Australia LNG Industry – A Global Success Story with an Uncertain Future

Big Tanker Ship imageThe life cycle of liquefied natural gas (LNG) is an elaborate process that weaves together a host of players coordinating a complex supply chain. While that process begins with natural gas suppliers, along the way it touches liquefaction plant operators, transporters, traders, and more — each responsible for ensuring the commodity reaches the end consumer while maximizing profit.

As a leading software provider to the LNG industry, Allegro is dedicated to addressing the complexities of LNG with next-generation commodity management software designed to manage the complex aspects of gas liquefaction, storage, transportation, and regasification, as well as trading, actualization, billing, and inventory valuation.

As industry players well know, the LNG market is constantly evolving — driving the need for end-to-end transparency even higher. The most recent change?

A new global LNG export leader.

The World’s Largest Exporter of LNG

In November of last year, Australia claimed the title of “The World’s Largest Exporter of LNG” with some 6.5 million tonnes (about 312 Bcf) of LNG delivered to the fast-growing Asian markets — surpassing perennial export leader Qatar, which shipped 6.2 million tonnes (or 298 Bcf) to its global customers during that month. Although Australia’s primacy was relatively short-lived (as Qatar’s output had dropped due to plant maintenance), with several recently completed LNG facilities currently ramping-up production, the country is set to compete with Qatar as the global LNG export leader for the next several years… at least until the Qataris complete a number of expansion projects in 2024, at which time their annual output will reach an estimated 110 million tons, placing them well ahead of the Australians.

While becoming the world’s largest exporter may be a point of interest to some and pride to others, that title — however long it may or may not last — doesn’t fully reflect the impressive growth in Australia’s LNG industry over the last decade. Though Australia has produced LNG since Woodside’s Northwest Shelf project came online in 1986, rapidly increasing demand for natural gas from the Asian markets spurred some $250 billion in investment LNG projects to develop eight new export facilities since 2008. This intensive development effort has now culminated with the commissioning of the world’s largest offshore floating LNG facility, Shell’s Prelude plant, which began ramping-up production in December of last year.

The Full Capacity of Australian Natural Gas Exports

With vast supplies of natural gas in coal seams, shale deposits, and tight sands, Australia currently produces about four times as much gas as is domestically consumed. And given the country’s geographic advantage near the high-growth Asian markets (particularly China, India, and South Korea), natural gas is set to replace metallurgical coal as the country’s second most valuable export resource in 2019, trailing only iron ore.

However, despite this success in selling into the fast-growing Asian markets, competition and capacity to fill future demand in that region are increasing, and most analysts are projecting a surplus of global supply until demand catches up around 2022. With approximately 315 million tonnes imported to global markets in 2018, total global nameplate liquefaction capacity exceeded demand by about 90 mpta (though not all plants will run at capacity all the time) at the end of 2018. And, with an estimated 25 mpta of new global supply projected to come online in 2019, there is little doubt that most LNG producers will face lower prices in the near term.

Looking at the Future of Natural Gas and LNG in Australia

According to the Australian government, proved natural gas reserves currently stand at 240 trillion cubic feet (Tcf) with estimates of potential reserves as high as several thousand Tcf. However, most of those potential reserves exist in shale or tight sand deposits, which would require massive hydraulic fracturing to economically produce — a controversial, divisive, and increasingly politically-charged topic around the country.

Environmentalists in Australia have been successful in banning fracking in most regions over the last few years, though recent research funded by two of the territorial governments has concluded that fracking represents a very low risk of environmental damage. With the release of the results of these studies last year, Western Australia and the Northern Territory partially lifted moratoriums that had banned fracking in those two states. While significant swathes of acreage in both of the territories are still off-limits to fracking, operators of existing fields and some previously awarded exploration blocks have been allowed to resume activities — under close supervision — to access these unconventional reserves.

Australia LNG image

Balancing Liquefied Natural Gas Production Growth and Export Capacity with Domestic Demand

However, even with the production growth, these new reserves may provide in the western and northwestern regions of the country, building any new or expansion LNG export capacity in Australia will be challenging. Rapidly-declining reserves of coal-seam gas in the east and southeast areas of the country have forced some LNG companies to purchase natural gas in the country’s wholesale market. These constraints led to rising prices and prompted discussions by many, including Australia’s largest utility, AGL, that it may be necessary to build LNG import facilities on the country’s east coast to address projected LNG production shortfalls and distribution imbalances.

Pressures from Environmental Groups

Additionally, the industry saw recent success in the partial lifting of the fracking moratoriums, but this may be short-lived. Environmental leaders promised to push for a country-wide ban not only on fracking but on all exploration and drilling — arguing that natural gas production is adding to the country’s growing levels of greenhouse gas emissions.

Environmental groups will continuously challenge the country’s natural gas and LNG industries. Given their growing political clout and broad popular support, these organizations will undoubtedly play an important role in future territorial and federal elections. If they prove successful in helping to elect opponents to energy development, the regulatory pendulum could swing away from supporting these critical industries despite the valuable jobs and infrastructure they provide in many of Australia’s most remote and underserved regions. Should that happen, the country’s vast natural gas wealth could go largely untapped, ending any plans or hopes for growing LNG export capacity, and potentially leading to localized shortages and much higher gas prices for Australian consumers.

The Keys to Navigating an Uncertain LNG Market in Australia

The Australian LNG market offers great promise, but uncertainty around domestic regulations, increased competition, oversupply, and pressure from environmental groups present ongoing challenges. Because of these complexities, LNG market participants are in need of flexible and extensible commodity trading and risk management solutions that can help them navigate a diverse and volatile market.

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