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Hungover down under

Australia came good as an LNG powerhouse in 2016, but started to feel the effects of the boom's aftermath

It was a bitter-sweet year for Australia's energy sector. Exports from vast natural gas reserves reached new heights as newly-minted liquefied natural gas facilities in Western Australia and Queensland started up. Seven export terminals are now pumping out LNG. Three more are being built.

But tepid demand in Asia and rivalry from cheaper competitors - including American LNG flowing through the expanded Panama Canal - meant buyers took control of the market and were able to bully high-cost Aussie exporters into lower prices and more flexible contracts.

LNG export capacity reached about 42m tonnes a year - about the halfway point given another 44m t/y should be online by end-2018. After years of delays and ballooning costs, Chevron brought its Gorgon plant into operation - and promptly faced new price demands from India's largest gas importer, Petronet LNG. But the US firm had to delay another project, Wheatstone LNG, until mid-2017.

In Queensland, the last three new LNG plants came on stream (although Origin Energy was only expected to begin operations at the second train of Australia-Pacific LNG in late 2016). In the Northern Territory, Inpex said its Ichthys LNG plant would start up in late 2017.

The big problem was further afield. Weaker demand from Japan and South Korea helped create a glut in Asia's LNG market, depressing spot prices to around $6 per million British thermal units, less than a third of their price of two years earlier. For Australia, this means the nominal unit value of its LNG exports for fiscal year 2016-17 will be just $6.70/mBtu, compared with $11.30/mBtu in 2014-15.

Weaker oil prices also hurt. BHP Billiton, Woodside Energy, Santos and Origin Energy were all put under ratings review. To stem the losses, Santos appointed a new boss in December 2015. The same month, Woodside scrapped plans to take over Oil Search, switching to deals aimed at prolonging the life of the cost-competitive North West Shelf project. Others, like Drillsearch and Beach Energy, merged to keep afloat.

Collaboration was the industry's buzzword, if not panacea. It's supposed to mean developers working together to cut costs. But in 2016 it also meant an end to green-field projects. In March, Woodside shelved its planned Browse LNG, amid an industry shift to de-bottlenecking, backfill projects and brownfield expansions.

Exploration spending all but collapsed, leading to supply shortages in the eastern gas market, as producers prioritised LNG exports. By June 2016, companies' investment in the upstream had fallen by 59% compared with a year earlier; and by 80% compared with 2012's peak.

A big casualty was BP's exploratory drilling programme in the Great Australian Bight, one of the world's last deep-water frontiers. The economics just no longer stacked up. Onshore, moratoria on hydraulic fracturing for unconventional gas became more entrenched this year in the Northern Territory, Victoria and New South Wales.

Supply shortages saw wholesale spot gas prices in Australia's eastern gas market spike, causing Shell Australia's boss Andrew Smith to suggest Sydney build its own LNG-import terminal. Authorities thought the problem lay with a lack of competition in the market. The Northern Territory backed construction of the North East Gas Interconnector to aid gas flow to Queensland.

The absence of joined-up thinking on energy policy became clear in 2016, when the entire state of South Australia - except consumers with renewable power and battery-storage back-up - was plunged into darkness, following huge storms that top-pled high-voltage power lines.

The polite way to describe it is that Australia's energy sector endured a period of transition in 2016. It cemented its place as a gas-exporting powerhouse internationally, but suddenly realised it needed a way to deal with the aftermath of the LNG boom - and to fix its domestic market. It was quite a party down under, but now it's over.

This article is part of Outlook 2017, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here

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