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Gregory Brew

Gregory Brew

Gregory Brew is a researcher and analyst based in Washington D.C. He is currently pursuing a PhD at Georgetown University in oil history and American…

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Australian LNG Struggling Despite $172 Billion In Investments

Gas Storage Australia

With the resources to become a major LNG producer, Australia’s natural gas industry has been buffeted by market forces and instability. The primary reason: investments made several years ago during the price boom are now bearing sour fruit, as billions spent on new production and high-tech ventures are struggling to turn a profit in today’s depressed environment.

Yet there are still signs that the country will emerge as a major LNG producer, despite considerable political opposition to the energy industry.

Around $172 billion (A$230 billion) has been invested into the Australian energy industry, yet poor market conditions, including low prices and weak demand in traditional LNG markets like South Korea and Japan, has increased concerns over the long-term viability of Australian energy. Many of the expensive projects undertaken in Australia have run into difficulties.

One LNG project, the Ichthys joint venture between UGL and Inpex contractor JKC, has stalled due to contract disagreements. The $34 billion project is a joint venture between U.S., Japanese and Australian firms near Darwin and is among the most expensive LNG projects in the world, yet the project has continually gone over budget and is falling behind schedule.

UGL has seen its share price tumble by 30 percent as the dispute over the project has gone on, and now faces a $200 million provision to settle things with JKC over the $740 million SMP package and the $550 million deal made for the construction of the combined cycle power plant. JKC is a consortium of Japanese and American companies.

The massive Gorgon LNG terminal in Western Australia has been something of a boondoggle for all involved. Once complete it is expected to produce 15.6 million metric tons of LNG per year for 40 years and feed the demand for LNG in India and East Asia, where LNG is proportionally more important than anywhere else on earth.

Yet the project has been plagued with delays and is now $17 billion over budget. When the original decision to construct the terminal was made in 2009, the future of LNG seemed bright; now the market is saturated, competition from recently-completed LNG export terminals in the U.S. will likely reduce the available market for Australian LNG.

Shell announced in March that it was pulling out of its planned Browse FLNG (floating LNG) project due to persistent low prices; it’s recently announced “leaner and deeper” outlook will limit its interest in such projects, particularly now that it has acquired the BG Group.

Chevron, the primary mover behind the Gorgon project, enjoys a reputation in Australia as a tax-dodger. It has now used a shell company to extend a $7 billion loan to its Australian subsidiary, an in-house move meant to shore up financing for Gorgon. In the last few months Chevron has re-affirmed its support for the troubled project after a two-month shut-down was announced in April, after only one successful shipment. On the other hand, Chevron has announced that they are preparing to resume shipments from Gorgon after months of delays.

One Chevron executive, as he exited Australia, called for a renewed commitment to the country’s LNG industry. Chevron has sank about $80 billion into Australian ventures, including Gorgon and Wheatstone, an on-shore project being built in conjunction with Gorgon. His call was echoed by executives from Shell and other firms, as the political environment in Australia grows increasingly hostile towards an energy industry that some see as teetering on the brink of collapse.

Natural gas will remain in abundance, according to a recent IEA report which indicated that the current glut will endure through the next decade. There is also strong evidence to suggest that the surge in renewable energy, which currently enjoy a high rate of investment and falling costs, may already be overtaking natural gas. That being said, the market for natural gas continues to swing back and forth, enjoying a boom in mid-June.

There are reasons for optimism. A recent report by Wood Mackenzie indicated that LNG demand would increase by 130 percent by 2035. The consultancy has also indicated that Australia’s $180 billion LNG industry, developed over the last decade and now appearing something of an albatross, could bear potentially lucrative fruit further on down the line, particularly as projects like Gorgon are designed to bring returns over the very long-term.

One LNG firm, Australia Pacific LNG (APLNG), announced on June 29 that it had dispatched its first LNG shipment to Kansai Electric. The shipment left Curtis Island on the 29th and was bound for Japan.

The Ichthys project, once it overcomes the recent dispute and reaches profitability, will also prove competitive in the long-term. Once “de-bottlenecked” Australian LNG could be the most competitive and the best positioned to take advantage of rising LNG demand in India and East Asia, despite falling LNG consumption in Japan and the economic slow-down in China.

Profitability, however, is all relative. Wood Mackenzie assumes oil prices, to which LNG is pegged, will likely rise to $US70 by the end of the decade, which will bring an average rate of return for Australian LNG of 7 percent. Even if oil prices rise above $US80, the rate rises only to 9 percent.

The steady rise in oil prices since January has benefitted companies like Santos Ltd., which has seen its stock price double from $2.64 to $4.48 since January, though this is a far cry from the $15 it was trading at in 2014. Investors in Australian energy benefit from patiently waiting out this current depressed trend, with current investments likely to bring gains in a year or two, once prices have picked back up.

A recent statement from the Reserve Bank of Australia’s chief economist Alexandra Heath indicates confidence that Australian LNG will grow to be competitive despite the market set-backs. Heath was not as optimistic about Australian coal, and went out of her way to emphasize the importance of investing in renewable energy for Australia’s future, to match the $172 billion invested in Australian conventional energy.

By Gregory Brew for Oilprice.com

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