Commodities, International, LNG, Location, Markets, Projects

Gas export boom shakes market

ANZ Bank’s report ‘Australia’s Gas Industry:When Markets Collide’ estimated that LNG exports would overtake iron ore as the country’s key economic driver, tripling over the next five years from $18 billion to more than $50 billion.

The “boom”? is expected to be sustained by a 40 per cent increase in demand in Asia over the coming decade. China alone is forecast to experience an approximate 100 MMt/a shortfall in LNG supply by 2020, which will need to be met by imports.

Australia is currently the world’s second largest LNG exporter, behind only Qatar. However that is expected to change, according to ANZ, which says Australia could emerge as equal rival to the Middle East gas giant by 2020.

But while the future for the exports business might have producers rubbing their hands together in anticipation, the future does not look as bright for domestic consumption.

The ANZ report states that demand from Asia will put strain on domestic LNG supply and could lead to a doubling in wholesale gas prices for industry and a 30 per cent increase for households on the east coast.

ANZ senior commodity strategist and author of the 70-page report, Daniel Hynes, says while the bank expects “natural”? market dynamics to someday incentivise producers to cater the domestic market, Australian consumers are undoubtedly going to see a rise in their bills in the coming years.

“Domestic prices here are low compared to what is on offer internationally,”? Mr Hynes told Gas Today. “And until we see a shift in those domestic prices, producers are obviously going to shift their focus to the export market. At the moment LNG production costs are certainly higher than what domestic prices have been sitting at.”?

The bank listed the chemicals and metals manufacturing sectors as being the two hardest hit by a potential price increase and urged those industries to be proactive in installing cost-saving mechanisms to prepare for the presumed price hike.

Without prompt mitigation strategies, those industries could see profitability fall by a fifth and return on equity halved, the bank warned.

“In general, this is going to be an evolving shift that could potentially be mitigated with prudent strategies,”? Mr Hynes says. “And in the shorter term it is going to be a concern of forced diversification of energy resources.”?

Citing the ANZ report, the Australian Workers Union (AWU) called on the federal government to step in and cap LNG exports amid concerns the gas price increase would lead to job losses.

Reserve Our Gas, an advocacy campaign initiated by the AWU to try keep gas stockpiles onshore for domestic use, says the LNG export market could harm employment and household’s cost of living.

“Our reward for allowing multinational gas companies to extract our gas should not be skyrocketing domestic prices and mass job losses from our manufacturing industry. That’s plain wrong,”? AWU National Secretary Scott McDine says.

“Yes, we should allow multinational companies to play their part and make healthy profits. But the Australian government should reserve the right to act if we decide that our precious gas reserves are not actually helping the ational interest.”?

However the AWU’s claims were quickly quashed by the oil and gas industry’s peak body, the Australian Petroleum Production and Exploration Association.

APPEA chief executive Malcolm Roberts said, simply, that more gas will in fact put downward pressure on prices and that the ANZ research confirms that Australia’s gas export industry will have significant and long-lasting benefits for the Australian economy.

“The AWU should be encouraging governments to remove the unnecessary regulatory barriers that are discouraging the safe and timely development of new gas supply, particularly in Victoria and NSW,”? Dr Roberts says.

“Australia has more than enough gas to meet both domestic and export demand but unnecessary restrictions on exploration and development in NSW and Victoria must be lifted to increase supply and put downward
pressure on prices.”?

Benefits from a LNG boom for the wider Australian public are not expected o materialise for some time, accordingto the ANZ strategist, with government revenues and the country’s trade balance initially being propped up by the sector’s growth.

But despite the clear and present export opportunities offshore for existing LNG producers, Hynes expects there to be a notable contraction in the supply side beyond 2020.

And combined with the imminent decline in demand from long-trusted offshore Asian markets such as Japan and South Korea as they move closer to restoring their nuclear dependency, producers should consider diversifying their exports.

“The second phase of expansions and projects in Australia are likely to be delayed because on the numbers that are presented
now, they certainly don’t stack up,”? he says.

“This will be a natural progression that you see in any commodity market where a huge influx of supply weakens prices and thins out the project pipeline. But we are not expected that to happen at 2019 at the earliest.”?

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