Over the past few months I have warned that two of Australia’s major export commodities – thermal coal and liquefied natural gas (LNG) are at risk from the shale gas boom currently underway in the US. The threat is two-fold.
First, the huge increase in natural gas production derived from shale rocks has caused significant domestic coal-to-gas switching, which has led to increased competition from US thermal coal exports.
Earlier this month, the Reserve Bank of Australia’s (RBA) released its quarterly Statement on Monetary Policy, which contained an entire chapter devoted to the coal market. In it, the RBA described the growing competition from US coal exports and the downward pressure this is creating on global thermal coal prices:
A key driver of the fall in thermal coal prices over 2011 and 2012 was an increase in the volume of exports from the Americas. Exports from the United States rose by over 50 per cent in the first half of 2012, after almost doubling over the previous two years from low levels. US coal exports increased as domestic energy demand shifted to gas. This followed a decline in US natural gas prices over 2011 and into 2012 as production of unconventional gas from shale rock increased…
The reduction in demand for coal in the United States also meant that US imports of coal declined. In response, countries that exported to the United States, such as Colombia (which had supplied around 80 per cent of US thermal coal imports in 2011), have increased their exports to other countries.
The second threat is from exports of LNG from the US. There are reportedly 15 large LNG projects seeking approval to export from the US to non-FTA nations (i.e. Asia and Europe). And according to the most recent International Energy Agency (IEA) annual report, the profit margin available from exporting gas to Asia is expected to remain far more attractive than prices available within the US (see below chart), suggesting that the desire to export LNG from the US could grow.
Earlier this month, it was revealed that Japan’s Tokyo Electric Power Company (TEPCO) had announced a deal to purchase US LNG linked to the Henry Hub natural gas benchmark for a period of 20 years, commencing in 2017. This followed a report in January by Deloitte arguing that Australian LNG exports would suffer the most in the event that US LNG exports take-off in a big way.
However, today, Jim Rogers, CEO of Duke Energy, one of the world’s biggest energy companies, argued that Australian gas producers won’t be significantly affected by the shale gas boom in the US. From The Australian:
Jim Rogers, veteran chief executive of the biggest power company in the US, Duke Energy, said that while US shale gas had been “the largest, most transformative development in the past decade”, the move to export shale gas was unlikely to affect the high prices enjoyed by Australian LNG gas producers in the near future.
“I think the amount of LNG that will go into the market from the US won’t substantially change the LNG price for a while… It is going to be small relative to the size of the market. And there is political pushback from some companies… The steel industry doesn’t want natural gas exported — they want to keep it at home because it is cheap. That is going to be a dynamic that is taken out”.
Mr Rogers said that while two export terminals had been approved for US shale gas, they would “take a while to build, they are very expensive and the question is how many more will be built and whether the political pressure for some industries to keep the gas at home is great”.
The news is a welcome development for the burgoning Australian LNG industry. With seven LNG projects due to come on-line next year at a cost of more than $175 billion, Australian has a lot to lose from large scale export competition from the US.
With any luck, the fallout from the US shale gas boom will be restricted to thermal coal.