For the past 12 months I have argued that Australia’s LNG boom is looking rather like a bubble, built on unrealistic extrapolations of demand, overly cheap finance, wildly inflating costs, a stampede for supply all adding up to wildly inflated asset values and, ultimately, poor returns on bubble pricing. It is now facing off with a giant
Australian LNG has a long history of pioneering investment. From the North West shelf to the first floating LNG project ever constructed.
Like other Australian commodities this history aligns with that of development economics of Asia. The first wave of Australian LNG development grew to service a modernising Japan and its demand for energy. This bilateral relationship has a long history of cordial relations, share-equity investment and oil-linked contract pricing to satisfy both parties.
The second wave of Australian LNG was far more chaotic, matching the staggeringly swift rise of the much larger Chinese economy. It began along with the pre-GFC oil boom and Malthusian assumption that the world was going to fall short of everything as the enormous Chinese and then Indian middle classes ballooned and consumed more energy per capita.
Multitudinous LNG projects were sanctioned in Australia which found itself by 2010 developing no fewer than seven LNG project simultaneously. Needless to say this did not end well with gigantic cost blowouts for all as they competed for labour and other resources.
Yet, as the commodity super cycle peaked in 2011, demand suddenly fell well short of expectations and kept doing so over the next four years. Making matters worse, the US shale revolution suddenly turned that nation from net LNG importer to net exporter of a magnitude equal to Australian LNG. The global glut from 2015 was enormous.
The Australian LNG boom included a particularly cavalier offshoot in QLD where coal seam gas was liquefied via three projects on Curtis Island. As the boom subsided, and oil-linked prices crashed, the companies involved were all either sold or destroyed.
The legacy left by the projects was one of very high Australian gas prices with very low Asian gas prices, also delivering an huge blow to the competitiveness of the east coast economy. Thus the $200bn investment proved to be the greatest single capital mis-allocation in the history of the Australian economy (and surely global energy markets) and was little more than a monument to Banana Republic economics as tax takes failed, income fell and hollowing out transpired on raised local costs.
MacroBusiness was the only analytic house to call the Australian LNG bubble early, track it and predict its demise. It continues to cover the LNG sector with daily updates and a large grain skepticism and is a must read for anyone that needs to know the economic forces coming to bear on the sector.
From The Australian, it appears that for the time being Australian LNG is winning the price battle with Japanese customers: Woodside Petroleum chief Peter Coleman said recent LNG price negotiations, which included price resetting over the Pluto LNG plant with Japanese buyers, were as hard as they had ever been, despite contract talks being limited
I’ve got no issues with Woodside or Australia sending the giant capex plan for the Browse LNG development to Korea but you might just pause to wonder why Australia doesn’t bother competing for such a huge pile of cash. From UBS: Woodside provided more clarity on its timeline and scale of its Browse development utilising
Cross-posted from Kate Mackenzie at FTAlphaville. The US shale gas production boom took everyone by surprise — apparently thatincludes George Mitchell himself, who was credited for sparking the shale gas production surge on his death last month. Yet the variety of output from different shale gas plays is also taking some by surprise. Like Shell, for
From the AFR: Woodside Petroleum has revealed it is aiming for a go-ahead in mid-2015 for a huge floating liquefied natural gas project for its Browse gas in north-west Australia involving three of the massive vessels. The outline of the project, unveiled in Woodside’s full-year results presentation on Wednesday, involved phasing capital expenditure to reduce risk and
By Leith van Onselen The Western Australian Premier, Colin Barnett’s, hope of having the proposed Browse liquified natural gas (LNG) project developed onshore rather than via an offshore floating LNG facility has today been dealt a significant blow with lead proponent Woodside recommending a floating offshore project to its joint venture partners. From the Australian:
So, it’s suddenly a little more clear why Chevron has become an election football: As Chevron’s $52 billion Gorgon project became embroiled in the election campaign, trade union officials accused Chevron of seeking to dodge responsibility for poor labour productivity and high costs. The union’s demands for employees working for 19 offshore oil and gas contractors around
Wow, this is poorly thought through on pretty much every level. From the AFR: The world’s biggest energy companies have launched a multimillion-dollar advertising blitz warning that high costs could jeopardise the $150 billion gas boom, in a campaign reminiscent of the mining tax fight. The Australian Petroleum Production and Exploration Association (APPEA) campaign warns approval
From Angela Macdonald-Smith at the AFR: Judging by the headlines, the outlook for the Asian liquefied natural gas market is bleak. But that’s not the message from those much closer to the action. …flying under the radar has been a dramatic shift in policy toward gas pricing by China and India, the world’s biggest growth
A recent note from Citi gives a good round-up of the barriers to expanded gas and oil fracking in Australia as presented at recent conference. Investor “ESG” Perspectives We have focused this note on issues relevant to clients (fund managers and superannuation funds) who are looking at the unconventional gas industry from an “ESG” (Environmental,
From The Australian and as predicted at MB almost a year ago now: GAS export contracts underpinning Australia’s $US200 billion ($222bn) worth of new and under-construction LNG plants are coming under pressure as US-led competition leads Asian customers to demand cheaper LNG from two of the nation’s big projects. Woodside Petroleum faces hurdles in price talks
