Easy rides no longer guaranteed by: Barry Fitzgerald From: The...

Easy rides no longer guaranteed

by: Barry Fitzgerald
From: The Australian
May 29, 2013 12:00AM


THERE was a time when new liquefied natural gas capacity in Australia was founded on a "build it and they will come" sort of basis.

It did not matter that Australian LNG capacity had become the most expensive in the world to build, and that the gas used to boil noodles in far-off Tokyo or Seoul had also become the world's most expensive.

Australia got away with it on the basis that it was politically and socially stable, as much as by having a huge gas resource base that its tiny population was never going to fully exploit - certainly not at the sort of fancy prices that LNG commands in the key Asian export markets where indigenous supplies of energy don't exist.

But the game is over. Asian buyers have woken up to the fact that, on the horizon, they will have greater choice in where they source their LNG.

That became all too clear yesterday when Chevron, the developer of $80 billion in new LNG projects off the coast of Western Australia, dropped a bombshell and revealed that its flagship project, the $52bn Gorgon scheme, was only 65 per cent sold on its gas production. But the real shock was that South Korea's Kogas had not followed through on a September 2009 deal to take annual deliveries of 1.5 million tonnes of LNG.

More to the point, the suggestion was that Kogas's government masters had ordered the pullback on the basis that the global LNG supply industry was in a state of flux and, as a result, it could be in South Korea's longer-term interests to hold off making the sort of commitment implied by the 2009 heads of agreement.

The reality is something else, with Kogas apparently striking a cheaper deal with another Australian project, Shell's Prelude. But the point is that the industry is facing escalating competition, internally and externally, and can no longer be guaranteed an easy ride. The external competition is the real worry.

Only last week, the long-feared competition in Asian markets from the US took another step towards becoming a reality when the US approved a second LNG export project. The application of fracking and horizontal drilling techniques has unlocked massive sources of gas that in the US market fetch less than one-third the price Australian LNG commands in Asia through an oil-linked pricing system.

Macquarie analysts do not expect LNG prices to "collapse under any future pricing convention". But it does look as if things just got a whole lot tougher, potentially robbing Australia of a new wave of LNG projects to carry on from the $160bn investment splurge under way. Industry and government must meet the challenge head-on by restoring Australia's cost position.