North America seizes the LNG boom

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From The Australian this morning:

MALAYSIA has highlighted the risks to the growth of Australia’s liquefied natural gas industry by declaring its intention to push ahead with a $C36 billion ($37bn) plan to build an LNG plant in Canada.

State-owned energy company Petronas, one of the founding partners of the Santos-led Gladstone LNG plant, could spend the vast amount over 30 years at a terminal earmarked for development in Prince Rupert, British Columbia, Malaysian Prime Minister Najib Razak said yesterday.

The comments reflect the shift in global LNG development away from Australia, where high costs are discouraging new investment.

They also illustrate the North American gas threat brought about by cheap shale gas is not limited to the growing approvals of US exports from the Gulf of Mexico.

University of Western Australia and Rice University (Texas) economist Peter Hartley says Canada’s west coast is closer to Asia than Australia and looms as a strong potential LNG competitor.

No, they are not. Currently the US has over 50 gas pipelines to and from Canada and Mexico. The US gas glut will seep through the borders either as lower imports or higher exports. As I’ve been arguing for over a year, Hartley reckons:

He said Canadian and US exports were expected to lower international LNG prices and stop new Australian investment.

“For future projects in Australia, those on the drawing board, it doesn’t look good,” Professor Hartley said.

“I think the North American exports will displace additional LNG projects in Australia beyond those that are currently in construction and push them back by at least 10 years. After 2025, I think a lot of them will come back.”

Australia’s real gas crisis, if you want to call it that, is how to lower the costs of production for existing operations, not how to build even more uncompetitive infrastructure.

This is born out further by analysis of America’s southern border where the Panama canal is being widened. From the AFR:

…While the opening of the deepened and widened canal in 18 months’ time will enable increased volumes of coal exports from the US to Asia, the major impact will be on LNG and liquefied petroleum gas (LPG), said Neil Beveridge from Bernstein Research.

The enlargement of the canal will enable large gas tankers and LNG vessels to pass through the crucial transit point for the first time, cutting shipping days from the US east coast to Asia from 41 days at present (via South America’s Cape Horn) to 25 days.

Freight costs could be almost halved, putting the US on a par with the Middle East for transport to Asia.

…Australian producers such as ­Woodside Petroleum and Santos say US exports will remain limited to about 50 million tonnes a year by 2025 and will not be much cheaper than Australian supplies. Goldman Sachs is, however, forecasting about 60 million tonnes a year of US LNG exports by 2020, noting 46 million tonnes of capacity has already secured government approval.

I will add that GS remains bullish on prices despite the supply shift. I’m not. The US will push much more LNG volume into Asia than this, either directly or via Mexico and Canada.

David Llewellyn-Smith

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 founding 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.

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Comments

  1. I agree, we’ve been getting excellent prices in Asia for way too long, it’s just not going to last.

    Along with the US, Russia is pushing hard to export more to china/japan. The Altai pipeline would be a big blow to Australian LNG sellers.

    It wasn’t that long ago I heard a CEO talking up all the uncontracted gas they had. You don’t hear execs spruiking that anymore.

  2. HnH
    Have you read Bill Powers (Cold, Hungry & in the Dark) and Arthur Berman re: US Shale Gas?
    They and others have concluded the 100yr supply story is yet another wall st Ponzi scheme along the lines of tech stocks and sub-prime. The dumb late money (BHP etc) has been used up and the story more widely recognised along with the dummies’ billion dollar write downs recently.
    They think the natural gas price will be in high double digits soon (2013-15) and the US exports of LNG if they happen will be quickly stopped by force majeure in the face of domestic shortages, that NG powered vehicle expansion over there is a non starter etc.

    • notsofastMEMBER

      As I understand in the longer term, they require at least $7 to $8 per mcf to justify drilling shale wells with dry gas. Which is what is required if the gas supply in the US is to be sustained.

      A lot of people are losing a lot of money in natural gas at moment in the US, but hey, it is helping the US recover some of their manufacturing industries.

  3. Good to see you are promptly on to that report in the AFR on the upgraded Panama Canal cutting the ocean shipping time for US LNG exports. The cost advantage for Asian markets now goes to the US for LNG. That is probably the last straw for the Gladstone LNG projects, and maybe the Darwin LNG project. Note: it may also adversely affect the projected expansion of our coal exports. Interesting times. WW.