Those looking for a quick uptake of investment in floating LNG (FLNG) to help bridge the mining investment cliff will be frustrated by today’s news that the WA government is refusing to change its leases to allow offshore processing of the gas: “They don’t expire till the end of next year so you may ask,
By Leith van Onselen The Australian today has published an interesting article on the row developing over future LNG investment in Western Australia: FEDERAL Resources Minister Gary Gray and West Australian Premier Colin Barnett are at loggerheads over the federal government’s strong push for the rapid development of Woodside Petroleum’s multi-billion-dollar Browse liquefied natural gas
By Leith van Onselen Citigroup has today released interesting analysis of US President Barack Obama’s new Climate Action Plan, which is highly supportive of renewables and natural gas, but negative for coal. On LNG exports, Citigroup says the following: In an effort to encourage fuel switching from coal to gas globally and developing a global
From The Australian: THE International Energy Agency has warned of further delays and cost blowouts at Australia’s $190 billion pipeline of LNG projects, many of which it says may be too exposed to any changes in LNG pricing. The Paris-based energy watchdog also does not see expansions of plants such as Gorgon, let alone any
A rare treat this morning for investors with mining services firm, Clough, announcing a profit upgrade. From the AFR: Strong contract performance and cost efficiency and productivity measures have seen the engineering and project services company upgrade fiscal 2013 earnings before interest and tax expectations to $90 million on revenue of $1.5 billion. …Clough has benefited
Cross-posted from The Conversation Australia may have over 1000 trillion cubic feet in undiscovered shale gas resource but the enormous cost of infrastructure needed to extract it may outweigh its economic benefit unless shale gas prices rise, a new report has found. Shale gas, which is buried further below the surface of the ground than
Hmmm…it really does pay to pay attention to the global economy. From The Australian: AUSTRALIA’S high-cost liquefied natural gas projects – the investment backbone of the nation’s economy – are under increasing pressure from Asian buyers demanding steeper discounts amid evidence at least $60 billion worth of gas supply deals have fallen over. Chevron, the
A new McKinsey report has everyone excited. From the AFR: The challenge is great – we need to be more productive than our competitors in a whole host of areas to close what is a significant competitiveness gap. Improved productivity is the key, and a collaborative approach between individual companies, the industry, policy-makers and regulators is required. If
Arrow LNG was originally conceived as $25 billion four train LNG behemoth on Curtis Island in Queensland to be fed by coal seam gas. The third and fourth trains have already been removed from the plan decisively enough for BREE to remove the project its likely list. I’ve been expecting further rationalisation of the project
What is it, national MB day today? From the AFR, Warwick McKibbin is out with another warning that will be familiar to readers: Professor McKibbin said the expected massive expansion of shale gas in the US would reduce the price of world gas prices from 2016 onwards. This would cause manufacturers and other energy-intensive industries
Over the weekend the US declared Australia’s gas boom at an end. Following President Obama’s recent confirmation that he would permit LNG exports to non-free trade agreement nations, the Department of Energy gave approval to Freeport LNG to export to non-FTA nations: At the time it submitted its Application, FLEX had not yet entered into
From the FT comes a story that has great national significance to Australia but has been missed by the media completely. The US is going to export LNG: The Obama administration has signalled support for more plants to export liquefied natural gas, as the US embraces its surging energy production as a key new element of its
From the AFR: Arrow LNG has been holding negotiations on potential consolidation with rival LNG ventures in Queensland, raising expectations that owners Shell and PetroChina are moving towards scrapping plans for a $20 billion-plus stand-alone plant to instead join Santos or Origin Energy projects. Origin chief executive Grant King and Santos boss David Knox on
Cross-posted from The Conversation. There has been an acceleration in the number of coal seam gas and mining proposals approved in Australia. Since 2010, eight projects have been given the green light in Queensland alone. All projects have been through a state environmental approval process and some through the Commonwealth process as well. But now
There’s an interesting story today from Bloomie via the SMH that offers some staggering statistics on Floating LNG (FLNG): The engineering challenges are massive. Shell’s Prelude vessel, vying to be the first floating LNG facility in the world, will be as long as the Empire State Building and six times the weight of the largest aircraft
The AFR has a solid report today on the slippery slope LNG is headed down: US exports linked to the domestic American Henry Hub price – at least three years and billions of dollars of investments away – can’t come quickly enough for Asian buyers. “Chubu Electric is positively seeking change in the energy market,” said
Australia’s new Minister for Mining, Gary Gray, is busy talking us up today: Addressing the 17th International Conference on Liquefied Natural Gas (LNG 17) in Houston, Texas, Minister Gray said that with seven of the world’s twelve projects now under construction in Australia, he expects that by 2018 Australian production will approach 90 million tonnes
From the AFR comes more troubling news for Australian LNG: The Japanese government is pulling out all stops to shake off the oil price link that has long governed its liquefied natural gas supplies, as it seeks to relieve its struggling economy of a $US40 billion post-Fukushima energy impost. The country’s powerful Ministry of International