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Viewpoint: New era beckons for Australian LNG

20 Dec 2017 03:33 GMT
Viewpoint: New era beckons for Australian LNG

Sydney, 20 December (Argus) — The final two LNG projects under construction in Australia are on course to start up in 2018, capping the largest ever investment in the country's resources sector. But the new capacity will come on line at a time when the market is likely to be amply supplied for the next four to five years.

Australia will have 86.6mn t/yr of export capacity when the two projects, the 3.6mn t/yr Prelude floating LNG (FLNG) venture offshore Western Australia (WA) and the 8.9mn t/yr Ichthys LNG plant in Darwin, are completed. But Australian LNG projects are unlikely to export at nameplate capacity, after the three-coal bed methane (CBM) gas to LNG plants at Gladstone in Queensland pledged to provide more gas to the domestic market to offset concerns about potential shortages. One of those projects, the 7.8mn t/yr Gladstone LNG plant, will produce an average of 6mn t/yr in the period to 2020, operator Australian independent Santos says.

The deal between the three Gladstone-based LNG projects and Canberra on domestic supplies has led to forecasts of Australia's LNG exports being scaled back. The National Australia Bank said in late November that Australian LNG exports are poised to reach 58.1mn t in the 2017-18 fiscal year ending 30 June, up from 52.2mn t in 2016-17. This is below the 63.3mn t projection from the Australian government's commodity forecaster, the Office of the Chief Economist, which was made in early October.

Australia currently has 69.65mn t/yr of capacity. The second 4.45mn t/yr train at the country's newest project, the Chevron-operated 8.9mn t/yr Wheatstone, is also due on line next year.

Changing dynamics

The LNG market is undergoing structural changes as new supplies and customers emerge, which may erode the competitive advantage that Australia enjoys thanks to the sheer size of its export capacity.

The way gas is traded internationally is changing, the IEA said in its World Energy Outlook 2018 report released in mid-November. Destination flexibility, pricing based on gas-to-gas competition, a rise in spot deals and shorter contract durations have gradually made inroads into global gas markets. All of these factors are putting pressure on the traditional business model on which much of Australia's LNG industry is based, namely large supply contracts with utilities in northeast Asia.

Newer exporting countries such as Angola, Papua New Guinea and Peru have increased LNG supply diversity, while others such as Cameroon and Mozambique are to join the market in the next few years, the IEA says. But the biggest driver of a more competitive LNG market is the US, which has many of the characteristics — flexibility, hub-based pricing and spot availability — that are transforming the wider gas market.

The US "is not just exporting growing volumes of gas over the next 25 years, it is also giving additional impetus to a major shift in how gas markets are organised and how trade is conducted. This has far-reaching implications for future gas markets and security of supply, accelerating a transition towards a truly global gas market", the IEA says.

Cost challenges

Australia is seen as a high-cost LNG developer. More than A$200bn ($152bn) was spent adding 62.5mn t/yr of LNG capacity, at an average of around $2,500/t. The cost issue is likely to mean Australia will largely miss out on the next wave of global investment in new LNG capacity.

The global market could move from a surplus to a deficit around 2022 or 2023, meaning new projects would have to start being sanctioned in 2018 given the typical five-year construction period for greenfield liquefaction projects. Instead, Australia will be looking at replacing gas supplies that are expected to peak within the next five years at the country's two oldest LNG projects, the 16.3mn t/yr North West Shelf venture offshore WA and the 3.7mn t/yr Darwin venture located in the Northern Territory.

Australia's rise as a significant LNG supplier has been helped by the emergence of portfolio participants such as Shell and Total, which together have been involved in five of the seven LNG projects sanctioned in the country since 2009. Portfolio participants do not disclose details of sales and purchase agreements from particular projects, but instead supply customers from their portfolio of LNG production assets. But a well-supplied market in the coming years could put this business model under pressure, as portfolio participants take on significant volume and price risks, the IEA says.

Australia's LNG expansion in the past five years has also been partly driven by technological innovation, which has helped make CBM an economic feedstock for large-scale LNG production. CBM fields supply 25.3mn t/yr of the new capacity in east Australia. The other main technological advance has been the development of FLNG vessels that exploit remote, stranded gas resources without the need for a land-based liquefaction plant. Shell's 3.6mn t/yr Prelude FLNG project offshore WA is expected to start shipments next year, which will be closely watched to assess its success in terms of operability and costs.

Prelude was sanctioned in May 2011, at a time when analysts were forecasting a large wave of investment in new FLNG production capacity. While the new investment has fallen short of some predictions, floating vessels have transformed the LNG market through the construction of more than 20 floating storage and regasification units (FSRUs). These vessels, which regasify LNG and feed the fuel into a gas transmission or distribution network, can reduce costs by 40-50pc compared with fixed onshore import facilities, according to IEA estimates.

The use of FSRUs has enabled the emergence of new importing countries, such as Pakistan and Egypt, which prefer smaller and infrequent volumes and another factor that poses a challenge to Australia's traditional LNG business model.

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