Is US shale a realistic threat to Aussie LNG?

On Wednesday, the Obama Administration granted approval to a third liquidied natural gas (LNG) terminal – the second permit issued over the past three months. According to Reuters, the Lake Charles terminal in Louisiana has been given permission to export up to 2 billion cubic feet of natural gas a day for 20 years. There are also nearly two dozen applications reportedly awaiting export decision.

“I think over the next several months we will see the administration move forward with further approvals, particularly now that there is a new energy secretary in place, and the pace at which this happens could also pick up,” said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University and former adviser to President Barack Obama…

The United States has now given the green light to 5.6 billion cubic feet per day of gas exports from three projects. That represents about 8 percent of daily U.S. gas output…

As argued previously, increasing competition from the US poses a major threat to Australian LNG exports, with the competitive pressure likely to weigh on global prices and choke-off further onshore LNG investment.

On this front, ANZ Research has today produced an interesting report (below) arguing that US LNG is not a major threat to Australia, and that new investment is likely owing to the big forecast rise in global demand, particularly from China:

– Low US gas prices have already triggered USD95 billion worth of new US capital projects – the winners are the petrochemical and fertiliser industries.

– US will be exporting LNG from 2016 and be producing 40 million tonnes per annum by 2020, making it the third largest producer after Australia and Qatar.

– Australia’s current committed LNG projects will propel it to the world’s largest LNG producer by 2020 ahead of Qatar, producing 88 million tonnes per annum.

– Increased US LNG exports could delay or reduce the second wave of Australian gas projects, but stronger forecast global LNG demand will see most approved.

– Freight and gas prices will ultimately determine Australia’s supply response. We think Australian gas prices will remain comparatively low, averaging USD4.5mmbtu compared to HH prices of around USD5.0mmbtu over the same timeframe… [This] will give Australian LNG the edge.

– China will contribute the largest share in global gas demand by 2030, growing an impressive200% over the next 15 years…

Australia will [therefore] continue to see strong investment in LNG, with strong demand offsetting rising US LNG exports. And China will be keen, but slow to develop shale reserves, with a lack of infrastructure, know-how and challenging geology creating headwinds…

My main bone of contention with the ANZ’s analysis is around their estimated LNG costs. Specifically, they assume that US LNG will become uncompetitive at a Henry Hub gas price of USD5.0mmbtu. This contradicts the recent IEA annual report, which noted that the profit margin available from exporting gas to Asia is expected to remain far more attractive than prices available within the US, suggesting that the desire to export LNG from the US will only grow (see below chart).

Secondly, I am not sure how ANZ have derived the US10.0mmbtu total cost figure for Australian LNG, given that Wood Mackenzie has previously shown break-even costs on Australia’s newest LNG projects above US11-12mmbtu (see below chart).

So long as Australian projects are chasing oil-linked supply contracts that price LNG in the $14-16mmbtu range, the US is in an excellent position to capture the new business in North Asia.

Full report below.

Shale – The New World (ANZ Research – August 2013)