Last week’s US decision to give the go- ahead for a large liquefied natural gas export facility in the Gulf of Mexico opens a new chapter in America’s re-invention as a major natural gas producer. Until now, the big story with the US’s implementation of shale gas technology has been the prospect of a cheap energy powered American manufacturing renaissance.
Now the more daunting prospect is the US will become a major LNG exporter targeting the top two markets for Australian gas, Japan and South Korea. More worrying in Australia, US domestic prices are less than a third as high as those written into the 20-year plus Asian supply contracts that have underwritten the massive LNG projects in Queensland and Western Australia that defined Australia’s second mining boom.
LNG analysts highlight several reasons why US LNG is unlikely to undermine the commerciality of Australian LNG. First, LNG export facilities must be approved one by one in a multiple step and very costly regulatory process in the US, with significant opposition in Congress from those who want to keep cheap gas at home to create manufacturing jobs.
Second, much of the US’s current cost advantage in gas production disappears when the full costs of liquefaction, shipping the LNG through the Panama Canal and across the Pacific, and then re-gasification, are taken into account.
Instead of the difference between $US4 per million British thermal units for domestic US gas and the $US15 per million BTU Japan and Korea are willing to pay Australia and others for LNG today, the effective cost of putting US LNG into Asia would be about $US12-$13 per million BTU.
Third, the upper bound on US LNG exports over the next 10 years is likely to be only about projected Australian exports, say 40 billion cubic metres per year for US shale gas compared with Australia’s 80-100 bcm. Australia is poised to overtake Qatar as the world’s leading LNG exporter by the end of the decade. The US will command at best third place.
Finally, even if they could strike new deals with US LNG exporters at somewhat lower prices than they have locked in for Australian LNG, it is unlikely Japanese and Korean power companies will try to renegotiate their Australian contracts let alone walk away from them.
Part of the reason is cultural, but part is also business pragmatism. Because the fixed costs of LNG are so great, everyone involved plays the long game, and all know prices go up and down over the lifetime of contracts. Indeed, periodic price re-assessments are built into most of the Australian export contracts.
Put it all together, and Australia remains poised to make a lot of money selling a lot of gas in Japan and Korea for a long time, with the potential for even more if and when China becomes a big LNG importer.
Nonetheless, emergence of the US as a significant LNG exporter will affect the Australian economy in two powerful ways.
Natural gas investment in Australia is already slowing, and this trend will intensify. Project costs will become a bigger and bigger concern. Think Chevron’s $10 billion plus cost overrun on its Gorgon facility. New projects will likely be slowed down, possibly including Gorgon’s Wheatstone. Other potential projects might be rethought from the ground up, such as Woodside’s decision to put its mega investment in Browse on ice.
And the downward pressure on the Australian dollar, against the greenback at least, will only strengthen. It has no doubt been triggered by the cut in Australian interest rates at a time when initial moves to start rolling back monetary looseness in the US seem closer at hand. But the strength of the Aussie since the GFC has been as much about commodity prices and Asian demand as about the carry trade taking advantage of higher interest rates than in Europe, Japan and the US.
Australia was always going to face less mining investment and a lower dollar. Whether that is a net plus or a net negative for our economy is uncertain. But the prospect of significant US LNG exports into Asia will force us to confront these twin realities sooner than we thought.