LNG

Half-prepared for battles of wits

Macro Associates bills itself as “Australia’s pre-eminent economic and investment publisher.” A simple analysis posted today at MACROBUSINESS provides a caution for sciolistic politicians in the Clark Government:

Australia has a long history of pioneering investment in LNG markets. From the North West shelf to the first floating LNG project ever constructed. Sadly, this legacy of excellence blew up into an enormous post-GFC [Global Financial Crisis] bubble that proved to be the greatest single capital mis-allocation in the history of the Australian economy (and surely global energy markets).

No fewer than seven enormous projects competed for resources at once driving input prices wild and destroying the economics of each. The boom included a particularly cavalier offshoot in QLD where coal seam gas was converted to LNG via three projects on Curtis Island. As the boom subsided, and oil-linked prices crashed, the companies involved were all either sold or destroyed.

clownAnother publication, Natural Gas Intelligence (NGI), provides detail of the marketplace for LNG. It is now an international exchange much different than the one that first excited the ex-policeman and small town lawyer who thought, with equally ill-equipped assistants, they could negotiate for British Columbia at boardroom tables of giant multinational energy corporations.

It might seem obvious that LNG is in abundance now, [Cheniere Energy Inc. executive Andrew] Walker admitted, but that hasn’t always been the case. The reasons for today’s abundance are significant.

“There’s a reason why LNG hasn’t been abundant through most of its 50 years, and that’s because it’s come from countries that were centrally controlled by governments or national oil companies that controlled the exports,” he said. “So you did not have multiple LNG projects competing to export the national resource. Companies did not allow it to happen.”

That made the global LNG market prone to shortage. But with Australia and the United States emerging as major suppliers, multiple liquefaction and export projects with multiple trains will compete at the direction of a free market, not governments.

“It kind of sounds obvious, but a lot of people miss that,” Walker said. “That’s why we have LNG abundance.”

…”We’ve gone from an industry that’s constrained to an industry where you have abundance of supply with a transparent price.”

The Strategic Culture Foundation provides additional information that hints at the futility of efforts by LNG latecomers:

…the impact of US gas in Europe will be gradual, but it does start to change everything. The new LNG will put downward pressure on prices, and losing both volume and value could be a hard pill to swallow for Russia…

…Russia is not standing idly to watch the situation…

Russia can offer a better deal. At current prices, US LNG delivered to Europe would cost around $4.3 per million British thermal units (MBTU), according to price reporting agency Argus Media. Russia sells its gas to Europe for $ 5.80 per MBTU, on average. However, analysts say that Russia could drastically lower prices in a price war, to below $3 per MBTU.

Unlike their American competitors, Russia’s gas producers are not strongly tied to the world oil prices. It enables them to reduce gas costs without much damage. The prices below $3 will drive American competitors bankrupt.

2 replies »

  1. “The prices below $3 will drive American competitors bankrupt.”

    Christy: “See… that will really help us, if those competitors are removed. Go, Russia!”

    Coleman: “But Christy, we’re nowhere near Europe…”

    “So? Oh… Well, maybe the Russians would buy our LNG. They’re close, aren’t they?”

    Like

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