(EnergyAsia, September 11 2014, Thursday) — Fearing rising energy prices, Australian consumers could force the country’s booming liquefied natural gas (LNG) industry to limit its export plans, according to a new study by the UK-based Oxford Institute for Energy Studies.
This will add to the growing list of challenges including rising business cost, labour shortages and Asian customers’ demand for lower prices that the Australian LNG industry must overcome if it is to overtake Qatar as the world leading supplier of the fuel later in the decade.
The Oxford study, “The Future of Australian LNG Exports: Will domestic challenges limit the development of future LNG export capacity?,” was written by David Ledesma, James Henderson and Nyrie Palmer.
With seven new LNG projects due for completion between now and 2018 to add to existing facilities, Australia is on course to become the new global LNG leader given its plentiful gas reserves, track record of project execution, domestic political stability and proximity to fast growing Asian markets.
By 2018, Australia is expected to have developed a total of 86 million tonnes/year of LNG capacity, exceeding Qatar’s 77 million t/y, to become the world’s largest. Two-thirds of Australian liquefaction capacity will depend on feedstock from conventional gas reserves off the country’s northern and north-western coast through three existing and three new land-based plants.
However, the study also took aim at Australia’s disadvantages: the shortage and intense competition for skilled labour within the country, the strength of the Australian dollar, logistical and environmental challenges in executing projects in remote locations that have resulted in significant cost escalations and delays to project executions.
Of late, the study found that Australia’s own “much overlooked” domestic gas market is exerting “significant” impact on the fate of new LNG projects.
The authors observed that potential supply shortages and high domestic prices in eastern Australia have led to talk of an energy crisis accompanied by growing calls for regulators to implement a “domestic gas reservation” policy to protect consumers.
Such a policy is already in place in western Australia, but has been tripped up by “economic and legislative” difficulties, said the study.
“In Western Australia there is a domestic market obligation (DMO), but domestic gas prices are also rising towards LNG export net-back parity levels, while in the Northern Territory, there is little or no political will to introduce a gas reservation policy, despite the fact that a major recent industrial plant closure has been blamed to some extent on lack of gas availability.”
Citing the Bureau of Resources and Energy Economics (BREE), the study said:
“In the short term, a reservation policy diverts gas from the export market to the domestic market, increasing domestic supply and placing downward pressure on domestic gas prices. However, in the long term it may work as a disincentive for industry to develop further gas supply projects.”
The authors concluded that while gas reservation may have short-term political benefits, it will not provide a long-term solution to gas shortages or help lower prices.