Another rise in LNG exports in 2017 will cause unexpected problems in Australia's domestic market
Australia has been a fascinating study for liquefied natural gas-industry watchers for the past six years. On the east coast, three LNG mega-projects sprung up in the small regional Queensland city of Gladstone, based on the world-first use of coal-seam reservoirs. It was also the first time LNG projects had been developed in a domestic market in any country.
Somewhat remarkably, the construction phase of the boom will give way, with relatively few hiccups, to a production phase in 2017, when all the new mega-projects (except Shell's Prelude) will be commissioned. Total Australian LNG production will rise sharply, to 54m tonnes a year.
The experiment, though, is not over yet. Going into 2017, the biggest cloud over Australia's vastly expanded LNG industry is a potential shortage of gas in the east coast domestic market, which is inextricably linked to the three Gladstone projects.
That market - which stretches down the eastern seaboard from Queensland, through New South Wales (NSW), Victoria and Tasmania to South Australia - benefited for decades from a gas glut and prices that were among the lowest in the world.
The glut became an order of magnitude larger in the early 2000s with the discovery of some 30 trillion to 40 trillion cubic feet of CSG in Queensland. It seemed a logical step to build multiple LNG projects to export to hungry Asian markets. But the gas glut has quickly reversed into a gas shortage thanks to several unforeseen developments.
The first was a decision by Santos, the operator of Gladstone LNG (GLNG), to draw on gas that would otherwise go to the domestic market to cover a shortfall in its CSG reserves. The flexibility to top up with conventional gas seemed like good risk management at a time when ramping up an LNG train from entirely unconventional sources was still untested.
But then came the curve balls. In response to a vocal minority of protestors, the state government of NSW effectively banned CSG exploration and development in highly prospective basins that extended across the border from the rich areas in neighboring Queensland.
Further south, Victoria's state government took things a step further, banning not just fracking but onshore oil and gas exploration of all kinds. While some has continued inland in the Cooper Basin, which lies in the development-friendly states of South Australia and Queensland, mature gasfields in the east coast market are depleting much faster than new fields are being added.
For those watching from afar, it's clear to see that a large part of the problem stems from piecemeal state government regulation of an industry whose success or failure has national (or even international) repercussions.
The absence of a nationally coordinated approach to renewable energy is now also heaping even more pressure on east coast gas supply. Over the past decade, South Australia has pushed ahead far more aggressively than other states with renewable energy. The state now meets up to 40% of its energy needs from wind, one of the highest levels globally. Low-cost, wind-generated power floods into the grid most of the time, and was a death blow for the state's last remaining coal-fired power station.
But when the wind doesn't blow, South Australia depends on a small number of gas-fired generators and two electricity interconnectors with Victoria. Recent blackouts have highlighted the energy-security risks, and put intense pressure on state and federal governments to keep sufficient gas-fired generation and gas supply as a backstop, a challenge with a looming shortage and rising gas prices.
Energy security now bedevils the national political agenda in a way that few expected.
The east coast gas shortage creates both problems and opportunities for the Gladstone project operators Shell (QCLNG), Origin (APLNG) and Santos (GLNG). GLNG has the most headaches because it may need to buy much gas that would otherwise go into the domestic market. QCLNG and APLNG have sufficient reserves, and therefore some flexibility to divert CSG from export sales into the domestic market to take advantage of high spot prices.
But there must also be a much broader risk for all three east coast LNG operators of intervention by government as the effects of the east coast gas shortage become apparent in 2017.
While it is far too early to predict the fallout from the looming shortage in east coast gas, Australian LNG will most certainly remain a fascinating experiment that bears close watching by other countries.
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