Australia boom a cautionary tale as companies advance projects to export LNG from Canada
Expert says domestic sales quotas could be another challenge developers must face Down Under
At the Western Energy Summit held in Calgary on May 10, IHS CERA associate director Jihad Traya did his best to temper any excitement among attendees that exporting liquefied natural gas from Canada’s shores will bring back natural gas prices from the dead.
“LNG is not a panacea,” Traya told the audience during a session focused on understanding North American oil and gas fundamentals and Asian demand.
Still, the march to export LNG from Canada continues.
This week, Malaysia energy giant Petronas, which acquired Progress Energy in a $6 billion deal that was approved by the Canadian government in December of 2012, said it has hired the engineers to do the front-end engineering and design of its Pacific Northwest LNG project the company plans to build in Prince Rupert, B.C.
The Pacific Northwest LNG project is one of 10 in various stages of development, the Financial Post’s Jeff Lewis reported recently, and Traya said there are a staggering 37 LNG export projects being proposed for North America.
Traya also noted that the global market for LNG is currently 33 billion cubic feet per day. Meanwhile, he said the 37 North American proposed projects would ship 37 bcf per day.
Although demand for LNG is expected to increase over the next decade, will there be enough customers to sop up that extra 37 bcf per day projects like Pacific Northwest LNG want to pump out – especially when there are other places like Qatar and Australia that already export LNG and have plans to export a lot more.
“What about Qatar, Venezuela and Australia?,” Traya asked at the Western Energy Summit. “There is going to be some culling of those [North American] projects. Yes, LNG exports will happen, but at a limited scope.”
Proponents of Canadian LNG export projects no doubt are looking at Australia to get a greater sense of what can happen in the middle of an LNG boom.
Just like Canada, the Aussies have a number of LNG export projects in the hopper, with seven onshore and five floating LNG facilities under construction.
But in a report released this week, London-based research and consulting firm GlobalData points out that, “while the Australian LNG sector has massive financial potential, ballooning development costs, driven by the prodigious strength of the Australian dollar, are continuing to chip away at profit forecasts.”
Those challenges aren’t new, but GlobalData’s leading upstream analyst for the Asia-Pacific region says the Australian government might be set to add another one to the pile.
Jonathan Lacouture points out in the report that while the companies building these projects prefer to sell the LNG to the likes of Japan and South Korea who will pay a premium for it, Australian markets are short of natural gas. Lacouture suspects the Australian government might do something to rectify that in the next five to 10 years and introduce a domestic sales quota for the LNG projects.
At a time when the massive Greater Gorgon project’s price tag has jumped from US$39 billion to US$52 billion, government-mandated sales quotas won’t help the profit margins of Aussie LNG export schemes, Lacouture says.
Although Australia’s upstream hydrocarbon industry has proven itself as one of the most fruitful in the world, the investment climate may continue to sour. These types of market regulations, coupled with punishingly high carbon taxes, would significantly affect the profitability of LNG developments. Construction of facilities and infrastructure processing gas and then conveying it into local pipeline networks will increase capital expenditures while the loss of LNG sales volumes would choke revenue streams.
Canadian projects may never be subject to domestic sales quotas, but the Australian LNG experience illustrates just how risky this kind of investment is. Traya may very well be right that LNG exports from B.C. won’t reach the heights that some are hoping for.