Australia Sees LNG Under Pressure

The real value of Australia’s LNG exports is forecast to increase from A$23bn ($17.6bn) in 2016–17 to A$39bn in 2022–23, driven by higher export volumes and, to a lesser extent, higher prices.

But unless project completions slip, global markets are set to enter a period of overcapacity, according to a report, Resources and Energy Quarterly, published April 9 by the government's chief economist which found:

• LNG is forecast to overtake metallurgical coal as Australia’s second largest resource and energy export in 2018–19;
• The completion of the final three Australian LNG projects under construction will underpin strong growth in export volumes and bring total export capacity to 88mn metric tons/yr;
• LNG contract prices — at which most Australian LNG is sold — are projected to increase gradually in line with oil prices; and
• Australian LNG projects are likely to face increasing competition, as global LNG markets look set to move into a period of overcapacity, starting in 2H2018 and lasting through to 2020. Slippages in project completions, however, have the potential to delay overcapacity.

Oil-linked LNG contract prices in north Asia are projected to rise gradually over the outlook period. The real Japan Customs-cleared Crude (JCC) oil price, to which Asian LNG contract prices are often linked, is projected to increase from US$55/barrel in 2017 to US$60/b in 2023. LNG spot prices in Asia are expected to decline in the short term. Spot prices for LNG delivered to Asia are forecast to fall to an average $6.60/GJ in 2019 (US$5.60/mn Btu), as additions to global supply capacity outstrip growth in LNG demand over the next few years. LNG spot prices are then projected to gradually recover from 2020 as supply growth slows, reaching an average $9.40/GJ in 2023 (US$7.90/mn Btu).

World LNG imports are projected to increase from 250mn mt in 2016 to 378mn mt in 2023. Emerging Asia – led by China – and Europe are expected to drive demand growth, the report says. Prospects for growth in Japanese and South Korean LNG imports are more limited. Despite robust growth in demand, the expansion in global LNG supply capacity is expected to outpace LNG demand over the next few years. Overcapacity in global LNG markets is expected to set in sometime in 2018 and last through to 2020. The expansion in global liquefaction capacity will be concentrated in the US, Australia and Russia, the report said.

The latest LNG export data comes after the Australian Reserve Bank noted in its most recent Statement on Monetary Policy that: “As additional LNG production comes on line over 2018 and 2019, LNG exports are expected to contribute around ¼ percentage point to GDP growth per year," according to Australia Petroleum Production and Exploration Association (Appea).

Responding to the economic report, Appea CEO Malcolm Roberts said the data confirms how significant LNG exports are to sustaining Australia’s economic growth. “There is a growing demand for cleaner-burning energy in our region where air pollution is a major cause of premature deaths in some Asian cities. With Australia’s abundant supplies of natural gas, the outlook should be extremely positive. But for LNG to continue to be a pillar of the nation’s economy amid challenging market conditions and growing competition from other suppliers, exploration and development must be fostered, not restricted.

“The growth of the export industry has brought the capital to find and develop eastern Australia’s next source of gas supply. And more investment is required – we will need up to A$50bn in continuing investment to 2030 to maintain supply."

The government report also pointed to a bleaker future for the country's thermal coal exports. It said the Japanese Fiscal Year (JFY) benchmark price for 2018 (April 2018 to March 2019) will likely settle at US$100/mt, but drift down steadily over the next few years, reaching US$75/mt by 2023 as demand falls faster than supply, with Australia and Russia both exporting more. Non-OECD Asia will drive growth in world demand, with the OECD consuming less as governments push away from coal, the report said.