The future implications of shale gas developments and LNG exports from Australia

In recent years, LNG markets have become more competitive. Growing energy demand in Asia coupled with the loss of electricty from nuclear power generation in Japan after the Fukushima disaster have led to a thriving LNG market, currently headed by Australia but projected to include new supplies from the U.S., Canada and, potentially, Africa by 2020. Long-term oil-linked price contracts have so far benefited the Australian gas export industry. However, most of the new gas supplies will be based on spot-market prices. This study forecasts an increase of at least 6% by volume of Henry Hub based LNG into the Asian market by 2017 and for spot pricing to make up to 40% of the market. It is estimated that LNG exports from the U.S., based on current Henry Hub prices of less than $7/GJ, will be priced in the range of$12-14/GJ for the Asian market, making it more attractive to importers compared to prices likely in excess of $15/GJ from Australia. The disparity is largely due to the much higher operating and labour costs of the Australian LNG industry and it will put increasing pressure on the industry to change its business models and reduce its prices. In addition, increasing LNG exports from Australia have led to constraints on domestic gas supplies, leading to increases in the price of domestic gas as a result of the exposure to international markets. The development of unconventional gas resources and of conventional offshore gas resources with FLNG is perceived as a viable means to increase gas availability not only to the domestic market but also for export to the Asian market, thereby maintaining contracted obligations on supply. However, the potential of FLNG is not certain, with the “Prelude Project” predicted to come online only in 2017, and the success of unconventional gas is currently limited only to coal seam gas, despite a high level of controversy in relation to environmental impact and public protest. Australian shale gas faces many barriers, mainly due to the unique geology, high development costs, a lack of infrastructure and services, and community concerns. Therefore, there is a degree of uncertainty as to whether shale gas will ever become a significant component of Australian LNG exports. This study reviews the global LNG markets, in particular those in Asia, and makes some conclusions on the LNG export outlook for Australia