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Analysis: Australia mulls LNG imports; inflow will alter trade flows, regional markets

Singapore — Australian energy companies are considering LNG imports to meet a shortfall in domestic gas supply, a move that will impact regional gas markets, trigger new trade flows and influence pricing decisions for the players involved.

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In an unusual turn of events, Australia could end up importing LNG shortly after topping Qatar as the world's largest LNG exporter by the end of the decade, with at least two floating storage and regasification units on the drawing board and progressing rapidly.

ASX-listed AGL Energy has proposed an FSRU at Crib Point, off the coast of Melbourne, with a capacity of 1 million mt/year. It is expected to clear final investment decision in 2019 and start operations within two years of FID.

The second FSRU is planned at Botany Bay near Sydney by a consortium called Australian Industrial Energy, comprising Australia's Squadron Energy and Japan's Jera and Marubeni. Squadron Energy is a privately owned natural resources company and part of iron ore magnate Andrew Forrest's Minderoo Group. The AIE project expects FID this year and imports by 2020.



A third FSRU near Adelaide has been talked about, but details were not immediately available.

"Gas-on-gas competition is great for the consumer," AGL General Manager Phaedra Deckart said at an industry conference earlier this year.

"If there is room for two, then again, that brings more competitive supply to the market, then that again, is great for the consumer," she said.

Australian LNG imports open up significant opportunities for producers and portfolio players.

The ramp-up in US LNG volumes, which are largely spot market cargoes with open destinations, means that US LNG cargoes have a strong chance of arriving on Australian shores.

Even the LNG projects in Western Australia and Northern Territory have the option to divert spot cargoes to southern Australia, if they can overcome cabotage restrictions and commercial hurdles.

Australia's winter demand occurs during a slump in summer demand in the northern hemisphere, giving traders a seasonal outlet for excess cargoes.

Most importantly, LNG imports will relieve pressure on both the Australian government as well as the three major LNG projects in Queensland, which are being pushed to divert contracted supplies to regional markets.


MEETING THE ENERGY DEFICIT


A confluence of factors has caused the gas shortages in southeastern Australia, where the FSRU projects are planned.

"[The shortages] were partly from irrational exuberance about coalseam gas," EnergyQuest CEO Graeme Bethune said in an interview, referring to Queensland's three large LNG projects, Gladstone LNG, Australia Pacific LNG and Queensland Curtis LNG, which source gas from coalseam formations.

Bethune said there was enormous optimism about unconventional gas reserves and resources in the late 2000s and early 2010s that was unrealistic, but the reserves now appear insufficient.

"The greatest area of reserves risk is Queensland coalseam gas. Last year, Queensland 2P reserves were written down by 1,341 PJ," according to a quarterly analysis by EnergyQuest. It said this is more reserves than the entire Cooper Basin, an oil producing region that has Australia's largest onshore oil field.

EnergyQuest said a preliminary analysis shows Queensland's LNG projects face "substantial reserves risk" and there is "a looming supply deficit in the southern states due to the decline in fields offshore Victoria."

The decline in reserves is exacerbated by unexpected demand.

Australia's gas-fired power generation has spiked with the closure of coal-fired stations due to an environmental backlash, which has also caused a clamp down on exploration activity in southern Australia. For instance, the state of Victoria, where much of the energy demand is located, has a moratorium on conventional exploration and indefinite ban on fracking.

Policy decisions have also contributed to the shortages. Western Australia has a long-running policy which states that 15% of gas production is to be reserved for domestic use, but eastern Australia doesn't.

"These problems are not likely to be solved by trying to fine tune the east coast gas market," Bethune writes. "What is needed is significant additional sources of gas supply, particularly in the southern states, such as through the LNG import proposals of AGL and Australian Industrial Energy."

He said imports will help avoid the pitfalls of large-scale government-directed curtailment of LNG contracts, and are cheaper and quicker than building a pipeline from Western Australia.

But not everyone is convinced.

Earlier this year, pipeline-proponent Colin Barnett, Western Australia's former Premier, asked: "Does it really make sense for Australia, as the world's biggest exporter of LNG, to be buying LNG?"

He said importing LNG immediately locks energy costs, particularly gas costs, into the world trade in LNG especially when LNG demand is growing exponentially.

"So, my answer -- not new -- is we need to build a pipeline. It is as simple as that," Barnett said.

-- Eric Yep, eric.yep@spglobal.com
-- Nathan Richardson, newsdesk@spglobal.com
-- Edited by Geetha Narayanasamy, geetha.narayanasamy@spglobal.com