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US LNG eyes eastern Australia market

Trans-Pacific shipments might compete to fill the country’s regional supply shortage

Australia could find itself in the unusual position of importing US LNG, despite having recently assumed the mantle of the world's largest LNG exporter.

Prices competitive to other Asian markets and broadly similar transport rates could see US LNG supplying eastern Australia's supply-constrained pipeline gas market as early as 2020, say analysts, assuming start-up of any of five floating, storage and regasification unit (FSRU) import projects by then.

The project promoters are Australia's AGL Energy and ExxonMobil in Victoria; Melbourne-based Venice Energy in South Australia; and consortium Australian Industrial Energy (AIE) and South Korea-based Epik LNG in New South Wales. The plans offer total potential import capacity of over 5mn t/yr to a pipeline market spread across six states: Queensland, New South Wales, Victoria, South Australia, Tasmania and the Northern Territory.

Eastern Australian domestic gas prices have risen steeply since three Queensland-based LNG export facilities were commissioned, linking domestic prices into the wider international market. Global commodity traders, including Japan's Jera, Trafigura, Gunvor and Vitol, have ambitions to deliver non-Australian supply, sourced at competitive prices, into a market at times characterised by opacity and apparent ill-logic as well as elevated price levels.

To East Asia or eastern Australia?

"The [late December] US netback from Australia would be around $6.40/mn Btu, well above the short-run marginal cost of US liquefaction plants of $4.20/mn Btu, [thus] attractive for US sellers," says Carlos Torres-Diaz, consultancy Rystad's vice-president for gas and renewables markets. US LNG could ship to AGL's Crib Point—the most advanced of the five proposals, with a 2021 projected start-up—for $2.46/mn Btu, only just above the $2.42/mn Btu transport rate to Japan, he says.

This relative freight rate parity for US volumes to eastern Australia and East Asia tallies with Petroleum Economist shipping distances, which put Sabine Pass on the US Gulf Coast 9583 nautical miles, or 24.2 days at sea based on a standard shipping speed, away from Victoria's Western Port. By comparison, Sabine Pass to Tokyo's Higashi Ohgishina terminal is 9268 nautical miles, or 23.4 days sail away. In short, if eastern Australia offers a price competitive to East Asia, US volumes could logically service either or both for a roughly similar cost.

More difficult logic is how US supply competes with Australian alternatives. The coalbed methane (CBM) production that fuels Queensland's export terminals might appear to have an in-built advantage based on proximity and zero liquefaction costs. But analysts see two issues, the first that Queensland volumes are largely locked up in long-term export contracts.

The second is more telling, that upstream CBM production costs are prohibitive—indeed, to some minds, domestic prices are elevated in part because exporters buy market gas andbecause it is cheaper than their least competitive wells.

Uncontracted volumes from Australia's northwest and northern LNG terminals offer keener competition to would-be US importers. The distance from Western Australia's Dampier to Western Port is 2493 nautical miles, or 6.3 days at sea, compared to 3738 nautical miles, or 9.44 days at sea, from Dampier to Higashi Ohgishima. Should these terminals have spot supply, and assuming similar prices in eastern Australia and East Asia, it may be a no-brainer to supply the former, potentially squeezing out US supply.

Building US links

Close ties between three of the project developers and US exporters suggest, though, that Australian volumes' availability is not seen as a given.

AIE's partner at its proposed Port Kembla FSRU is Jera, the world's largest LNG trader, which could supply from its US Gulf Coast Freeport LNG liquefaction plant, albeit as just one option in its global supply portfolio. Venice Energy's Port Adelaide project has support from Japan's Mitsubishi-Mitsui joint venture, partner in the US Cameron plant.

Epik LNG, which plans to market its FSRU capacity to traders, has close ties to Next Decade, developer of Rio Grande LNG (RGLNG), one of several second-wave US LNG projects. "With all the projects coming on … in the Permian, prices have collapsed, so I believe companies like Next Decade—or one of their customers at RGLNG—could procure cost-competitive gas. Then it would definitely be competitive to ship it all the way down to Australia, to regasify it and plug it into the system," says Epik LNG's managing director Jee Yon.

US exporters may also face short-term LNG oversupply, due to a swathe of capacity arriving in tandem with the full ramp-up of Australian mega-projects and a slowdown in Chinese import growth, making Australia one of a potentially limited number of attractive short-term options.

"After 2022, we see the LNG market tightening as demand catches up with liquefaction infrastructure, which could lead to higher Asian spot prices," says Torres-Diaz. "It would be wise for Australian importers to lock-in volumes through medium-term contracts of between 3–-5 years if they want to reduce the risk of being exposed to these higher prices."

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