September 2014 The Future of Australian LNG Exports: Will domestic challenges limit the development of future LNG export capacity? David Ledesma, James Henderson* & Nyrie Palmer** OIES PAPER: NG 90 *Senior Research Fellows, OIES, **Senior Regulatory Officer, NSW Resources and Energy The contents of this paper are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its members. Copyright © 2014 Oxford Institute for Energy Studies (Registered Charity, No. 286084) This publication may be reproduced in part for educational or non-profit purposes without special permission from the copyright holder, provided acknowledgment of the source is made. No use of this publication may be made for resale or for any other commercial purpose whatsoever without prior permission in writing from the Oxford Institute for Energy Studies. ISBN 978-1-78467-008-5 September 2014: The Future of Australian LNG Exports ii Acknowledgments The authors would like to thank everyone who helped us in drafting the paper, in Australia as well as the UK. Your contributions have helped to enrich the document and ensure accuracy of the content and conclusions September 2014: The Future of Australian LNG Exports iii Preface With seven the new LNG projects under construction and due for completion in the 2014 – 2018 timeframe amounting in addition to existing facilities, Australia is expected to overtake Qatar as the world’s largest supplier of LNG by the end of the 2010s. With its plentiful gas reserves, prior track record of LNG project execution and operation and relative proximity to the fast growing Asian LNG markets the degree of comparative advantage would seem to guarantee a benign investment environment. However, several factors, among them competition for skilled labour within Australia, the strength of the Australian dollar and the specific logistical and environmental sensitivities of the project locations have resulted in significant cost escalations and in some cases delays to the original project schedules. This paper also serves to convey an understanding of the much overlooked Australian gas market and, significantly the impact that the new LNG projects are already having on internal supply/demand – price dynamics and the political challenges raised. Much energy media attention has focused on the problems faced by the current group of new Australian LNG projects. This paper comprehensively addresses the root causes but more importantly conveys the scale of the new wave of Australian LNG supply and integrates this with its impact on the domestic market which until now has been largely isolated from global energy dynamics. The OIES Natural Gas Research Programme is committed to producing timely and insightful research on both supply and demand side developments and this paper achieves both these objectives. Howard Rogers Oxford, September 2014 September 2014: The Future of Australian LNG Exports iv Contents Acknowledgments .................................................................................................................................. iii Preface ................................................................................................................................................... iv Contents .................................................................................................................................................. v Figures ................................................................................................................................................... vi Tables and Maps .................................................................................................................................... vi 1. Overview ............................................................................................................................................. 1 2. LNG in Australia .................................................................................................................................. 2 2.1 Introduction ................................................................................................................................... 2 2.2 Australia’s gas resources .............................................................................................................. 4 2.3 Australian gas demand ................................................................................................................. 8 3. Australia’s three existing LNG projects ............................................................................................. 11 3.1 The North-West Shelf .................................................................................................................. 11 3.2 Darwin LNG ................................................................................................................................. 13 3.3 The Pluto Project ......................................................................................................................... 13 4. The 2010s growth spurt of Australian LNG ....................................................................................... 15 4.1 Challenges facing project construction ....................................................................................... 19 4.2 Projects under construction......................................................................................................... 24 5. The varying importance of the domestic gas markets in Australia ................................................... 26 5.1 Introduction ................................................................................................................................. 26 5.2 Market size and growth potential ................................................................................................ 27 5.3 The Northern Territory – a very small domestic market, dominated by LNG export strategy .... 30 6. The Eastern gas market and the impact of imminent LNG exports .................................................. 32 6.1 Introduction ................................................................................................................................. 33 6.2 Overview of the East Australian gas market ............................................................................... 33 6.3 Gas resources and production in Eastern Australia ................................................................... 38 6.4 Coal Seam Gas development issues in Eastern Australia ......................................................... 41 6.5 The combined impact of CSG developments on Queensland’s major LNG projects ................. 46 6.6 Gas contracts and prices in Eastern Australia ............................................................................ 50 6.7 Could a gas reservation policy be introduced? ........................................................................... 55 6.8 Conclusion – East Australia’s gas debate and LNG projects ..................................................... 57 7. The Future – the competitiveness of Australian LNG ....................................................................... 58 7.1 Introduction ................................................................................................................................. 58 7.2 Australian LNG will need to be cost competitive under new contractual terms .......................... 60 7.3 Economics of LNG export projects ............................................................................................. 60 7.4 FLNG as another alternative to reduce costs ............................................................................. 65 7.5 Which new projects will proceed? ............................................................................................... 66 8. Conclusions ....................................................................................................................................... 67 Appendix 1 – Australian Gas Basins ..................................................................................................... 69 Appendix 2 - Governance and regulation ............................................................................................. 71 Appendix 3 - Gas Pipelines ................................................................................................................... 73 Appendix 4 – Reserve Classifications ................................................................................................... 78 Abbreviations ........................................................................................................................................ 79 Bibliography .......................................................................................................................................... 80 September 2014: The Future of Australian LNG Exports v Figures Figure 1: Energy production in Australia by fuel (2011/12) ..................................................................... 2 Figure 2: Australia’s major resource and energy exports by value (2011/12) ........................................ 3 Figure 3: Australian primary energy consumption by fuel ....................................................................... 4 Figure 4: Major gas suppliers to Asia ...................................................................................................... 5 Figure 5: Australian gas production by region (2012)