The Great Gas Gamble: Australian Financial Review - by Angela Macdonald-Smith 22 Jun 2013 What could be wrong with this picture: Australia is about to ride a second commodity boom in gas, just as demand for coal and iron ore pulls back. A massive $200 billion investment splurge in new liquefied natural gas supply means we will overtake Qatar as the world’s number-one exporter of LNG by about 2018. Three huge LNG export projects being built in Queensland will end the comfortable isolation of the east coast gas market, linking it for the first time with international commodity prices. Federal Resources and Energy Minister Gary Gray calls the surge in LNG supply capacity the” finest achievement" of his predecessors, the Coalition’s Ian Macfarlane and Labor’s Martin Ferguson. An impressive seven of the 12 major LNG export projects under construction around the world are in Australia. On the face of it, here is the next big thing to keep the Australian economy afloat for years to come. Yet this gas bonanza is causing fierce divisions. Firstly there are the sceptics who reckon this so-called boom is overstated, that rising costs will blunt Australia’s competitive edge and a weakening of Asian gas prices take also some of the glitz off the golden egg. Then there is the effect onshore. As gas prices rise, so do the stakes for Australian manufacturers, Australian consumers and the politicians who must deal with the problem. Five dollar gas is history," Macfarlane says, as local manufacturers complain of price demands by producers for new supplies that have already topped $8 per gigajoule, double historical levels. The angst on the east coast is particularly severe as gas buyers used to rock-bottom prices contemplate the prospect of competing with the Asian export market for their supplies. Up until the last few years, no more than two new LNG projects had ever been constructed in the country simultaneously. The rush of investment, while a boon for the economy, has squeezed labour and construction resources and driven up costs to levels that make the new plants the most expensive worldwide, according to the International Ener~’ Agency. The reward in terms of export dollars will be huge, however, with LNG export capacity to approach 90 million tonnes a year by the end of the decade, more than four times current levels. Depending on oil prices, Australia’s export revenues from LNG are forecast to jump more than live-fold in the next five years, to $60.9 billion, overtaking Australia’s commodity export stalwart coal and only just behind iron ore. For Queensland more specifically the boon also comes in jobs and state revenues: There are 31,000 people now employed in the gas industry, while estimates of royalties, reined back in the June budget, are seen at $450 million a year within four years. Export revenues are put at $53 billion a year. But others see little to cheer about. "There are no winners out of this gas boom," says Mark Chellew, chief executive of building materia!s producer Adelaide Brighton, which is facing a surge in prices for the gas it uses to fire its kilns. He blames the rush on three separate groups forging ahead with separate worldscale LNG projects side by side in Gladstone, all to be fed by thousands of separate wells sunk in coal seams across the Surat Basin in south-central Queensland. The extracted gas will be frozen in huge refrigerator-like plants on Gladstone’s Curtis Island, converting it into liquid forni for shipment to high-paying buyers in ener~i-hungry Japan, South Korea and elsewhere across Asia. With the first LNG still a year from being shipped from Gladstone, the three projects have already suffered a combined blowout in their construction budgets of almost $10 billion. Some are having to supplement their own coal seam gas resources with other gas supplies that would otherwise have been available for local customers. Estimates of returns from the projects have suffered, with Macquarie Equities putting likely returns from Santos’ $US18.5 billion GLNG venture at just 9.5 per cent, below the company’s cost of capital. "In hindsight the country has allowed too many refrigerators to be built in Queensland which will cost more than we thought they would," Mr Chellew says. "That has impacted shareholder returns and is going to lead to a shortage of gas on the east coast and significant price rises for domestic users. It’s a massive public policy failure which will unfold in terms of the impact on our economy from 2016 on." Once the Queensland plants are in full flow, a huge 70 per cent share of daily east coast gas production will be being exported as LNG, says Macquaric ener~’ analyst Adrian Wood, comparing that to the furore in the US over a potential 10 per cent of local gas being shipped overseas. "Of course it’s going to have some sort of impact," he says. But Mr Macfarlane, who oversaw the germination of the Queensland LNG export industry as resources and energy nhiriister in the Howard government, rejects the suggestion that local manufacturing has been sacrifIced in a chase for LNG export dollars. "The reality is that had the LNG industry not been built then this gas would still be sitting in the ground and would still be too expensive to extract by backing into NSW," Mr Macfarlane says. "That is the bottom line." Gas prices on the eastern coast, historically around $3.50 per gigajoule, have already passed $4 for many customers and are on their way north. Producers such as Santos forecast prices will reach $6-$9 once the LNG projects in Queensland start up. An Australian Industry Group survey found that prices of $8.70 a gigajoule on average are already being quoted for new contracts or long-term contracts past 2015. UBS says prices will peak at over $10 per gigajoule for deliveries in Queensland between 2016 and 2019. Many manufticturers, already struggling with the still relatively strong Australian dollar and high labour costs, say they cannot cope. The pain will be most severe in NSW, which relies on other