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How To Play The Oil And Gas Bull Run

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Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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Australian Government Just Shocked The Natural Gas Markets

Share prices are crumbling, buyers are scrambling, and industry is raging after a shocking turnaround from the world’s largest exporting nation for liquefied natural gas (LNG) yesterday.

Australia.

As I wrote last week, political controversy has been swirling around the Aussie LNG industry in recent days. With natgas consumers across the continent complaining about rising domestic prices — coming as producers are shipping increasing volumes of gas abroad as LNG.

And yesterday, the Australian government did something about it.

Prime Minister Malcom Turnbull announced on public radio Thursday morning that his government will take the right to restrict LNG exports. As he explained, “It is unacceptable for Australia to become the world’s largest exporter of liquefied natural gas but not have enough domestic supply for Australian households and businesses.”

The export restrictions will reportedly come in the form of a “gas security mechanism” to be enacted as of July 1. Under these rules, the federal government will have the right to block exports during times of high demand and rising prices at home.

Few details were given beyond this — such as how producers might be compensated for lost revenue and broken contract commitments due to export restrictions. With big producers like Santos and Origin Energy saying they will meet with officials to discuss.

But the reaction from investors and industry was decidedly negative. With share prices of producers falling as much as 7.5% on the announcement — and oil and gas executives calling the new policy “unprecedented”, raising “sovereign risk”. Related: African Citizens Face Steep Fines For Not Going Green

The problem isn’t going to be easily solved. As the chart below shows, domestic natgas prices have been rising notably since mid-2016 — coinciding with the start-up of major LNG export projects. 

(Click to enlarge)

Natgas prices in Sydney have doubled over the last year (dark red line) – Source: Financial Times

That makes large-scale exports a tough sell to the Australian public. But also poses a big burden to LNG exporters — who have spent an estimated $200 billion building facilities across the country.

The outcome here will have a major effect on global LNG flows, profits for producers, and new project activity. If exports are pulled back, global prices will rise and we could see renewed interest in other natgas nations positioned to supply to key markets in Asia.

But if Aussie exports continue, the natgas price here is likely to remain at world-leading levels — making this a hotspot for new exploration and development. Watch for further details on the gas security mechanism from the government, and for responses from industry.

Here’s to pipes to nowhere.

By Dave Forest

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Leave a comment
  • Jhm on April 28 2017 said:
    Wow. So this is what happens when you use LNG exports to jack up domestic gas prices.
  • Observer on April 28 2017 said:
    Yes, but you can buy Australian gas in Tokyo for half the price you can in Sydney, and that is with liquefaction and transport costs for the Japanese market.

    In conjunction to that Sydney and Melbourne were looking blackouts and industry shutdowns impacting millions of people and thousands of jobs and a big hit to the GDP and perception of supply reliability domestically.

    So the government had to do something because the free market was simply not working.

    Note that Western Australia is a separate domestic gas market and has had a requirement for all exporters to allocate a certain percentage of reserves for domestic use for decades, so any of the Eastern States gas companies that did not see this coming for at least the last five years were just plain dumb as rocks.
  • Veritas on April 30 2017 said:
    @Observer has hit the nail on the head. The companies on the east coast that rushed to develop LNG facilities to process coal-seam gas resources, and the government, have seen this coming for at least 5 years and done nothing to increase the supply available for export.
    Conoco Phillips' partner Origin Energy is also a major domestic supplier on the east coast.
    The situation could probably be resolved if the companies with gas plants at Gladstone did a few deals (perhaps with Shell/Arrow?) to open up new supplies but there is a risk that production facilities have been overdeveloped.
    The problem is also exacerbated by the east coast market encompassing 3 states and having to be sorted out by the federal government.
    The west coast is a completely different story with, as @observer says, a 15 percent gas-reservation policy having been implemented many years ago by the WA government and more than ample conventional resources to supply processors.
    A proposal to build a pipe to take WA gas to the east coast would take years to implement and is also subject to a host of domestic political problems and can't really be seen as realistic.

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