A combination of new supply sources and rising costs at home could mean Australia's burgeoning LNG sector losing ground to new players, several speakers at an oil industry conference in Brisbane warned this week.
On Sunday the chief executive of the Australian Petroleum Production and Exploration Association, David Byers, cautioned that Australia's next A$100 billion ($96 billion) worth of LNG projects might be built elsewhere unless costs could be reduced.
"Australia's attractiveness as a place to invest is under pressure," Byers said on the eve of the annual APPEA conference.
Andrew McManus of Wood Mackenzie Australasia pointed to another factor affecting future Australian LNG projects -- increased sources of supply.
Australia faces a hiatus in new LNG projects as LNG buyers' focus turns to the US, McManus predicted at the conference Monday.
"It is inevitable that markets like China and Japan, which are major Australian LNG offtakers, may now seek to diversify their supply options," McManus said.
The US, which offers potentially lower-cost, more flexible LNG and can approve export projects quickly, "is leading the pack," of potential new LNG suppliers before 2020, McManus said. But, he added, "significant uncertainty remains around the timing and volume of LNG the country will ultimately export." Nonetheless, Wood Mackenzie predicts the US and Canada will account for half of the world's potential new LNG capacity by 2025.
Other countries could also benefit from growing global LNG demand, the WoodMac consultant said.
"Almost 80% of the next wave of pre-FID [final investment decision] LNG projects are located in the 'big five' of the US, Australia, Canada, East Africa and Russia," McManus added.
However, he cautioned: "Opportunities for new Australian projects will be limited, and the high-cost environment will need to be controlled for these projects to be competitive with emerging supply regions."
Any new Australian capacity was likely to be smaller in scale than the large greenfield developments approved in recent years, and would likely be limited to the expansion of existing facilities or floating LNG, he added.
Looking forward, Australian LNG projects approaching FID would need to be aware of what buyers wanted and be ready to respond if other regions faltered, McManus said.
Matthew Fitzgerald, a partner at legal firm Herbert Smith Freehills, agreed that reaching FID dates for key Australian LNG projects would soon be critical as the first East African LNG projects would come on line around 2016, perhaps accompanied by US LNG exports too.
"For those Australian LNG projects that are still working towards FID we think it's very important that FID is achieved as soon as possible because of the fact that the East African gas industry is going to come on line so... we think 2016 is probably an important year [for Australian LNG projects] in that regard," Fitzgerald told APPEA delegates Monday.
Fitzgerald highlighted India as market where East African LNG could compete with gas from Australia.
In future portfolio buyers might also buy LNG from Mozambique and Tanzania and thus play a role in determining pricing and whether new projects got off the ground, Fitzgerald added.
David Clinch, who heads Herbert Smith's Greater China energy practice, said that East Africa's geographical position -- making it able to supply the Asian and Atlantic markets -- could lead to big changes in the global LNG market.
"Could we end up with a more global LNG price...and even create a bigger spot market in Asia?" Clinch asked.
Peter Cleary, vice president of strategy and development at Australian oil and gas producer Santos said he thought it unlikely.
"There won't be one global [LNG] market priced off the cheapest price," Cleary predicted.
Speaking on the sidelines of the APPEA conference on Tuesday Cleary said that even when priced off today's Henry Hub gas price of about $4.50/MMBtu, the addition of liquefaction and shipping costs would make US LNG only $3-4/MMBtu cheaper than LNG being sold to Asian buyers with a link to a crude oil price of $100/barrel.
The Henry Hub price could rise in future, and the oil price could fall, Cleary reasoned. In addition, the US is only likely to be able to supply between 20% to 40% of new global LNG demand, "so Asian buyers can't get all their gas from the US."
Asked if Asian buyers tied in to long-term, oil-linked contracts might renege if much cheaper LNG became available, Cleary said he expected Santos' gas buyers to "honor the sanctity" of their contracts.
Santos CEO David Knox added that in Japan gas and utility companies are still rewarded is for security of supply, not shaving cents off a contract price, while the two Asian buyers from its Gladstone LNG project are Korea Gas Corp, which has never reneged on a contract, and Malaysia's Petronas, which as a large gas seller itself does not want to "screw up" the LNG market.
