Another US gas plant “alarms” Australian LNG

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From The Australian:

THE US government has given a fourth LNG plant approval to export to Asia’s big gas buyers, bringing the level of approved exports from the nation’s overflowing gas market to 50 million tonnes a year — double Australia’s current production.

The fourth approval, of a Maryland plant planned by Dominion Resources, came just a month after the previous go-ahead.

It has brought approved capacity to nations the US does not have free trade agreements with — which include the big LNG-buying nations of Japan, India and China — to the level many LNG players have suggested US exports will be capped at.

This means any further approvals will signal that the Obama administration is prepared to export more LNG than most had expected, despite vocal calls from the manufacturing industry to keep domestic gas for local use.

…The US Energy Department this week announced authorisation for the planned $US3.8 billion ($4.1bn) Dominion Cove facility to export 6 million tonnes of LNG per year for 20 years.

Most but not all. I have expected it for over a year and there’s more to come. This is real price pressure right now. This gas is sold on 15 and 20 year contracts, and the Australian projects with their dated oil-linked contracts are second best. Dominion has already forward sold its entire capacity to Japan and India. The contract terms are undisclosed but are very likely based upon Henry Hub pricing. From the Richmond Times:

The Richmond-based company has signed contracts with two major international customers, one in Japan and one in India, that will take all the plant’s marketed capacity. They want to buy relatively cheap natural gas in the United States and ship the liquefied gas home to their customers.

Australian LNG is going to have deflate itself. Any “second wave” of projects is dead.

Comments

  1. MB thank you for keeping us up to date on these gas projects.
    Just some comments; From the post “Japan and Australia declare LNG War”.Sept 11. “For Australia the volumes will be there but the terms of trade will keep falling”. I disagree with the proposal that the volumes of gas will be there in the Bowen and Surat basins, however the only way we will know for sure is when the gas starts being extracted, and if the gas is not there, it will be too late, and most likely will destroy the aquifers supplying water to the farmers.
    British Gas has taken a massive risk here. We’ll know shortly.
    The contract to build the gas compressor stations has been awarded to Thiess, who are better known for moving dirt. Their efforts to construct a desal plant in Victoria, give an indication to their prowess at petrochemical type construction. We will be watching to see how that goes.
    There is much discussion in other posts about the forthcoming collapse in property prices, which in my opinion will be triggered by rising unemployment, but that collapse is going to be miniscule compared to these white elephant projects in Gladstone not providing return to the investors, I agree “Australian LNG is going to have deflate itself. Any “second wave” of projects is dead.” The fall out from job layoffs in Gladstone alone could trigger a Queensland recession.
    Greed in housing caused that bubble.
    The notion they were the sharpest knives in the draw, has led British Gas into this Gladstone gas debacle. You wouldn’t be dead for quids. WW

  2. China cutting back on coal imports, China’s shadow banking starting to Alert even the Chinese with Beijing now coming down harder which means less imports for building projects. Japan wanting to bring nuclear power back online plus harvest gas under the sea (on top of big solar panel farm investment)Australia’s job market turning to shit, I can only see a lot of pain for Australia in the next couple of years and as things get worse I would say the one thing left that has any value, property will cave in on it self.

    • The Japanese talk of harvesting the methane hydrates is just talk. They cannot do it economically even at gas prices of $15 per mcf.

      The Japanese would only have developed it if the US did not agree to significant LNG exports, to give them a leaver on a significant US manufacturing advantage, the cheap US gas price. And then the Japanese would have sunk what ever capital was required to develop the methane hydrates, hidden the loss off book in a government account somewhere and sold $3 per mcf gas to revive its industries and exports.

      A bit like what the US has done with Shale Gas only it would have cost the Japanese a lot more per unit to develop its methane hydrates than what the US has spent developing its shale gas.

  3. Current LNG demand is running at roughly 250Mt per year. By 2020 it is expected to be 400Mt. The fastest growing energy source.

    We need some perspective here, I expect that 12.5% of the market does not have the pricing power that is being trumpeted in the media and on this website. I admit that cheaper supply will get contacted earlier, but these are big projects, that take 4-5 years to construct and demand is strong.

