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Analysis: Australia's growing LNG export controls jeopardize oil and gas investment

London — A growing litany of government controls over Australia's natural gas exports will jeopardize future investment in the country's oil and gas sector and render it uncompetitive against global rivals like the US, Middle Eastern exporters and Russia, top executives said at the SEAOCC conference in Darwin this week.

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The concerns come amid global trade tensions as Chinese investors are turned away from the US energy sector, leaving rivals like Australia to take advantage of the situation. However, a complex political situation may prevent the country's LNG projects from doing so.

Growing curbs on Australian LNG exports also threaten the country's stable business environment -- one of the biggest advantages it has compared to remote exploration areas like Mozambique, the politically unstable Middle East and underdeveloped regions like Papua New Guinea.

Earlier this month, the Australian Labour Party -- the current favorite to win the next federal election, which will be held at some point this year or next -- said it plans to put in place permanent LNG export controls, bringing Australian energy policy closer to that of Southeast Asian countries like Indonesia than to a free-market mechanism like the US.

"Australia relies on foreign investment but sovereign risk is rising fast," Santos chief executive Kevin Gallagher said.

He said political parties were embracing policies of price controls, export controls and forced divestiture of assets legally created or acquired, and voiced concerns that populist interventions could get worse as federal elections get closer.

If governments continue to escalate their interventions to change the rules after investments have been made in export projects, they increase the prospect of investors assessing Australia as being too risky a destination for their funds, Gallagher said.

"Overseas investors are genuinely concerned about export and price controls, and the security of their investments in Australia," he added.

Foreign investors need governments to reassure them that export contracts will be honored, Australia will remain committed to competition and free trade, and that it will allow its vast undeveloped gas resources to be unlocked on stable and internationally competitive terms, Gallagher said.

He previously noted that the industry had already agreed to policies that include export controls for uncontracted gas, domestic gas reservation for new supply sources and a national interest test for new LNG trains.

FOREIGN INVESTORS PANIC

Australia is poised to overtake Qatar as the world's largest LNG exporter by 2020, and is already the largest LNG supplier to countries like China and Japan. Political rhetoric on LNG exports has put energy security for these countries at risk.

"We were surprised and embarrassed by last year's announcement to limit LNG exports under the Australian Domestic Gas Security Mechanism," Osaka Gas chairman Yasuo Ryoki said.

He said the salesmen at Osaka Gas, which is one of Japan's largest gas buyers and power utilities, were busy taking phone calls from panicked end-users who had read about the possibility of Australia's export restrictions.

"While we understand the notion of the federal government that exports should be based on stable supply within the country, we ask for more discretion in the future since a more careful explanation beforehand would have avoided misunderstanding and confusion," Ryoki said.

On June 20, 2017, the Australian government announced the ADGSM, meant to ensure domestic gas supply by requiring LNG projects to limit exports or find offsetting sources of new gas. The ADGSM has not been triggered but the industry responded by voluntarily diverting spot cargoes to domestic markets to meet shortages in eastern Australia.

"We never thought that there could be any sovereign risk in Australia. It was really really surprising and made us very uneasy," Ryoki said.

Osaka Gas has been ramping up energy investments in Australia to counter shrinking markets in Japan. These investments include upstream, midstream and downstream energy sectors. But companies like Osaka Gas find regions like the US offering better opportunities, which is why a decline in sovereign risk could be a gamechanger for Australia.

"It has been attractive to invest in Australia in the past. In addition to large resources and a skilled workforce we've enjoyed relative certainty and predictability of government policy. This has helped to attract investments here versus other global locations," said Pat Dinan, director of the Barossa project for ConocoPhillips, which will provide more gas to the Darwin LNG facility.

"What is less clear is whether it will remain so in the future," he added.

--Eric Yep, eric.yep@spglobal.com

--Edited by Alisdair Bowles, alisdair.bowles@spglobal.com