Welcome to ‘most bullish moment in LNG’s history - AFR article

The war in Ukraine willcreate a huge gap in the supply and demand for LNG around the globe; priceswill rise significantly and Australia is well-placed to help fill the supplygap.

Europe’senergy reckoning may arrive much sooner than it ever thought possible.

The standoff over Russia’s demands to be paid byEuropean gas customers in roubles rather than Euros took a dramatic turn onThursday night, as Vladimir Putin announced he would stop the flow of gas on Friday night if Europe didn’t comply with his demands. About 40 per cent of Europe’s gas comes from Russia.

“To buy Russian gas, they need to open rouble accountsin Russian banks,” Putin said in a televised appearance. “It is from thoseaccounts that gas will be paid for, starting April 1. If such payments aren’tmade, we will consider this a failure by the client to comply with itsobligations.”

Is Putin bluffing or is this the beginning of acataclysmic energy crunch for Europe? What happens in the next few days isunclear, but Putin’s threat only underscores how urgently Europe needs tofind alternative sources of gas - and why Australia is perfectly placed to capitalise on what Credit Suisse energy guru Saul Kavonic calls “the most structurally bullish event in LNG industry history”.

The maths, represented in the graph below, arerelatively simple. Currently, the world produces about 400 million tonnes ofLNG per annum, but before the Ukraine crisis emerged, a gap of about 70 milliontonnes per annum was likely to open up by 2030.

Russia haschanged all that.

On the supply side, somewhere between 30 milliontonnes and 50 million tonnes of gas will be lost as sanctions lead to thedegradation of existing Russian gas fields and the abandonment of extensionprojects and/or new start-up projects. On the demand side, between 40 milliontonnes and 70 million tonnes of demand for LNG will be created as Europescrambles to replace Russian molecules.

As a result, Kavonic sees the supply/demand gapexpanding from 70 million tonnes per annum to about 100 million tonnes perannum. That shift in the market would be about 10 times the size of theimpact Japan’s Fukushima nucleardisaster had a decade ago.

‘Priceswill have to rise materially’

There simply aren’t enough projects in the pipeline tomeet this demand surge, which Kavonic says means one thing: “Prices will haveto rise materially to incentivise such a large wave of supply.”

The coming price rises will have a myriad ofimplications, not least of which is what Kavonic describes as the possibilityof “energy poverty and emissions concerns arising in other developingcountries, who are less able to afford higher gas prices, and may resort backinto more coal on cost grounds”.

But rising prices should also lead to a combinedglobal effort to solve the supply shortage.

And that’s where Australia comes in.

“The growing need for more LNG in Europe opens up anew opportunity for Australia to again capitalise on its gas endowment and aidgas supply security for Australia’s allies in Europe and trading partnersglobally,” Kavonic says.

“Australian gas could play a meaningful role in aidingEuropean energy security, with every cargo of LNG Australia sends to Asiafreeing up more gas to head to Europe.”

Kavonic sees the opportunity for Australia to fillabout 15 million tonnes of the supply/demand gap this decade, through Woodside’s giant Browsedevelopment, extension to the life of the North West Shelf and between 1 million and 2 million tonnes being squeezed out of Queensland’s gas fields for export.

Clearly, this scenario is good news for Woodside andSantos in both the near term – UBS said this week it expects both companies tomore than double profits this year – and the longer term, with a strong priceoutlook helping both companies sell down stakes in projects and secure moreattractive long-term supply deals.

But Kavonic says the need for policy changes to securewhat he calls “Australia’s freedom gas”.

There will be a need for greater diplomatic efforts asAustralia takes a seat at the global gas policy development table with Asian,EU and US policymakers.

“The time for Asian trade partners to reconsidercontracting strategy and equity participation in Australian LNG projects maynow be here, and given the heightened geopolitical considerations, there is acore role for Government diplomacy.”

Kavonic also suggests accelerating approvals for newLNG supply will help the cause, as will policies that encourage joint venturecooperation and help solve labour shortages in the sector. Policies that limiteast coast gas exports, and hold prices down, may also need to be tweaked.

Kavonic says Australiashould also be placed well to ramp up hydrogen exports later this decade, as itbecomes a substitute for LNG.

Notably, the biggest risk Kavonic sees to his outlookis that Europe underpins a massive expansion in LNG supply, ramps up investmentin renewables and, when the Ukraine conflict ends, keeps buying Russian gas atsome level, leading to a glut of LNG developing towards the back end of thedecade.

“We might argue that this scenario should still bevery bullish for LNG near/midterm before paving way for bearish longer-termoutcome.”