In the increasingly topsy-turvy world of liquefied natural gas (LNG) markets, the world’s largest LNG importer could soon be exporting the super-cooled fuel to the world’s second largest LNG exporter – a situation unimaginable, even laughable just a few years ago.
On Monday, news broke that a Japanese consortium, made up of JERA, the world’s largest private LNG buyer, and Marubeni Corp., were planning to export gas to industrial users on Australia’s eastern coast. There is even a possibility that the Japanese consortium will construct an LNG import terminal in New South Wales (NSW), Australia’s most populous state.
A report three days ago in The Australian Financial Review said that the proposed terminal’s imports could represent up to 75 percent of NSW’s gas demand, while plans to increase the number of gas-fired power stations will increase that demand pull.
How could Japan, for all practicable purposes a hydrocarbon anemic country with scant oil and gas resources, import gas to oil and notably gas rich Australia?
The answer is straight forward: In an effort lock in lucrative prices for LNG in the Asia-Pacific region amid limited supply around the start of the decade, Australia went on an LNG export project development feeding-frenzy. Since the country doesn’t have an energy master plan there was no coordination on these massive CAPEX export projects. Adding insult to injury, budget blowouts and cost overruns since then have been the norm, casting further doubt on the wisdom of Australia having as many as ten major LNG export projects.
As a result, Australia will soon overtake Qatar as the world’s largest LNG exporter, with more than 80 million tons per annum (mtpa) of liquefaction capacity. Qatar, however, and likely for geopolitical reasons as much economic, has vowed to increase its production capacity from 77 mtpa to over 100 mpta in the next five years.
The U.S, for its part, is projected to become the world’s second largest exporter of LNG by the end of 2022, just behind Australia and ahead of Qatar, the Paris-based International Energy Agency (IEA) said in July. However, the IEA did not factor in Qatar’s 100 mpta uptick goal into its equation.
Notwithstanding, given the Trump Administration’s pro energy thrust and the call to make the federal review process for new LNG project proposals easier, the U.S. could still rival both Australia and Qatar as the top LNG exporter by the mid to later part of the next decade.
Cataclysmic events intersect gas markets
At the start of the past decade LNG supply contracts were almost entirely indexed to the price of oil, virtually ensuring producers with both a steady stream of income since buyers were locked into 20 and even 30-year long term contracts, and also ensuring that these prices would only not pay for their capital-intensive projects, but lock in handsome profits.
This situation for LNG markets climaxed on March 11, 2011, when a 9.1 magnitude earthquake hit the Japanese coast with a subsequent tsunami, which caused not only a meltdown at the Fukushima Daiichi Nuclear Power Plant, but the subsequent shutdown of all of all of Japan’s 50 nuclear plants needed to produce electricity.
The result was cataclysmic for LNG buyers and for Japan itself whose gas import dependence as a result of the shutdowns sent the country’s trade imbalance to record highs. With a then global shortage of LNG and with buyers at the mercer of suppliers, spot prices in Asia, which represents around two-thirds of global LNG demand, hit historic highs, finally breaching the US$20/MMBtu mark in February 2014. For the next several years, Japan and other large LNG buyers, India, South Korea and Taiwan, sought various ways to mitigate stretched LNG supplies and spiraling prices associated with that shortage.
However, sine then massive gas output from Australia and now the U.S. has flooded global markets, ensuring that the historic supply overhang could continue to at least 2022, or even longer, depending on whose forecasting model you use.
Buyers fight back
Over the past two years, this supply glut has given ammunition to LNG buyers to fight back as they seek better contractual terms, mostly pivoting away from restrictive destination clauses, take or pay provisions, and oil-price indexations.
Australia, for its part, whose headlong thrust in the LNG export race has neglected to reserve enough gas for domestic consumption, setting off a political fire-storm within the country and forcing Canberra to act.
With the situation spiraling out of control, Prime Minister Malcolm Turnbull's administration announced controversial export controls in April that would restrict exports from the region if gas became unavailable to domestic users.
And, it’s this Australian domestic supply gap that Japan is seeking to fill – in essence coming full circle in just a matter of years.
Ironically, JERA (which is spearheading the push to export LNG to Australia) was formed in 2015 when Japan was scrambling to wrest some measure of control over its over-reliance on LNG imports, particularly its increase of LNG spot cargoes and exorbitant prices. JERA is a joint venture between two of Japan’s biggest power companies, Tokyo Electric Power and Chubu Electric Power.
LNG markets have now come full circle, with more unexpected developments sure to follow.
By Tim Daiss for Oilprice.com
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