Australian LNG in the fight of its short life

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The Australian is reporting today on local LNG running into trouble after China/Russia gas deal:

On the same day that Santos chief executive David Knox tried to calm the rising fears about the implications of the deal for ­Australia, Macquarie yesterday painted a bleak outlook for the next wave of multi-billion-dollar LNG plants and expansions earmarked for development around the nation.

…With the Russian gas set to be sold well below the current price of LNG from Australia, the Macquarie analysts predicted LNG prices would have to fall in coming years. Australian LNG projects are among the highest-cost producers in the world, so could see their profit margins severely eroded if LNG prices retreat.

“Prices are headed towards marginal cost and Australia is simply not the marginal producer,” Macquarie said.

“This suggests new local projects will be undercut by international competitors while existing projects will witness downward pricing pressure at renegotiation time.”

MB readers have long known that Australian LNG was headed for this fate anyway, it’s just been made worse. The real issue is what it does to the current projects, the magnificently expensive seven.

The Russian deal is for 29 million tonnes of gas per annum but it’s going to grow from there, maybe even double. In fact, if you’re going to build the thing why would you do twice? From ECNS:

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Russia and China could soon sign another major contract on gas pipeline construction project after they signed a landmark 30-year gas deal in Shanghai during Russian President Vladimir Putin’s state visit in May, a senior Russian official said Wednesday.

“Given the pace of Chinese economic growth … with an agreement upon the compromise (gas) price formulas having been achieved, it is very likely that a contract could also be signed in the very near future for the construction of a western route ( gas pipeline) that will fully cross the Siberian Federal District, ” Russian presidential administration chief Sergei Ivanov told reporters in the Siberian city of Novosibirsk.

He said the contract on the western route, also called the Altai natural gas pipeline, might be “less capital-intensive” than that of the eastern one, but “it’s no doubt going to cost us tens of billions of U.S. dollars,” Itar-Tass news agency reported.

The official said the project, like the eastern one, would create jobs and stimulate many economic industries, which will have “a cumulative effect.”

That would make the deal worth more like 50 million tonnes per annum at a price estimated around $10mmbtu. Australian projects deliver at about $14mmbtu break even (being generous!).

The leading edge of this gas revolution is already upon us with Australia’s reliance on oil-linked pricing making it obviously difficult for projects to sign up new customers. Within five years (maybe sooner) it will be tougher again as failing contracts, price renegotiation, restucturing, and cost-out deflation overtake the sector.

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It’s not much fun reporting on it, I know, and thank goodness we had the boom when we did. We’d be a lot poorer now without it. But the pain will still come over time as more falls in the terms of trade hurt standards of living while volume growth boosts GDP.

The great back fill of Australian waste has many years yet to run.

About the author
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.