Rain And High Winds Battering The UK

Australia is poised to overtake tiny Persian Gulf natural gas powerhouse Qatar as the world’s largest LNG exporter in coming years, but cost overruns, labor issues and fierce competition for resources have caused project delays or cancellations. So many are wondering which projects ultimately get built, when will they come on stream and how much LNG can the market expect from down under?

Professor Peter Hartley at Rice University’s Baker Institute recently clarified the picture at the USAEE/IAEE North American Conference in Anchorage, Alaska. Cost increases and market opportunities will limit medium-term Australian LNG development, he said.

He set the stage by discussing the domestic market picture, explaining there are 3 natural gas markets in Australia: North, East and West. The country currently produces much more gas than it consumes, with 2012 output of 49 billion cubic meters – an 8.8% year-on-year increase – and consumption of 25.4 Bcm last year, which represents an almost 1% decrease from 2011.

Domestic gas demand primarily goes to power generation and mining, which includes natural gas liquefaction. A liquid trading hub is developing in Eastern Australia, said Hartley.

Hartley pointed out that Australia is the first region outside North America to produce natural gas from shale deposits. The country’s Cooper Shale is similar in quality to US Haynesville and Barnett Shale.

“We have access to water, markets and rigs,” said Hartley. Interestingly, although the Cooper Shale is centrally-located in a desert region, the geology creating the underlying aquifer is believed to extend beneath the sea into Papua New Guinea, where ample rain feeds and replenishes it.

Australia shares many of the same conditions often cited for facilitating US shale gas development, like previous knowledge of the resource (over 700 wells have been fracked), land access, water access and technology, Hartley said.

LNG Project Cost Overruns

There are currently 10 LNG projects operating or under construction. Well-publicized cost overruns are caused by several factors, including environmental constraints like carbon capture and storage requirements at the massive Gorgon project. Another contributing factor, high labor costs, is due in part to high land and housing costs for employees. And limited infrastructure – including hospitals and healthcare facilities – adds to the cost of staffing development projects in some of the country’s remote regions.

Competition for labor and materials from other mining projects are also driving LNG project cost increases. In addition to natural gas and some oil, Australia is rich in many minerals and industrial metals.

After the wave of projects currently under construction, market opportunities will largely dictate which planned projects receive final investment decisions and ultimately get built, said Hartley. “Australian LNG exports are joined at the hip with Chinese demand,” he said.

Although most of the projects under construction have sales and purchase agreements with Japanese utilities and other importers, Hartley explained China will account for a bulk of the incremental regional demand. Whether or not Japan restarts its nuclear plants remains another major wild card that will impact future Australian LNG project development.

India’s natural gas import requirements are another important factor, he said, not necessarily because Australian LNG cargoes would directly feed that market, but because even if more proximate Middle Eastern volumes go to India, that would create market opportunities for Australian LNG in other parts of the world.