LNG is the new coal
With the media spotlight focussed on activists, the Greens and even Pacific nations complaining about coal, no one seems to have noticed that our LNG exports are now double the value of thermal coal exports and are growing fast.
After analysing data collected by Australia’s Department of Industry Innovation and Science, the US Energy Information Administration declared in August that Australia would surpass Qatar as the largest exporter of LNG this financial year, as a succession of massive projects have come on line.
Although that achievement has long been expected, Australia may in turn have to fend off a strong challenge from the US, which is now developing its own succession of gigantic gas export projects to take advantage of the country’s fracking boom.
That should add up to a shift in the markets with gas becoming cheaper and so more competitive against coal. Increases in conventional gas supplies have already affected demand for thermal coal (used in power stations) in the UK, which takes gas shipped over conventional pipe lines from Russia, as well as in the US, where the trend has been helped by Obama-era restrictions on coal plants.
The latest Australian project to enter production is the Prelude FLNG (floating liquid natural gas) platform, a nearly 500-metre long platform which liquifies natural gas for pumping onto ships. The $US10 billion plus facility sent off its first shipment from the Browse Basin, 475 kilometres offshore from Broome in June.
Prelude FLNG is, in turn, the latest in eight export LNG projects that have come on line from 2012 in Queensland, the Northern Territory and Western Australia to more than quadruple Australian gas exports. In contrast LNG exports from Qatar, an oil-rich nation on the Persian Gulf side of the Arabian peninsula, have barely grown for years.
The June issue of the Resources and Energy Quarterly produced by the Office of the Chief Economist estimates that in 2019-20 Australia will sell $54 billion worth of LNG, with the bulk of the sales going to Japan, China and South Korea. In contrast, thermal coal exports were just $26 billion in 2018-2019 financial year, as prices came off highs. Coal used in smelting which seldom receives any attention earned another $42 billion.
Although there are no more new LNG fields in the development pipeline, gas exports will continue to expand. The existing Ichthys project off the coast of the Northern Territory will undergo a massive phase two which will involve a nearly 900-kilometre undersea pipeline, and Woodside Petroleum is considering investing $44 billion in a series of projects, with the first phase involving the Scarborough gas field, discovered in the 1970s but 375 kilometres north-west of the Burrup Peninsula on the WA coast, in water nearly a kilometre deep. The second part involves further development of fields in the Browse Basin. A decision is to be made next year, with one advantage being that activists will have trouble objecting to or disrupting projects so remote from their suburban strongholds.
Despite leaving Qatar in the dust Australia will have the US breathing down its neck with that country’s EIA forecasting that the US, now the third largest supplier, will triple its output this year as several new facilities come on line. Both Russia and Malaysia are also expected to increase production.
This all adds up to a huge increase in gas supplies but gas prices, or getting supply at any price, remain a problem for Australian domestic users. Businesses have declared that they will have to cease operations if gas prices do not fall and governments have insisted that export projects reserve gas for domestic use. Should Woodside go ahead with its projects about 15 per cent will be so reserved.
As is often pointed out but ignored in complaints about energy prices, gas production of the more recent developments were sold forward in long term contracts which were arranged when gas prices were lower. If coal seam gas production in Queensland falls short for any reason, the long-term contracts come first and domestic buyers may miss out.
One way around this is to connect Australia’s gas pipeline network with international markets to get the benefits of international spot prices. This requires a specialised docking facility for LNG ships and, despite the vast gas resources being tapped in remote areas without direct pipeline connection, Australia does not yet have one. But there are several proposals.
In August, NSW planning minister Rob Stokes declared a Korean-backed $589 million GasDock project in Newcastle a project of critical state significance, providing it with a streamlined approval process. Another project in Port Kembla, backed by Andrew Forrest, already has planning approval and is expected to start operation in early 2021. Three other projects are under consideration, two in Victoria and one in South Australia.
Will gas prices fall when those facilities are built? Its not that simple. North Asian spot-market prices were above those of the Australian Eastern market for much of 2017 and 2018. Then there is the difference between the long-term contract price and spot prices, with the long-term prices now being higher. The problem, as pointed out in various reports by the Australian Competition and Consumer Commission, is that our east coast had more supply before the LNG trains (production lines) in Queensland were built.
A better way to achieve lower prices, the commission noted in a statement in August last year, would be for the states to increase supply by allowing more gas projects. This the Victorian Labor government in particular has refused to do, banning even exploration in most of the state. All that said, the gas import docks and massive increase in international supply must have some effect on gas prices and that should benefit consumers, although perhaps not the coal industry.
Got something to add? Join the discussion and comment below.
You might disagree with half of it, but you’ll enjoy reading all of it. Try your first 10 weeks for just $10