East coast gas market a 'slow train crash'
The east coast gas market is being compared to a "slow train crash", with major shortages of coal seam gas for the Queensand LNG export projects bringing a crisis that may only be resolved by a whole-scale restructuring of the state's new $70 billion sector, according to Credit Suisse.
The bank's energy analysts calculate that the three Queensland LNG projects are short of as much as 8800 petajoules of gas reserves to meet their 20-year LNG sales contracts, equivalent to 12.5 times the total east coast domestic market.
But investment is not being made to develop gas resources on the east coast because of stretched balance sheets, low prices due to the oil price slump and uncertainty over future coal seam gas supply volumes.
"The sad reality is there are just no winners in this whole situation," energy analyst Mark Samter said on Tuesday.
He said the LNG producers had spent $75 billion to date on three LNG projects that will not cover their cost of capital, while industrial users on the east coast have suffered a doubling of prices and may have difficulty sourcing gas at all by the end of the decade. Government is still set to reap revenues from the LNG exports, but much less than assumed when oil prices were higher.
"It's created a mess really for the country, it's not just for the producers and the buyers," Mr Samter said. "There's a slow train crash happening and it doesn't look like much is being done to resolve it."
Queensland's first LNG exports were shipped early this year from BG Group's $US20.4 billion Queensland Curtis project in Gladstone. Shipments are expected to begin mid-year from Origin Energy's $24.7 billion Australia Pacific project, while Santos's $US18.5 billon GLNG venture is due to being production in the second half. The projects are the first worldwide to manufacture LNG for export from coal seam gas rather than conventional gas fields.
Despite commentary that a merged LNG development made sense, the three separate LNG projects went ahead, and will result in a tripling in gas demand on the east coast within 18 months. A fourth project, the Arrow Energy venture owned by Shell and PetroChina, has been ruled out, but the two oil majors have yet to determine how their gas will be used.
Mr Samter said the development of Arrow's circa 9500 petajoules of gas seemed to be the only answer to the gas supply problem but that major impediments stood in the way: PetroChina's desire for its own LNG supplies from the development of the resource, and the cost of developing Arrow gas, which would require oil prices of $US75-$US80 a barrel, well above current levels.
He suggested a solution involving a merger between all the LNG plants on Curtis Island, which could make LNG volumes available for PetroChina.
In the shorter-term, the impact on the gas market on the east coast will be dramatic, with about 200-300 petajoules of gas having to be re-directed from the domestic market to feed the LNG projects, said Credit Suisse analyst Martin Kronborg.
"If supply isn't added soon demand will have to adjust sizeably," Mr Kronborg said. But the problem is that much of the undeveloped gas on the east coast is held by Santos, Origin Energy or smaller players that cannot afford to invest in supply projects.
Mr Samter said the situation had become a "major poltical issue" for government, which may need to step in to ensure at least some Arrow gas gets supplied into the domestic market.
"They really were culpable in seeing Australia export its compettiive advantage in cheap energy," he said.
"The reality is that over the 20 year contracts that have been signed for these projects, you are broadly taking - arguably stealing - 40 years worth of domestic east coast supply and sending it offshore."
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