Obama signals trouble for Australian LNG

images

From the FT comes a story that has great national significance to Australia but has been missed by the media completely. The US is going to export LNG:

The Obama administration has signalled support for more plants to export liquefied natural gas, as the US embraces its surging energy production as a key new element of its national security policy.

Barack Obama said at the weekend the US was likely to be a net gas exporter by 2020, the strongest sign yet that the president is swinging his support behind higher energy sales overseas.

The Department of Energy is studying applications for new liquefied natural gas terminals, with approval of one in Texas likely within months. It would be only the second such approval granted for sales to countries without trade agreements with the US, such as Japan, the world’s largest importer of LNG.

“I’ve got to make an executive decision broadly about whether or not we export liquefied natural gas at all,” Mr Obama said during a trip to Costa Rica. “But I can assure you that once I make that decision, then factoring in how we can use that to facilitate lower costs in the hemisphere and in Central America will be on my agenda.”

…In a little-noticed speech in New York in late April, Tom Donilon, the White House national security adviser, said the new energy bounty allowed the US “a stronger hand in pursuing and implementing our international security goals”.

Mr Donilon said increased US and global gas production could break the link between the gas and more expensive oil prices and “weaken control by traditional dominant natural gas suppliers”.

The White House is also promoting gas as an alternative fuel to oil and coal as a way to reduce greenhouse emissions.

The initial pace of approvals for new LNG export terminals is likely to be measured, a nod to domestic political sensitivities about how to manage the country’s surging energy production.

…So far, only one US LNG export project, Cheniere Energy’s Sabine Pass plant in Louisiana, has been approved for sales to non-trade agreement countries, which include Japan, members of the European Union, and fast-growing markets in Asia such as China and India.

That licence was granted two years ago, and there are 19 more applications for such worldwide export permits filed with the energy department.

The next project in line for approval, the Freeport LNG development in Texas, will be only the second granted for sales to countries without a trade agreement.

There are 22 more projects with approval to sell to countries with which the US has a trade agreement, but of those only South Korea is a significant gas importer, and the plants will probably need to sell to other countries to be commercially viable.

That’s the end of the LNG boom. It’s probably the end of the contract pricing of LNG as well. It’s game on for gas sales in the Pacific Rim.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

Did you know the MB International Shares Fund has returned an average of 17.1% per annum and the Tactical Growth Fund an average of 10.4%? Register below to learn more:

Latest posts by Houses and Holes (see all)

Comments

  1. If I recall the chatter on MB, this is not much of a surprise to most of you, right? I recall telling someone a couple of months back that Australia’s natural gas predictions do not hold water anymore, and specifically cited US production, and got told I didn’t know what I was talking about because I didn’t work in the O&G industry. Certainly, I don’t and what I don’t know about the industry would fill a book. But I wonder what my acquaintance thinks now…

    • Richard CampbellMEMBER

      I wouldn’t panic yet.

      The US gas industry has very effective PR units who glide over several issues: a) the fact that shales like Haynesville are already in decline b) that these deep shales require hundreds of wells or thousands when the whole structure is considered c) there is a big differenced between the income from wet gas wells and dry gas wells d) the decline rates vary but in the Marcellus can be as high as 70% within two years which means that producers can be on treadmill as they drill to replace lost production and meet supply contracts e) as regulations tighten the fracking water can no longer be disposed in streams and must be wither treated or reinjected e) profitability is problematic as it appears that most shale companies are only around break at present on as the profit wells may not cover the dud wells with lower production.

      There are sure to be 10-20% ? of operators who are doing well or very well, but since the big five in shale like Devon, EnCana and BG wrote of over $7 billion through 2011-12 it is more likely that most of the small operators are struggling or going backwards quickly.

      Now that power companies are cranking up coal volumes now that gas is back to $4 a therm, coal seems to have put a cap on shale gas which condemns some or many to losses. If shale was $6 it seems that most would be profitable.

      The sheer number of operators makes it difficult to generalise (about 95 in the Marcellus alone) and the other issue is the failure of the US Geological Survey and the Dpt of Energy to make the distinction between geological estimate and recoverable hydrocarbons clear.

      The downward revisions from “100 years” of gas to the current 25 practical years of supply has not been made clear – certainly to the politicians. The US still has a massive gas appetite at about 25 TCF a year so it is likely that the administration will be restrained in practice.

  2. It will be quite amusing when the first LNG shipments arrive in Newcastle. Why should we take responsibility for our own energy footprint when we can outsource it to someone elses backyard. And who cares if it costs more money and takes more energy to get it here.

    • That last sentence is nonsensical.

      The international LNG carrier market would not exist if LNG cost that large a fraction of the base product price to ship globally.

      • Logically yes. However, rather depends upon what the user is prepared to pay!?

      • You missed my point. It’s almost always cheaper in terms of energy transport costs to source energy locally. That we have so many people against being responsible for sourcing our energy from our own country is what I’m not happy about. We have plently of local supply and the debate CSG and Shale in Australia should be about who owns it and where it is used.

  3. I agree this has major implications for Australia. However, the only two LNG terminals mentioned so far are in the Gulf of Mexico. Also, Obama’s reference was to South America which indicates perhaps their attention at present is with their own hemisphere. In the absence of LNG terminals on the west coast (and good luck with those applications if you think back about the fate of BHP and Woodside’s attempts to build INWARD LNG terminals a few years ago), LNG tankers would have to pass through the Panama canal in order to service Asian markets. Does anyone know whether the modern fleet of LNG tankers will fit through the canal? Again, the infrastructure to pipe shale gas to the west coast is un/underdeveloped at present. Perhaps we have have a bit more time to lock in our LNG supply contracts with Asia.

    • Panama canal widening complete in 2015. This has big implications now. There’ll be no more contracts signed for LNG supply. It’ll be Henry Hub all the way hence.

  4. I still would not despair yet. From some quick research the Panama canal is being widened to allow vessels of 49m width to pass through its locks. The new Q LNG tankers loading at Qatar terminals are 55+m wide. Smaller LNG tankers can navigate the Panama canal, but would involve higher carriage costs than those from the Middle East. And how current LNG demand will be priced off Henry Hub when NO foreign country can access US shale gas is a mystery to me.

  5. Alex Heyworth

    If the US will not be a net exporter until 2020, that gives Australian suppliers a useful window to get in first and tie up a good relationship with the buyers. Just hope they have the sense not to push too hard on price.

      • Alex Heyworth

        Probably, but once that is settled (which will be long before 2020) Australian suppliers can lock in contracts at whatever the new agreed price is. Volume compensating for price drop.

  6. Something is wrong with local policy settings, when the USA can be good at both exporting a resource like this AND utilising it locally to competitive advantage; and Australia is not even good at utilising it locally to competitive advantage, let alone staying competitive with the export of it, let alone staying competitive against potential imports of it.

  7. notsofastMEMBER

    Having had another think about this item, although I believe there are no drivers for an LNG export terminal based a from a purely financial basis, there is whole other number of potential reasons that other countries would like to see the US have an export terminal.

    Firstly so that the US is limited from gaining a manufacturing trade benefit in the future by having an artificially low price of gas, such as now. Japan and China may both be prepared to sink a few tens of billions into a LNG facility just to ensure this. But there are so many permutations and combinations around this that it is not clear what is the right choice.

    I would suggest that the decision on whether the US builds an LNG export terminal is more diplomatic and geopolitical rather than anything else.