states for 95 per cent of its gas requirements. Chop-and-changing government regulation and landholder protests have slowed development of the state’s coal seam gas resources to a snail’s pace. Small explorers have abandoned the state, while larger players such as Santos and AGL Energy wrestle with ever-tightening regulations as they try to push their projects forward. AGL chief executive Michael Fraser, whose company is short of gas in NSW past 2016 when its major supply contracts start to expire, warns of thousands ofjobs being lost as prices rise. EnergyAustralia managing director Richard Mclndoe cautioned this week that the company’s $430 million modern gasfired power plant in NSW is becoming uneconomic compared with generators that burn cheap coal. "A supply crunch is looming, driven by export demand and failure to develop new production," he said. A lack of resources is not the issue. While proven and probable coal seam gas volumes are put at 2983 petajoules, total resources in the state may be as high as 155,000 petajoules, more than 95 times 2009 consumption, according to the Grattan Institute’s energy program director Tony Wood. But no new supply projects are under construction, with AGL’s Gloucester coal seam gas project the closest to a decision but still hamstrung by policy uncertainty. Macfarlane says the LNG industry is being unfairly blamed for the problem, which lies more with NSW. "In the end the solution to this problem is to develop the industry in NSW," he says. The second thing is that industry is going to have to accept that the gas price is going to internationalise, and on a cost basis, gas won’t be lifted out of the ground for less than $7 because itjust costs that much to do it." But that hasn’t stopped manufacturers calling for government intervention to stop the rot. One of the loudest voices is that of Manufacturing Australia chairman Sue Morphet, who has called for a percentage likely under 5 per cent of resources to be reserved for local use. Morphet argues that reserving just 5 per cent of east coast gas for domestic usc would support $29.5 billion in manufacturing output. The Grattan Institute wants governments to steel themselves against calls from interest groups for such intervention and instead tackle market issues to improve F~A 018 transparency, ease capacity trading on pipelines and break upjoint venture marketing. Australian Pipeline Industry Association chief executive Cheryl Cartwright argues instead for more fundamental action on the policy front, and says that attempts to remodel the relatively undeveloped and disconnected Australian gas market on the deep and developed US market will be wasted. "We’ve got to find a way to improve the market that we’ve got rather than try to emulate something that doesn’t match our gcographyorgeolo~’," Cartwright says. She suggests an alternative approach, involving government putting in place a fund to co-invest in or underwrite long-term investments in gas infrastructure. That would have to be backed with a policy commitment by government that ensures a long-term future for gas in Australia, such as a policy that encourages gastired power generation. But the difficulty for manufacturers is that prices will rise anyway, even if the supply crisis is solved. "The reality is that gas is the last commodity to internationalise," says Macfarlane. "Even if we get the supply situation right the sheer base coast of pulling out coal seam or shale gas, it’s got to be a price approaching the international price anyway or compailies will leave it in the ground." It’s a bitter pifi for some to swallow. "What was Australia’s competitive advantage? It was cheap energy," Adelaide Brighton’s Chellew says. "Not only do we not have cheap energy going forward we actually have the most expensive labour because of our industrial relations policy at the moment. So Ithink our public policy has scored an own goal." At the same time, all is not well on the LNG side either, with a potential second wave of investment in export capacity seeming increasingly unlikely. Labour costs that are among the highest in the world together with an increasingly onerous environmental and regulatory burden are threatening to halt growth in the industry in its tracks. Australian LNG project costs have reached $US4000 per tonne of supply capacity for Inpex’s $US34 billion Ichthys project, the lEA says, four times as much as ConocoPhillips’s Darwin LNG plant cost a decade ago. They are at severe risk of being priced out of the market as cheaper supply sources emerge around the world, particularly shale gas-based ventures in the US and Canada. Industry and government officials put the potential investment at stake in Australia at $100 billion to $150 billion. Already this year Woodside Petroleum’s ambitious plan for a massive onshore development of its Browse gas resource at a brand new site on the Kimberley coast in Western Australia has fallen by the wayside. Previous estimates of a possible cost of $45 billion are understood to have been well short of the mark. The Browse partners will instead take another two years to work up a cheaper alternative, with a floating LNG project the most likely outcome. ExxonMobil and BHP Billiton are also going down the floating route for their large but remote Scarborough gas deposit, far off the WA coast. While floating LNG has yet to he commercially or technically proven in any producing project worldwide, the excitement about the process in the industry is impossible to ignore. Not so happy is WA Premier Colin Barnett, who is vehemently opposed to the process, and fears a loss of revenues and jobs for the state. Trade unions have gone further, with Amalgamated Metal Workers Union WA state secretary Steve McCartney labelling the technology "economic vandalism" and vowing to fight it "all the way." 60.9 S billion projected revenues from Australia’s LNG exports in five years time.
Posted on: Sun, 30 Jun 2013 17:37:07 +0000
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