Gas exports to fire

Australia could be the world’s largest LNG exporter by the end of the decade.

Summary: Australian exports of liquefied natural gas are set to rise 300% by the end of the decade, pushing us up the LNG exporting ranks – potentially to the top position. While US shale will provide competition, there is limited near-term downside risk to Australia’s export prices.
Key take-out: Australia has seven major LNG plants under construction, and all will begin exporting to Asia by 2015.
Key beneficiaries: General investors. Category: Commodities.

Australia is a significant player in the global gas markets and on the verge of becoming an even larger one. It now accounts for 9% of globally traded LNG, and production is likely to ramp up substantially. Investment in capacity to export LNG to Asian markets has been the key driver of Australia’s recent investment boom. Seven of the world’s 12 largest LNG plants are being built in Australia, and investments in Australia account for around two-thirds of all current global investment in the LNG industry.

These investments are long-term projects. The first began in 2008, the last in 2012, and the big ramp-up in production is yet to come. Absorbing this positive investment shock has been an enormous challenge for the Australian economy. It has led to cost overruns and crowded out other parts of the economy. However, the investment stage is starting to slow. Exports are set to increase sharply, with government forecasts suggesting a rise of over 300% between 2015 and 2020.

Based on Australian government projections, Australia will become the second-largest exporter of LNG in the world by 2016. If all major investment projects under consideration are built, Australia stands to become the world’s largest exporter of LNG by 2020, overtaking Qatar.

A potential threat to the Australian LNG story has been the large increase in US shale gas production and recent plans for US gas exports. This has put downward pressure on US onshore gas prices and raised some concerns about Australia’s projects; but the near term risk to Australia is small, as almost all (91%) of its new LNG exports are forward sold on contract to Japan, China, India and Korea. Australia is also well ahead of other countries in building its LNG export facilities, with capacity set to ramp up from 2015.

Australia has potential shale and unconventional gas sources of its own. These developments are in their early stages, but could become a significant source of the country’s gas production, especially given the LNG export capacity that is already being built.

Recent investment will see even more gas exported

Exports of LNG have already increased significantly in recent years. As a share of total exports, gas exports have risen from 1.4% in 1990 to 6% at the end of 2012. From here, the Australian government forecasts predict a rapid rise in LNG exports over the next decade – as the strong surge in investment brings a significant amount of capacity on line (Chart 2).

Exports are expected to ramp up from 2015, as some of the large projects currently under construction begin to enter the production stage. Overall, LNG exports are projected to increase by 340% over the period from 2012-2020. This growth would see gas exports rise to 12% of Australia’s exports by 2020 – even accounting for the large expected ramp up in Australia’s iron ore and coal exports. Based on current investment, Australia will become the world’s second-biggest LNG exporter by 2016. If all planned projects came on line, it could overtake Qatar to be the world’s biggest LNG exporter by 2020.

Demand from Asia is expected to rise

The key source of demand over the rest of the decade is expected to come from emerging markets, particularly in Asia. The International Energy Agency estimates that global gas consumption could rise 13% between 2012 and 2020, led by an increase in demand from Asia. Environmental policy aimed at reducing carbon emissions could also provide a boost to gas demand, as natural gas produces less carbon emissions than coal fired electricity plants. The Chinese government anticipates increasing the share of natural gas in total energy consumption to 10% by 2020, from around 4% now.

The future role of nuclear energy in global energy production is also uncertain and may provide a further boost to demand for natural gas.

US shale gas exports a medium term risk

One risk to the outlook for Australia’s natural gas production and prices is the competition provided by the shale gas boom in the US and proposed LNG export capacity in Canada. The rise in production of gas in the US has already seen a significant decline in the price of natural gas in the US. The US domestic market gas price (Henry Hub) has fallen to around $US3.60 a unit. Substitution away from thermal coal usage in the US market has also put downward pressure on global thermal coal prices, which has been a major factor squeezing Australia’s thermal coal industry.

The next frontier: unconventional gas

Up until recently, Australia has produced gas from conventional sources only. However, the importance of unconventional sources of gas is beginning to grow. As a share of total production, coal seam gas rose to 11% in 2011, from close to zero in 2000. Coal seam gas now accounts for 24% of Australia’s total Economic Demonstrated Reserves (EDR) of natural gas.

While not a source of production currently, shale gas also has the potential to become a significant source over the long term. Australia has the world’s seventh largest reserves of shale gas, according to International Energy Agency. By way of comparison, unproved, technically recoverable shale gas reserves are four times larger than proved natural (conventional) gas reserves in Australia. However, the eventual EDR of shale gas remains highly uncertain.

Bottom line

I expect Australia’s LNG investment boom to be followed by a boom in LNG exports from 2015 onwards.

While the US is set to become a competitor in global gas markets, the downside for export prices is limited for the next five years or so, due to Australian producers’ long-term contracts and the long lead time in bringing US gas to market due to the large amount of required capital investment.

The downside risks to Australia’s export prices may be larger in the medium term.

Unconventional gas projects have the potential to be a significant source of gas production in Australia in the long term.

Paul Bloxham, is chief economist (Australia and New Zealand) for HSBC Global Research. This is an edited version of an article sourced from Downunder digest.

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