Australian Domestic Gas Outlook 2022

Speaking at the Australian Domestic Gas Outlook (ADGO) 2022 conference

in March 2022 ANGUS TAYLOR MP noted that the last few years have been a testing time for global energy markets.

Speaking about Europe’s energy security, he said that gas prices in the United Kingdom and Europe have increased by more than 300 per cent over the past 12 months. In early March, they beat previous highs hitting the equivalent of more than $85 Australian dollars per gigajoule.

With Russian gas accounting for around 32 per cent of total European and UK gas consumption in 2021, the full impact of the current crisis remains to be seen.

Europe’s experience has not been repeated in Australia. As a result of industry and government working together, Australia has avoided the price increases seen abroad. While Asian spot gas prices are significantly elevated, domestic Australian East coast spot gas prices have not followed. In the middle of March this year, domestic spot prices were up to 77 per cent lower than in Asia and Europe respectively. The gap between the East Coast spot price and the ACCC netback price remains one of the largest divergences since the netback was first published in 2016, with the April netback currently around 79 per cent higher. These low gas prices have remained even while Australia has been exporting record levels of gas to assist liquidity overseas.

Latest ABS statistics shows that LNG export earnings totalled almost $53 billion for the 12 months to January, up 52 per cent on the previous year. Australian exporters will continue to supply LNG overseas through their long-standing contracts. The world counts on Australia and our gas companies to export energy security. It is critical that this is done while ensuring Australian gas continues to work for consumers here at home.

Gas makes up 42 per cent of the total energy use in Australian manufacturing sector. Gas consumption has been increasing significantly in the mining sector and now constitutes close to 49 per cent of the sector’s final energy consumption nationally. In absolute terms, the sector’s total natural gas consumption is up 71 per cent in five years. As more renewable generation enters the grid at world-leading rates, the importance of reliable, dispatchable gas-powered generation continues to grow.

Local production must increase or consumers will face higher prices and disruptions in supply. The ACCC is forecasting southern supply gas shortfalls from 2024 to 2030, and an east-coast wide shortfall from 2027.

National Gas Infrastructure Plan shows that Australia needs at least one new basin online before 2030 to avoid future shortfalls. These basins include the Narrabri project in NSW, the world-class Beetaloo Sub-basin in the Northern Territory and the Galilee and North Bowen basin in Queensland.

Full version of Minister Taylor's speech cab accessed here.

Australian LNG won’t fix Europe’s gas crisis

Helen Clark, the editor of Energy News Bulletin, in her article published on 24th March, 2022, questioned possibility of Australia helping to reduce gas prices despite its huge liquefied natural gas export industry. The flexibility of LNG cargo compared with fixed-direction pipelines is one of its selling points, especially for an island nation with a vast surplus of gas.

Record-high and volatile oil and gas prices have convinced oil bulls that their product has a crucial role to play for decades yet. While renewables proponents suggest that wind, solar and battery technologies are crucial to energy independence, there remains a place for some oil and gas in the medium term.

In 2020, oil fell to US$20 per barrel, its lowest price in decades; two years later, it is at record highs of over US$100 a barrel.

Over the past two weeks, first the US and now the UK and Australia have banned Russian crude exports (although it’s essentially a non-issue for Australia; last year Russian crude made up only 1.2% of its imports).

Australia stands to benefit from the fuel crisis in the short to medium term, but based more on prices than on any agile ability to supply tight, high-priced markets.

Australia is the world’s largest LNG exporter at around 80 million tonnes in 2021, but the US is breathing hard down its neck. Last year, Australia’s share of the Chinese market slipped by a few percentage points even as actual volumes grew.

Meanwhile, US volumes increased three-fold and it overtook Qatar as the second largest exporter to China. The US signed six contracts with Chinese buyers last year and Australia signed none. The government’s 2017 trade white paper explicitly suggested that the US was a threat to Australia’s market share, even as world gas demand was expected to shift slightly from legacy buyers going green to developing nations with rising energy demand.

China receives some LNG from Russia, but the gas giant has only an 8% share of the global LNG market. That could grow next year if the Arctic LNG 2 project, led by Russia’s Novatek, comes online as planned; however, last week French partner Total Energies committed to not spending any more cash on the project and said it would wind down its activities with Russia. This week it said it would comply with any sanctions but would not offload its assets. It did, however, say development of the project would be difficult with technology sanctions in place.

