Commodities | Mar 20 2012
By Greg Peel
There are currently two liquid natural gas (LNG) production facilities operating in Australia – one in Darwin and the other in the North West Shelf, exporting around 20 million tonnes of LNG per year. In FY11, Australian LNG exports represented 3.4% of all total goods and services exports, Commonwealth Bank Research notes.
There are currently eight conventional LNG projects under construction in Western Australia representing $170bn of capital investment and a potential of 61mtpa output. Further projects that are yet to reach the final investment decision (FID) stage would provide another 31mpta. There are a further thirteen projects on the drawing board but as yet uncommitted with a total capacity of 45mtpa.
On this conventional LNG alone, the International Energy Agency (IEA) has estimated that if all projects currently under construction come on line as expected, Australia will move to become the world's second largest producer of LNG after Qatar. And that's before we get unconventional.
In Queensland there are three coal seam gas LNG projects which have all reached the FID stage. Back in Western Australia's Browse Basin there are also floating LNG production platforms being considered. However, it's a long way to go to outstrip Qatar which in a small area boasts an inconceivable abundance of natural gas.
The IEA estimates global LNG trade grew in 2010 by 25%. Current trade represents 30% of global gas trade, with the balance being transported by pipeline in unliquified form. In 2010 Australia was only the world's seventh largest LNG exporter at 8.5% of total selling mostly to longstanding customer Japan (70%) along with China, Taiwan and South Korea. Qatar provided 25% of global exports.
Asian demand for imported LNG is rising a-pace with Japan also suddenly requiring increased exports due to the post-Fukushima shut-down of nuclear reactors. The IEA nevertheless expects that by 2035, China will be the world's biggest importer of LNG absorbing one third of global production. BP estimates natural gas demand growth will outstrip growth for all other fossil fuels out to 2030, with emerging markets representing 80% of that growth. CommBank expects demand for LNG to grow at a faster pace than that of natural gas in general.
Importers of LNG will hit a bit of a flat spot on the supply side between now and 2014-16 while awaiting new projects to reach completion, particularly in Australia. Thereafter, CommBank expects Australian LNG exports to increase to $45bn in FY15 for a 330% increase on FY11, representing 11% of total exports (coal was near 15% in December 2011).
Spending on LNG projects will significantly boost Australian GDP growth over the next few years, CommBank notes. There will be some leakage offshore through spending on capital goods, but the fiscal impact to the state and federal governments via tax revenues should be large when taking into consideration state payroll tax and royalties, federal corporate tax and employee income tax and the proposed mining tax. It is estimated an average LNG project employs 5000 workers, but revenues and employment will also be generated by suppliers, contractors and service providers.
LNG should materially boost resource sector employment, but in the scheme of things current resource sector employment is only small. The sector employed only 2.2% of the Australian workforce in February this year compared to health (11.8%), retail (10.6%), manufacturing (8.5%) and education (7.6%). It is in the construction sector where the boost to employment is notable, with that sector representing 8.9% of total jobs last month.
Projects under construction in Australia have already experienced considerable risks in the form of construction delays and workforce shortages which, along with soaring prices for capital goods, are leading to wage-price blowouts. Expansion plans are in some case hampered by lack of proprietary gas. There is currently a heated debate in Australia with regard to the environmental impact of coal seam gas extraction.
Globally, risks could come on the demand side in the form of lower emerging market growth, but clearer risks lurk on the supply side. Qatar currently exports mostly to the Atlantic market (UK 18%) but exports to India, South Korea and Japan are also growing, and Qatar is also busy ramping up its own LNG export capacity.
Qatar's capacity is so abundant it has the power to control global pricing much in the way OPEC controls the price of crude oil, and indeed Qatar currently limits its own production a la OPEC in order to maintain attractive prices. Were Qatar suddenly to decide to take on the Asia-Pacific customers in a big way, Australia's major source of demand growth would be under serious threat.
In the meantime, it had been expected the US would be an importer of LNG over the next few decades but technological developments in unconventional gas production has meant a sudden boom in US shale gas projects. The IEA expects shale gas to reach one third of total US gas production by 2015 (it was 4% in 2005) and expects the US will become gas self-sufficient thereafter and even a net LNG exporter by 2030.
The high cost of LNG production and particularly unconventional LNG production means that sales prices must remain above a certain level for LNG production to be economical. The boom in global LNG project construction has come about as a result of the huge jump in the oil price over the past decade. LNG prices are benchmarked to the crude oil price, so were for some reason the oil price to fall steeply many LNG projects would be at risk of being loss-making.
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