--Clyde Russell is a Reuters market analyst. The views expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, April 16 Amid the recriminations that pass for debate in Australia, one point was missed about the scrapping of Woodside Petroleum's $45 billion Browse liquefied natural gas project: nobody said the demand wasn't there.
Instead, the debate focused on the escalating costs that rendered the planned onshore LNG plant in the north of Western Australia state uneconomic, and who was to blame for this.
There are plenty of candidates for culprit-in-chief on the cost front, ranging from an Australian dollar at near record highs in trade-weighted terms, a labour force that is the best-paid in the world and is still in short supply given the seven LNG projects under construction, and higher taxes at both state and federal level.
Add to this the strident objections from some environmentalists to the Browse project, which was to be based at James Price Point, an area rich in biodiversity and with cultural significance to local Aboriginal people.
Peter Coleman, Woodside's chief executive, was tactful in saying the Browse project needed a "fundamental" change in its cost structure to be viable.
But he also touched on the demand issue. "Every day ... our customers are saying to us very clearly 'No longer can we pay for your expensive projects'," he said.
The key things to note are that Coleman didn't say customers didn't want the LNG and that he remains committed to turning the reserve into the super-chilled fuel, just at a lower price.
What sets Australia's LNG industry apart from its coal counterpart is that the future demand seems more assured, given China may increase LNG imports fourfold to over 50 million tonnes by 2020, Southeast Asian nations are turning to the fuel and Japan will also take more as it turns away from nuclear power.
Both LNG and coal projects are suffering from cost escalation, which undermines project viability, and especially so in the current weak pricing environment.
But unlike coal, which is suffering from uncertainty over Chinese demand, global LNG demand looks set to increase as fast as new capacity, if not faster.
Of course, it won't all be in sync, with new supply especially lumpy as several of Australia's projects are likely to come on line at more or less the same time in the three years starting from late 2014.
These will make Australia the world's largest LNG supplier, with its capacity of about 80 million tonnes per annum overtaking current No.1 Qatar and dwarfing regional rivals Malaysia and Indonesia.
However, for all these projects to make the returns their owners expect, LNG prices in the Asian markets they aim to supply will have to remain high, and indexed to crude oil.
It's here that there is pressure for change from traditional customer like Japan and South Korea, the world's top-ranked LNG importers, and emerging giants like China.
All have seen the shale gas revolution in the United States deliver cheap natural gas and the promise that some of this will make its way across the Pacific in the form of LNG.
This has led to pressure being applied to LNG producers to accept either a much weaker linkage to oil or even go as far tying prices to those at natural gas hubs in Europe or the United States.
In the current situation where LNG markets appear well supplied and commodity prices are falling virtually across the board, the customers probably think they hold a winning hand.
But they probably shouldn't get too carried away as what's likely are more decisions like that Woodside made with Browse.
If the LNG developer can't be assured of high returns, the project will be scrapped, or at least delayed until the shoe is back on the producer's foot.
Yes, developers will look for ways to deliver new projects at lower costs and floating LNG platforms offer a potential solution.
But the cost-saving may not be as much as hoped for, and the complexity of a massive offshore platform means its operating costs may be more than those for an onshore plant.
Also, floating platforms are unlikely to be able to reach the size of onshore developments, robbing LNG companies of the ability to exploit the lower costs associated with building second or third LNG trains at an existing facility.
Royal Dutch Shell has approved a floating platform for its Prelude field off northern Australia, with the planned 3.6 million tonne per annum capacity expected to cost an upfront $12 billion.
This isn't much cheaper on a dollar per tonne basis than Inpex's $34 billion Ichthys plant in Darwin in Australia's Northern Territory, which has a planned capacity of 8.4 million tonnes per annum.
And it's actually more expensive than the $25 billion, 9 million tonne per annum plant being built by ConocoPhillips and Origin Energy in Queensland state, which will use coal-seam gas as a feedstock.
While spot LNG prices in Asia have fallen to the current $15 per million British thermal units, a 24 percent drop from the recent peak of $19.67 in February, it's likely that consumers' hopes for an end to oil-linked pricing in Asia will be dashed.
There just won't be enough supply from either the United States or Canada to create a glut of LNG in Asia, and the stream of new projects is now under increasing threat of not being built, as shown by the Browse decision.
It may well come to a choice for LNG consumers: either pay for the expensive projects in order to secure supply, or take your chances in the spot market, which looks unlikely to be oversupplied on a medium- to long-term basis.