China’s gas imports from Russia come through the Power of Siberia pipeline, which has an annual capacity of 38 billion cubic metres. Volumes are set to increase with the Sakhalin gas deal announced at the Beijing Winter Olympics, but it will need to replace partner Shell.

BP and Shell pulled out of Russia, with the British company walking away from a 20% stake in Rosneft worth billions of dollars and a difficult 30-year history in the country.

There will likely be buyers for these assets, but some analysts have noted that there could be intellectual-property issues, and LNG projects have typically been underpinned by some international oil company know-how.

With bans and a gas dearth amid unprecedented levels of demand in Europe, this is where the Australian PM suggested Australia can come in.

The issue (apart from PM Morrison not consulting industry before making the proposal) is that there’s simply not much LNG available, and new supply is at least four years away. Santos plans to temporarily close down its Darwin LNG plant next year while it develops its new Barossa field for backfill in 2025, Woodside may do the same in one train at the North West Shelf LNG venture, and Shell’s floating LNG vessel remains closed after a fire last year.

As Europe comes to grips with the need to diversify its gas supply, Australia’s LNG producers may be able step up. That could include bringing on another LNG train or two in Darwin and development of Woodside’s Browse field, which has been close to seeing a final investment decision three times for three separate development iterations. The second train at Woodside’s Pluto and Scarborough fields will add 5 million tonnes per annum. These are longer term speculations, however.

The immediate problem, though, is that at least 75% of Australia’s LNG is sold via long-term contracts linked to the oil price, typically at a price slope of between 11% and 14% and on a three- to six-month lag. This means the record profits for 2021 reported by Australia’s largest oil and gas companies when oil ended the year at US$80 per barrel will be dwarfed if the price stays above US$100.

Australia can’t supply more to Europe without breaking contracts—or rather the project proponents can’t. The government can only intervene in gas exports when the local market doesn’t have enough supply, and that remains an issue only on the east coast since Western Australia, home to two-thirds of exports, has its own island market.

Buyers can elect to vary their contracts by 10%, but it’s unlikely they will when replacement ‘spot’ cargoes are more expensive.

Another issue is that there’s already a gas shortage on the east coast. Roughly a third of LNG is developed there via onshore coal-seam-gas wells and shipped, and some supply is sent from offshore Victoria to Queensland, so any gas we could supply would have to be taken from our own struggling system, and manufacturers. This may become feasible as renewable energy replaces gas in the electricity grid, but according to Rystad Energy that won’t be until the end of the decade.

At this week’s Australian Domestic Gas Outlook conference in Sydney, the head of the Australian Consumer and Competition Commission said too much east coast gas was going to the LNG projects and there could be a shortage by 2024.

On the west coast, what is not exported via contract is kept in the state under its mandatory 15% domestic gas reservation policy.

The wholesale exodus of European majors with decades of history in Russia in less than a week is going to take a long time to unfold and energy markets are going to fundamentally change, but Australia is in no position to solve the problem anytime soon.

AUTHOR

Helen Clark spent six years as a correspondent and editor in Hanoi and is now the editor of Energy News Bulletin, based in Perth. Image: AFP/Getty Images.

Price war between Europe and Asia for LNG

Analyst Kolobanov says Europe will have to wage a price war with Asia for LNG.

Sergey Kolobanov, Deputy Head of the Economics of Fuel and Energy Sectors of the Central Strategic Research Centre, predicted a price war between Europe and Asia for liquefied natural gas (LNG). His words are reported by RIA Novosti.

According to the analyst, at the moment, while pumping gas into underground storage, Europe may face two problems: unpredictable weather and competition for LNG from Asia. “The liquefied gas market operates mainly on medium and long-term contracts. And suppliers are not interested in terminating them: the reputation of a reliable partner is important to them,” he said.

As Kolobanov explained, the volume of LNG that is available for delivery under spot or short-term contracts is about 190 billion cubic meters after regasification. This is not much, so a price war with Asia is expected for these volumes, which, in turn, restores the economy after the pandemic.

However, it is most likely that unpredictable weather can interfere with the Europeans. Thus, gas consumption is affected by two main factors. These are the heat, which increases the consumption of electricity for air conditioning, and the wind, on which the generation of electricity from renewable energy sources depends. Therefore, in calm and hot weather, the demand for gas generation increases.

Earlier, the Financial Times (FT) reported that the cost of chartering tankers for the transport of liquefied natural gas (LNG) reached a ten-year record. Thus, the freight of an LNG tanker cost $120,000 per day, which is 50 percent more than last year.