Basin review, LNG, Markets, Projects

Australian gas in the international market: growth opportunity or wishful thinking?

Not so many years ago, China was a communist country closed to the West. That has now changed. China is part of BRICS, a group of newly emerging economies, encompassing Brazil, Russia, India, China and South Africa. Two of these countries, China and India, are having, and will continue to have, a major impact on the development of Australia’s gas resources in the 21st century.

Since the start of this century we have seen the mammoth rise of the behemoth that is the Chinese economy. Its growth, and corresponding thirst for energy, has driven much of Australia’s economic growth, and cushioned Australia from the substantial blows of the GFC. Without the energy requirements of China, and to a lesser extent India, the development of Australia’s natural resources, especially gas resources from the North West Shelf and Timor Sea area, would not have occurred. Indeed China, along with other Asian countries, particularly Japan and South Korea, are crucial LNG export markets for Australia, fueling the development of Australia’s gas resources.

LNG investment in Australia

In the last ten years, there has been enormous investment in and development of Australia’s vast gas resources, placing Australia as the sixth-largest gas exporter in the world. These gas resources have been produced from conventional offshore gas fields that have been, or are being developed, including the Barrow Island, Wheatstone, Ichthys, Gorgon and Prelude fields. Petroleum companies continue to develop these fields so that they may export millions of cubic feet of gas, in the form of LNG, to these hungry Asian markets. The investment in these fields is enormous, amounting to hundreds of billions of dollars, and likely to place Australia as one of the top gas exporters within the next decade.

The rise of unconventional gas

These same Asian energy markets are also driving Australia’s exploding onshore gas industry with the search for, and extraction of, unconventional petroleum resources, especially coal seam gas (CSG) and shale gas.

To date, such investment has largely been confined to the development of CSG on Australia’s east coast. This activity has been particularly concentrated in Queensland, where upstream extraction activities and downstream LNG processing and transport to Asian markets has burgeoned, with several companies presently developing CSG-to-LNG facilities in the central Queensland and Gladstone area.

A similar scenario is about to be played out in the western states. Shale and tight gas resources in central and Western Australia are beginning to be developed, evidenced by the recent state agreement in Western Australia regarding the development of Canning Basin shale gas, and the recent commercial shale gas production in the Cooper Basin. 45510.png

A slice of the Asian market

The development of Australia’s gas resources are driven by international LNG developments, as gas producers and LNG exporters compete for a slice of the Asian market. According to the Australian Bureau of Resource and Energy Economics, although there are considerable opportunities for the continued economic expansion of the Chinese market, there are also many emerging challenges that are likely to slow economic growth. Such reliance on Asian energy markets has the potential for a major impact on the development of Australia’s gas resources, especially given that there has been a clear transition in the composition and direction of Australia’s trade, with the resources and energy sectors increasing their share of export earnings to 60 per cent in 2011-12, up from 49 per cent a decade earlier.

Slowed Chinese economic growth is having an impact on the development of Australian gas projects, leading to rethinking the way that gas resources are developed. This is demonstrated by Woodside’s shelving of the land-based James Price Point LNG processing facility for its Browse LNG development in favour of newly developed FLNG technology that has recently become available. However, it is important to realise that China’s energy needs are enormous, and a slowing Chinese economy will still require vast sources of energy, with much of the gas likely to originate from Australia.

The US shale gale and Australia

The United States “˜shale gas revolution’ has led to low gas prices, although it has had little effect on Australia’s LNG developments to date. This is likely attributable to the low LNG export capacity that the US currently possesses, and a reluctance of the US to export its energy, preferring instead to retain the gas for domestic use. However, as LNG processing facilities are approved, and the US sources external markets in the Asia-Pacific Rim, there is the potential for US shale gas to dampen investment in Australian shale projects. This is likely to be in the future, given that the US has to date been very slow in its approvals of LNG facilities.

Australia’s challenge: supply and demand

Australia’s petroleum activities and corresponding investment in processing and transport facilities have also posed several domestic challenges. There has been a marked effect on some state economies, with the increased demand on Australian energy resources posing complex economic, legal, social and political issues.

On the east coast of Australia the legal, social and economic controversies of CSG activities have been played out on state and even national stages, as New South Wales and Queensland grapple with the regulation of petroleum activities, land access, and management of water resources in the already fragile Murray and Great Artesian basins. Such questions and development have led to the Federal Government taking a leading role in the harmonisation of the regulation of these activities. However, the gas also provides enormous opportunities for many Australian states, particularly Western Australia, the Northern Territory, South Australia and Queensland.

An important domestic challenge Australia faces as LNG exports increase is the issue of domestic gas supply. A policy for securing gas reserves for domestic use was implemented in Western Australia in the 1980s, and continues today. Domestic gas reservation was a feature of the Gorgon Gas Project State Agreement, and has featured largely in recent onshore state agreements in Western Australia.

This issue of domestic gas reservation in eastern Australia has been hotly debated, with controversy surrounding calls for a domestic gas reservation. Some observers are pleading for a domestic gas reservation to ensure gas prices fall, and others are opposed to such a policy, calling it little more than company subsidising domestic gas.

Regardless of your view, there is no doubt that there is likely to be tightness in the eastern Australian gas markets in the near future as a result of LNG export to Asia.

Looking ahead

The impacts of China’s energy needs and quest for sources of energy are not new. However, over the next century, as energy resources become scarcer, and Asian countries look to Australia’s immense gas resources as sources of energy, the impacts will be felt in Australia where, international LNG developments will impact on Australia’s domestic projects, and the demands will also pose significant domestic energy challenges.

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