The (Natural Gas) Land Down Under

June 19 Main Image

Australia has proven Natural Gas reserves of 43.04 trillion cubic feet, yet the intense competition from Russian giant Gazprom threatens to curb the growth in Australia’s natural gas sector.

French energy Giant GDF-Suez and its Australian partner Santos have announced today the scuttling of a $10 billion liquefied natural gas (LNG) project planned in northern Australia – further dampening the country’s hopes of overtaking Qatar as the largest LNG exporter. Australia is endowed with incredible deposits of easily accessible natural gas fields which are primed to make it a leader in the South-East/East Asian energy markets. Furthermore, since the election of conservative Prime Minister Tony Abbott last year, Australia appeared to have the perfect storm of political will and high demand to make this industry boom.

Yet, today’s announcement is indicative of the growing pains Australia’s energy sector is feeling – and the reasons are not strictly economic. Yes, a major concern for companies seeking to invest has been the soaring cost of LNG development in Australia, linked particularly to high labor costs and an unfavorably strong Australian dollar. However these concerns would be of far lesser importance if the price of natural gas remained high enough to extract a profit. Enter politics. Natural gas is an oddity in the commodities world as there is no fixed world price. Indeed, natural gas is not as easily transportable as oil or coal (given that it is a gas) and thus requires infrastructure in the form of pipelines or LNG plants – both costly investments. Thus, prices fluctuate from region to region. For example, the price US Cents/kWh was 3.2 in the United States and 9 in Germany – almost 200% more!

As a result of this price disparity, certain markets are more attractive than others. The East Asian market in particular was to be the backbone of Australia’s export market. Yet, the recent gas deal between Russia and China where Russia will supply natural gas to China for 30 years starting in 2018. The deal, reportedly valued at over $400 billion, brings with it new infrastructure including pipelines and other natural gas facilities. It is widely speculated that Russian President Vladimir Putin accepted a less favorable deal to give an impression of rapprochement between China and Russia.

The repercussions of this Sino-Russian deal are deep: they have effectively cornered the Chinese gas market and have left the possibility of further expansion into East Asia. In addition, the transfer of Russian gas over pipelines is far less expensive than the Australian process of liquefying the natural gas. Unfortunately for the Australians, their isolation means resorting to LNG for all gas exports. Another market the Australians could potentially enter – the European – has artificially skewed towards renewable energy through generous government subsidies – thus reducing the demand and utility of gas power plants.

LNG, which once seemed like a safe investment for Australia and an engine for continued growth, is starting to fade given the mounting costs. Ironically, a possible solution to reenergize the market is to give access to cheaper immigrant labor. However the Abbott government has crusaded against immigration into Australia – thus restricting the market. It is possible that currency fluctuations make LNG profitable again however it is clear that despite Australia’s abundance of Natural Gas deposits, it might not have the revolutionary impact that certain analysts predicted.

For more on the statistic:

http://www.eia.gov/countries/country-data.cfm?fips=as

 Other interesting links:

http://www.theaustralian.com.au/business/mining-energy/australia-tipped-to-overtake-china-in-shale-boom/story-e6frg9df-1226805382078#

http://www.abc.net.au/news/2013-10-14/macfarlane-lng-exports/5014018

http://www.ft.com/intl/cms/s/0/9fc97498-f78e-11e3-b2cf-00144feabdc0.html#axzz350wMsTwk

http://www.rigzone.com/news/oil_gas/a/133621/Australia_Faces_New_Challenges_Attracting_LNG_Investments

http://www.theaustralian.com.au/business/latest/shell-sees-threat-to-lng-export-plants/story-e6frg90f-1226950455838