    To be honest, being a WA man, we can’t build them all at once anyway.

    • As a fellow Sandgroper I concur 😉

      What will undoubtedly happen though is a move toward a blend of the HH and JCC pricing, with US HH surprising some analysts to the upside.

      Our projects current and future remain well positioned.

    • Is this report new? It’s good.

      12% of the market does have the pricing power if its the lowest marginal producer. The commodity wisdom we forgot.

      As the report says, Australian projects are “increasingly vulnerable.” Them’s strong words in world of corporate double speak.

      • Yes very well rounded.

        I like to take a long term view of the LNG industry in Australia.

        Long term US export will only account for a small amount of the market. Plenty of need for Australian LNG.

        We might not build 200Mt of capacity in 10 years as some predicted, but certainly long term its an industry that will significantly add to Australian wealth.

  4. The Use of a Barrel.
    In the liquid energy industry the term barrel was initially used as a measure for a volume of product (mostly oil), which the oilmen sold on to the consumers at a reasonable markup.

    Seems the practical use of a barrel is now as a device the suppliers use to bend the oilmen over for a good shafting.

    Referring to the link on tobyoptimum

    How can the cost of construction rise at such a rate for LNG projects as the below table shows.

    1st stage developments = 200 million/mtpa
    2nd stage developments = 500 to 1500 million/mtpa
    3rd stage developments = 1200 million/mtpa
    Current: recently sanctioned and proposed projects = more than US$2,600 million/mtpa.

    “The early wave of LNG projects were largely developed for capital costs of less than US$200 million/mtpa of capacity, – the second wave of capacity was generally developed for costs in the US$500 million to US$1,500 million/mtpa range.
    The third wave of capacity is now challenged by what can only be described as a “step-change” in capital costs. Deutsche Bank estimates that the currently operating LNG projects were developed at an average cost of approximately $1,200 million/mtpa, whereas the average cost for the recently sanctioned and proposed projects is more than US$2,600 million/mtpa, more than double the historic average.”

    Reading this website has really opened my eyes.
    First we had bullshit jobs. Then bullshit cars and houses. Now we have bullshit LNG plants.
    Where is it going to end.? WOW.

    • ww,

      A similar relationship can be found in the rise of cost of construction per unit for almost any raw material commodity.

      Whether its iron ore, coal, copper, tin, etc, etc or what I believe is the most significant one which goes a long way to explaining the rest, the price of oil.

      Sure a big part of the increase in cost of construction was the initial shock of “the rise of rest” or should I say “the rise of a very small number from the rest”, but these higher costs of construction are very quickly establishing themselves as the new normal. Just as once $25 per barrel oil was once normal but now $100 per barrel is the new normal.

      And I expect this trend to continue up until oil finds a new equilibrium which I believe will need to rise at least in the medium term. Many oil companies around the world are making it quite clear that $100 per barrel oil does not justify the risk/return required to invest the massive amounts of capital to sustain current oil production let alone increase it. In the next few years I expect oil to be around $150 per barrel. Which if true, will mean that LNG projects will be again significantly more expensive in the future than they are today.

      So your question, Where is it going to end.?

      I don’t know, but it is quite clear to me that it is not going to end anytime soon.

    • At $2.6Billion per mtpa equates to about $113k per boe per day or $113B per million boe per day.

      An interesting comparison is that many oil projects that are under construction are looking at construction costs of between $50k to $100k per peak barrel of oil per day. Costs that in the past are unheard of in the oil industry. And costs that need greater than $100 per barrel to justify the risk and this level of investment.

      • NSF
        Thank you, Its going to take me all week end to think about this.
        We see housing prices going through the roof, and I cant relate much to housing, but my background is oil and gas-mining, and I just cant fathom a) how the escalation is so great, b) given that prices of the processing infrastructure are so inflated, what happens if a new technology comes along which changes the parameters, such as Under Sea methane in Japan, or the Kiwi’s wining the Americas cup, which shows that ingenuity can knock off these expensive projects as the margins are locked in.WW