Research and analysis

Australia: LNG superpower April 2014

Published 16 April 2014

This research and analysis was withdrawn on 18 June 2014

This document is no longer current.

As Europe looks to diversify its energy supply, this report looks at growth in Australia’s exports of liquefied natural gas (LNG), the impact of which will be felt most in Asia.

0.1 Ramping up production

Australia is now the world’s third largest LNG exporter, and still expects to rival Qatar for the top spot by the end of the decade. The country’s gas production will more than double in the next five years, as production begins to flow from the massive investments in new facilities over the last three years, according to the latest resources and energy report published by the Bureau of Resources and Energy Economics (BREE) on 26 March. Seven LNG projects are under construction, including Shell’s first floating LNG vessel Prelude whose hull was completed in December. It will be the world’s largest floating object. These will join three plants already operating to increase production from 62 billion cubic metres (bcm) in 2012-13 to 151bcm in 2018-19.

As a result, exports are expected to more than triple in the same period. In 2012-13 Australia exported 24 million tonnes (Mt) of LNG. With the projects under construction representing an additional 62Mt of capacity a year by 2018-19, exports are expected to hit 79Mt in that year. The export value in nominal terms is projected to increase by around 340%, from A$13.7bn to A$60.4bn. UK majors are very much part of the story. Shell has a significant stake in West Australian offshore gas, and both Shell and BG Group are major players in unconventional (coal seam) gas in Queensland. BP have smaller minority stakes in several fields and are leading exploration off the coast of South Australia.

Proposed investments in another 60Mt of liquefaction capacity are under consideration, with investment decisions dependent on costs, project financing and forward sales. Australia is a high cost production location. For some of Australia’s current offshore developments, construction and engineering costs are as high as 50%-60% of total project costs, compared with 30% elsewhere. And recent experience indicates that producing coal seam gas on Queensland’s east coast is more costly and uncertain than originally estimated. In addition to costs, future investment decisions will also be influenced by technological developments and competition from other exporters, especially the US.

0.2 Where is it all going?

A whopping 78% of Australia’s LNG exports in 2012 went to Japan, almost 18% to China, nearly 4% to South Korea and around 1% to Taiwan. Australia has positioned itself as a reliable supplier for the East Asian economies with little indigenous energy supply. Their (relative) proximity to Australia also helps, given the relevance of transport costs to LNG prices. Asian customers are also major investors in the development projects.

Estimates suggest 80%-90% of Australian gas coming on line has been pre-sold well into the 2020s. The capital intensive nature of LNG projects means gas is traded under long-term contracts, which underpin the large investments needed. Just 6.5% of the total capacity of the three plants currently operating is uncontracted.

Over half of Australia’s LNG exports in 2019 will still be going to Japan, which is expected to remain the world’s largest LNG importer over the medium term. BREE sees Japan’s LNG import mix, currently dominated by Middle Eastern suppliers, shifting in Australia’s direction, with around 40Mt of Japan’s 86Mt LNG needs being met by Australia in 2019, up from less than 20Mt today. Japanese companies and utilities have small equity shares in nearly all Australia’s LNG projects.

Australia also anticipates taking an increasingly large share of Korean and Chinese LNG imports from around 2017, although the extent to which Chinese imports ramp up will depend on developments with China’s own shale gas.

0.3 Global outlook

Australia’s experts see a less tight market developing as a number of new gas suppliers enter the market and compete to supply to Asian customers. Competition may bring increasingly flexible contractual arrangements, including pressure from Japan to move away from long-term contracts and oil-linked pricing. The ability of operators to extend or re-sign expiring contracts, sign new contracts or price their gas competitively in Asia-Pacific spot markets will be key determinants of export volumes.

0.4 Comment

What happens in this burgeoning Asia-Pacific gas market beyond 2020 will impact the global market. Big supply questions, particularly how much US and Canadian gas might find its way to Asian export, and how soon and how much of China’s reserves can be developed will be important. Large volumes going to Asia from Australia and elsewhere may enable others to export more to Europe than they otherwise would.

0.5 Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report