented by coal seam gas from the Surat and Bowen Basins that are also supporting the development of a major LNG export industry in Queensland state.

BREE warns that the Eastern Australian markets are about to undergo a major transition that could lead to a price shock for consumers. The impending start up of Queensland’s LNG export projects will coincide with the expiry of many domestic long term wholesale contracts over the next few years. The impact will be felt most in New South Wales state, where several wholesale gas supply contracts are set to expire between 2014 and 2018. By 2018, less than 15% of the state’s gas demand will be met by existing contracts.

While supply has expanded, the additional demand competition from LNG exports has significantly tightened up the gas market with prices surging towards netback levels of AUS$ 6 - 9 /gigajoule. Some large industrial gas users complain that they are unable to secure long term supplies and are demanding the government enact quota rules.

BREE indicated that ‘the degree to which the market will experience further tightening and potential price spikes is unclear’.

‘Much will depend on the rate of development and commissioning of new LNG projects, the time to reach capacity and flow rates for coal seam reserves, and the ability to quickly bring forward new projects in New South Wales.’

Conclusion

Australia’s gas use for electricity generation is expected to grow at a faster rate than other fossil fuels in the coming years. Gas production of approximately 59 billion m3 accounted for 21% of the nation’s energy supply in 2012.

As it races to complete its seven LNG projects by 2017, Australia will have to confront Hamlet’s dilemma on whether it really wants ‘to be, or not to be’ the world’s LNG king.

The full article can be found in the August issue of Hydrocarbon Engineering.


Adapted by Claira Lloyd

Read the article online at: https://www.hydrocarbonengineering.com/gas-processing/05082014/australia-the-lng-king-weng/


 

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