Australia battered but unbowed
Delays and cost overruns hurt the sector, but Australia is still on course to become a global export powerhouse
The 2014 collapse in oil prices was a heavy blow for Australia's booming liquefied natural gas industry, smashing the profitability of seven new mega-projects that represented a combined investment of about $200bn.
But two or so years down the track, four of the projects have been commissioned (QCLNG, GLNG, APLNG and Gorgon), while Wheatstone, Ichthys and Prelude are on their way to completion in 2017 or 2018.
In general, the LNG industry in Australia is proving to be resilient and remains on track to become the world's largest over the next two to three years.
QCLNG, which became part of Shell in early 2016 following its takeover of BG, was the first of the new generation of Australian LNG projects to come on stream, with first cargoes from train 1 in December 2014 and train 2 in July 2015. QCLNG has ramped up according to plan, despite the risks inherent in being the world's first LNG project based on coal-seam gas (CSG, also known as coalbed methane). The project shipped 8.2m tonnes of LNG in 2016, 96% of nameplate capacity.
GLNG, operated by Australian-based Santos, was the next cab off the rank, shipping its first cargoes from train 1 in October 2015. Train 2 began shipping cargoes in June 2016, but has ramped up slowly and relied heavily on third-party gas to bolster its CSG reserves. GLNG shipped only 4.6m tonnes in 2016. On an annualised basis, production in Q4 2016 was equivalent to 5.2m tonnes, 66% of name-plate capacity.
The much-anticipated US LNG export boom has so far failed to hurt Australian exports
Santos was forced into a major restructure and debt-reduction programme by the collapse in prices, and admits it has not had sufficient capital resources to fund the required level of development drilling. Santos recently disclosed that GLNG's previously advised contracted supply of 7.2m tonnes a year was a maximum figure. Actual contract volumes, while confidential, are apparently below 6m t/y. Santos is aiming to achieve 6m t/y of production within three years.
APLNG was next to be commissioned, with first cargoes from train 1 in January 2016 and train 2 in October 2016. Despite its later start, APLNG has overtaken GLNG, shipping a total of 4.8m tonnes of LNG in 2016. Production ramped up well through 2016, with shipments in the last quarter of the year of 1.75m tonnes, equivalent to 7m for the year or 78% of name-plate capacity.
Gorgon is the latest (and largest) of the new Australia projects to be commissioned. The ramp up is significantly behind plan, which caused upward pressure on Asian spot prices at the start of this year. The project shipped its first cargo in March 2016, but did not hit its stride until January of this year. Train 2 delivered its first cargo in October 2016 and has performed much better than train 1, allowing 2016 production to reach 2m tonnes. First LNG from train 3 is due by the end of March, several weeks ahead of schedule.
While the start-up performance of Australia's new projects has been a mixed bag, national LNG production rose strongly in 2016, up 49% to 45.2m tonnes compared to the previous year.
EnergyQuest projects three more years of strong growth. Australia's 2017 exports are expected to be around 57m tonnes. If current oil prices are maintained, EnergyQuest estimates that the value of Australian LNG exports will grow further to around A$24bn ($18.2bn), making it Australia's third-largest export earner after iron ore and coal.
Peak production of an estimated 83m t/y is expected in 2020, which is later than expected at this time last year, largely as a result of Gorgon and schedule slippages at all three projects still under construction.
The 8.9m-t/y Wheatstone project has already suffered a major delay of six months and is now scheduled to produce its first LNG in mid-2017, although this timetable is also under pressure.
49% rise in Australian LNG output in 2016
The Inpex-operated Ichthys project is also likely to suffer further delays. Inpex maintains that first gas will still be delivered in September 2017, although that timeframe looks very challenging after the subcontractor building the power station recently quit the project. There is also likely to be a further cost blow out.
Shell's pioneering Prelude LNG project is also on an uncertain timeline. There have been no updates recently, and we do not expect material production until 2019.
Despite all these difficulties, the vastly expanded Australian LNG industry remains a remarkable achievement and will be a major contributor to GDP for decades to come.
The industry's battered operators and owners are looking increasingly at the medium to long term where they can see reasons to feel reassured about the value and the potential of their newly created projects. First, the much-anticipated US LNG export boom has so far failed to hurt Australian exports, and doesn't look like it will pose a threat because of the high cost of Asian LNG imports from the US.
In January 2017, Japanese imports from the US had an average price of $12.63 per million British thermal units, well above the average import price of $7.56/m Btu, which is close to the Australian average.
In addition, Australian projects are expanding their share of markets in Asia, especially in the fast-growing Chinese market. China's LNG imports increased by 33% in 2016 to a record 26.2m tonnes, with growth accelerating towards the end of the year. In Q416, China's LNG imports jumped by 43% compared to Q415, driven by imports from Australia. Australia accounted for 47% of all China LNG imports in Q416, compared with only 27% a year earlier.
*The author is chief executive of EnergyQuest, an Australian-based consultancy specialising in energy market analysis and strategy
This article is part of a report series on LNG. Next article: Asia to soak up global LNG glut