Origin Energy, Shell hit by LNG export bans

The government’s crackdown on east coast LNG exports looks set to be broadened to capture the multibillion-dollar export projects of Origin Energy and Shell to prevent much-needed local gas being sold off cheaply in Asia.

The widening of the looming export controls beyond Santos’ $US18.5 billion ($23.22 billion) GLNG venture would be in line with last week’s blunt criticism by competition chief Rod Sims of Queensland LNG exporters shipping gas to Asia’s cheap spot market and “starving” domestic manufacturers.

The government is expected to declare as early as Tuesday a “shortfall” in the east coast gas market for 2018 under the new Australian Domestic Gas Security Mechanism.

One source said the volume of extra gas the government will declare is required for 2018 will be about 50 petajoules, with the possibility it could be increased to more than 100 petajoules given expected increased demand for gas for power generation to avoid the risk of blackouts.

The expected shortfall in east coast gas has now been removed.

Wood Mackenzie

That would represent between 7 per cent and 15 per cent of the east coast market, a huge volume that sources say may well rein in soaring prices for industrial users but could have significant repercussions in the local industry, including killing off emerging new gas field developments in the Bass Strait, Cooper Basin and elsewhere.

The move is certain to raise the ire of three LNG exporters, who say they have already responded to the tight east coast market and made more gas available. However, the broadening of the impact to cover all the Queensland projects will suit Santos, whose chief executive Kevin Gallagher has argued the burden should be shared across the industry.

Not just Santos

Under the process for the policy outlined by the industry department, the declaration of a “shortfall” in the gas market for 2018 would lead to limits on exports being applied to relevant LNG producers for the year, while others would receive an “unlimited” export licence.

The structure of the ADGSM points to the impact falling only on GLNG, because it is the only one not a “net contributor” to the east coast market, relying on gas acquired from other parties for about half its production.

The global LNG market is expected to move into deficit by early next decade.
The global LNG market is expected to move into deficit by early next decade.

FGE

But GLNG has already restricted output at its Curtis Island plant in Gladstone to the volumes needed to satisfy long-term contracts, while Origin’s APLNG project and Shell’s QCLNG venture produce beyond contracted volumes and sell into the spot market where a market glut means prices are weak.

“The market now fully expects the trigger to come and it will impact all three players not just Santos,” said Fereidun Fesharaki, chairman of London-based energy consultancy FGE.

Oz LNG no longer ‘safe’

“It certainly detracts from the vision of safe supplies from Australia.”

The Australian Industry Group, whose members include manufacturers struggling in the face of soaring gas prices, makes the point that export limits are needed on all three to be effective. Only that step would prevent gas not able to be exported by GLNG being re-routed via the domestic market to one of the two other projects in Gladstone.

Ai Group head of policy Peter Burn said that while his association is hoping that the threat of intervention will persuade the LNG ventures to find a way to secure adequate supplies for the domestic market, the threat needed to be effective, meaning a shortfall should be declared.

“I don’t think it would be viewed as an effective threat without applying across all three projects,” Mr Burn said.

Mr Burn said Ai Group wanted to see an early decision from the government on LNG export caps to spur more action on freeing up domestic gas.

The LNG ventures maintain they have already responded to the squeeze in the east coast market, including inking new sales contracts to supply the Pelican Point gas plant in South Australia, and by Santos’ GLNG venture agreeing to divert gas away from export to the east coast.

Note enough

Consultancy Wood Mackenzie has assessed that the measures already taken have eliminated the circa 100 million cubic feet a day gap between east coast supply and demand that it had previously estimated for 2017-21.

But Australian Competition and Consumer Commission chairman Mr Sims declared last week that the LNG producers had not done enough to keep local customers supplied, and Mr Burn agrees based on gas prices being offered to Ai Group members.

“We are going on what the prices are that people are telling us, and they are still above international prices,” Mr Burn said, pointing to anecdotal evidence of contract prices up to $15 a gigajoule or higher, compared to expiring contract prices of $5-$6/GJ.

Asian LNG spot prices are about $US6 per million British thermal units, roughly equivalent to about $7.55/GJ. The spot gas price in Sydney was about $8.12 on Thursday.

Dr Fesharaki said the surplus in today’s LNG markets means the broader impact of restricting exports would be “minor”. However, a bigger problem arises by 2022-23 when the global market is expected to have tightened “and all LNG is needed by the buyers”.

“This creates an unmistakable link between the domestic and international market,” he said. “The government must accept domestic users cannot pay lower prices than the international market.”

The government is due to receive advice early this week from the Australian Energy Market Operator and the Australian Competition and Consumer Commission that will be crucial inputs in the decision whether to declare 2018 a “shortfall” year.

Western Australia’s LNG exporters would also be covered by the licence system if a shortfall is declared, although are expected to receive “unlimited” licences.

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