Australia's bid to be the world's largest LNG exporter may fizzle out

Australia’s bid to challenge Qatar as the world’s largest LNG exporter has been weakened by several factors including gas shortages, domestic supply commitments, natural declines at its LNG projects and the lack of a cohesive energy policy.

As a result, Australia is unlikely to overtake Qatar’s LNG export volumes for any meaningful duration on a sustainable basis, an analysis of production data showed.

In the most optimistic scenario Australia’s LNG exports may match Qatar’s for a few months in 2019 or 2020 when its production peaks, but the Pacific Rim nation will not be able hold its top position on an annual basis for very long unless circumstances change.

Qatar’s LNG export capacity is the highest in the world at 77 million mt/year, and the combined nameplate capacity of Australia’s 10 LNG projects put together is 88 million mt/year. The problem is that while Qatar consistently reaches full capacity, and sometime exceeds it, Australia’s projects consistently run up to 15% below capacity.

In fiscal year (June-July) 2017–2018, Australia exported 62 million mt of LNG as the last of its projects were ramping up. The government currently forecasts LNG exports to hit the 77 million mt/year mark in fiscal year 2019–2020, close enough to beat Qatar. But even Australia has its doubts.

“However, given the narrow difference between the projected exports of the two nations, Australia overtaking Qatar is not a certainty,” the Office of the Chief Economist said in its latest Resources and Energy Quarterly report.

Australia’s LNG exports will peak in 2020 at 79.4 million mt, but still remain below Qatar’s production of around 80.7 million mt on an annual basis, according to data from S&P Global Platts Analytics. After that Qatar’s goes into expansion mode to reach its 100 mtpa target by 2020.

DISTORTED ENERGY POLICY

Several factors have contributed to Australia’s lesser-than-expected LNG exports.

Much of the shortfall is from Gladstone on the east coast, that’s home to three LNG projects — Origin-ConocoPhillips’ Australia Pacific LNG, Shell’s Queensland Curtis LNG and Santos-led Gladstone LNG.

They exported 20.4 million mt of LNG in 2017 representing capacity utilization of 81%, with APLNG operating at 96% capacity, QCLNG at 78% and GLNG at 67%, according to Adelaide-based consultancy EnergyQuest.

These projects in Queensland state, based on onshore Coal Bed Methane or CBM gas, have been controversial for several reasons.

Conventional LNG projects are sanctioned on Proven or 1P reserves with 90% recoverability, but the Queensland projects were sanctioned on Proved Plus Probable or 2P reserves with 50% recoverability, according to EnergyQuest's chief executive Graeme Bethune’s paper at the World Gas Conference 2018.

This was one of the first mistakes.

Bethune said two of the projects, QCLNG and APLNG, had sufficient CBM reserves at the 2P level, but GLNG barely had enough 2P reserves for one train in a two-train project.

But since a single train was not commercially viable, the two-train project went ahead with plans to source gas from domestic market conventional gas reserves like the Cooper basin and other CBM projects, including acreage in neighboring New South Wales, he said.

“The LNG industry in Eastern Australia is fundamentally weak because its elements were developed in the wrong order,” according to a 2017 study by the Institute for Energy Economics and Financial Analysis.

It said plants were approved with no consideration of the domestic market, CSG fields failed to produce the gas expected, the projects suffered huge cost overruns and the massive overbuild of LNG capacity resulted in the East Coast domestic markets being undersupplied.

The problems were exacerbated by state restrictions on gas development and the oil price crash that sucked up capex needed for funding upstream work at Australian companies like Santos and Origin Energy.

“Santos in particular cut drilling and prioritized buying gas from the domestic market rather than spending scarce capital on drilling. At the same time the lower oil price meant that any prospect of east coast shale gas development went out the window,” Bethune said in his paper.

Other factors like higher gas demand in the power sector, different states implementing divergent energy policies and the lack of national energy policy meant that gas shortages were imminent, with supplies caught between domestic demand and LNG export commitments on the east coast.

Backed into a corner, the Australian government introduced the Australian Domestic Gas Security Mechanism in 2017 to ensure domestic gas supply even if “LNG projects may be required to limit exports or find new gas sources”.

The political impasse on energy policy remains.

The Australian federal government hasn't produced any energy projections since 2014, probably for political reasons, Bethune said last month, adding that east coast gas producers should prepare for heavy-handed political intervention over the next year.

This will take its toll on Australia’s LNG export capabilities.