LNG imports are no gas market solution

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Gas market legend Mark Samter is again promoting LNG imports today, at the AFR:

…The debate then hit a new low last week with Bill Shorten’s “plan” to introduce a permanent gas export control trigger that can be pulled when prices are too “high”, not just based off a shortfall like the flawed Australian Domestic Gas Security Mechanism introduced by the Turnbull government (itself is an ineffectual policy medium term).

…A large factor in this is the monopoly returns for the pipelines, a topic strangely absent from the public debate on gas. What is inconceivable is that a government could or should mandate a “low” gas price, be it $6 per gigajoule or anywhere below the prevailing netback price.

While the federal government can control exports, constitutionally the states own the resources. Any intervention that would mandate an artificially low price for diverted export gas would wind back decades of economic reform in Australia.

Come on Mark. Where is has this guy gone, formerly at Credit Suisse:

■ Our preferred option is to reclaim the third-party gas currently being exported: Aside from the Horizon contract between GLNG and Santos, there was no evidence in the EIS or FID presentations that more non-indigenous gas was required. As such, one could argue reclaiming what has only been signed due to a scope failure, is equitable. Including the Horizon contract GLNG will be exporting >160PJa of third-party gas in the later part of this decade. Whilst we get less disclosure these days, BG previously said that after an initial 10–20% in the early days (now gone) QCLNG would use ~5%

■ Our preferred option is to reclaim the third-party gas currently being exported: Aside from the Horizon contract between GLNG and Santos, there was no evidence in the EIS or FID presentations that more non-indigenous gas was required. As such, one could argue reclaiming what has only been signed due to a scope failure, is equitable. Including the Horizon contract GLNG will be exporting >160PJa of third-party gas in the later part of this decade. Whilst we get less disclosure these days, BG previously said that after an initial 10–20% in the early days (now gone) QCLNG would use ~5% thirdparty gas – 20–25PJa. APLNG is self-sufficient, but as can be seen the other thirdparty gas would get extremely close to balancing the market. Clearly these things are far better done by mutual agreement from all parties, rather than a political mandate.

■ GLNG loses but can all be compensated? We estimate that, at a US$65/bbl oil price, GLNG as an entity would lose US$447m p.a. of FCF if they could no longer toll thirdparty volumes. Interestingly, if Kogas and Petronas could recontract their offtake on a slope of 12x (doable in the current LNG market) then their losses as an equity partner are all offset (not equally between the two albeit). Santos would see ~50% of its US$134mn net GLNG loss offset if the Horizon contract could move up to a slope of 8x from 6x. The clear loser would be Total. We wonder whether cheap government debt, a la NAIF, could be provided at the (new, lower volume) project level or even to take/fund an equity stake in it? In reality all parties (domestic buyers included) have some culpability in the situation, so a sharing of pain does not seem unreasonable 02 March 2017 Australia and NZ Market daily 31.

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Sure there are impediments to the domestic reservation solution, not least the federal/state mismatch, but they can be resolved with determination. QLDers are also getting their utility bills gouged.

Where I part ways completely with Mr Samter is on the impact of LNG imports:

So LNG imports in the short term must be part of the solution. LNG imports don’t deliver “cheap” gas in the old meaning of cheap. That said, if buyers sign up now they can benefit from the dwindling buyers’ strength in LNG markets and it would put a ceiling on prices. Given transportation costs in Australia, LNG imports could deliver cheaper gas to the southern states than Queensland LNG volumes diverted at the true netback price.

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How? LNG imports will need to be bought on the equivalent of either the Asian spot price or oil-linked contracts. With the falling Australian dollar those prices are already at $14Gj plus we must add the cost of the regasification plants and a margin. Even if we did Henry Hub-priced deals with the US, the price today is around $11Gj and with a falling AUD will get much higher. Not to mention that Henry Hub and the Asian spot price are very obviously going to converge as more US exports flow into the region.

Domestic reservation currently has southern prices at $9Gj more or less.

Plus, and here is the real problem, once a new set of LNG importers are added to the political economy of these questions, it will become even harder to push through national interest policy as an import cartel joins the export cartel in fixing Australian gas prices, with domestic reservation the first victim of both.

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Obviously the best solution is simply to keep the cheap gas here. There is no solution without pain but LNG imports are no solution at all.

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.