COLUMN-Australia going back to coal has lesson on U.S. LNG exports: Clyde Russell

Mon Feb 10, 2014 2:24am EST

--Clyde Russell is a Reuters market analyst. The views expressed are his own.--

By Clyde Russell

LAUNCESTON, Australia, Feb 10 (Reuters) - The decision by an Australian power company to mothball a natural-gas plant and restart two coal-fired units seems wrong on many levels, but strangely, it has implications for U.S. liquefied gas exports.

Stanwell Power Corp, an electricity producer owned by Queensland state, said last week it would shut for three years its 385-megawatt (MW) Swanbank E power station, west of the state capital Brisbane, while restarting two coal units with a combined 350-MW capacity at its Tarong plant.

The decision was framed in terms of economics, with the company saying it made more sense to sell the gas to other users than to use it to generate power, and that returning to coal would improve its competitiveness.

This switch back to coal power in Queensland brings together several issues that show the difficulty of implementing policies designed to combat climate change, while keeping industry competitive and encouraging lucrative energy exports in the form of liquefied natural gas (LNG).

Australia and the United States took different paths with their natural gas bonanzas, and both have reaped benefits, but not without complications.

Australia used large discoveries of conventional and coal-seam gas to embark on projects costing more than $200 billion that will make it the world's biggest exporter of LNG by 2018.

The boom in construction helped fuel economic growth and allowed Australia to sail through the 2008 global recession relatively unscathed. But the LNG push has also had some nasty side effects for Australia.

Domestic gas prices are roughly double those in the United States, leading to complaints from industrial users such as chemical producers about a lack of competitiveness.

Manufacturing in Australia has been stymied not only by high natural gas costs, but also by rising power bills and a stronger currency.

And while not all of the blame can be laid at the door of the LNG projects, some can.

The three LNG projects under construction in Queensland are based on coal-seam gas as a feedstock.

However, there have been issues in securing sufficient reserves and there is mounting opposition to producing the gas, which requires multiple wells and small pipelines across large areas, much of which is prime agricultural land.

This has led to an unlikely coalition of farmers and environmentalists, making it harder for energy companies to explore for new resources.

Just how green groups will feel about Stanwell's decision to shut a gas-fired plant and re-open coal units remains to be seen, but it's hard to escape the conclusion that their protests against coal-seam gas have not only raised prices, but also doubts about the future of Australia's ambitious LNG plans.

U.S. SHALE GAS

The United States travelled a different path with its shale gas bonanza, using it for domestic consumption as it lacked the infrastructure to export the fuel as LNG.

This saw benchmark U.S. natural gas prices drop by about 88 percent from the peak in December 2005 to a low in April 2012.

While prices have recovered since then to close on Feb. 7 at $4.77 per million British thermal units, this is still about half what users pay in Australia and less than a quarter of LNG costs for major Asian consumers such as Japan and South Korea.

This cheap gas has helped give the United States back its manufacturing mojo, with more than $90 billion of industrial projects under construction and lower energy costs boosting manufacturing competitiveness.

Now the United States is seeking to use some of its shale gas to enter the LNG market, looking to Asian buyers who are keen to lower costs.

While a study commissioned by the U.S. Department of Energy found that exporting LNG would provide a net benefit to the nation and not raise costs for domestic users, there are reasons to be sceptical.

Similar arguments were advanced in Australia, namely that coal-seam reserves were so abundant that there would be plenty of gas for exporters and local users alike.

The reality has turned out to be somewhat different: Domestic gas costs have doubled in Australia in the past five years, while electricity costs rose by 28 percent in the three years from 2010 to 2012.

While some of the gain was because of the former Labor Party government's introduction of a carbon tax, more of the increase was because of rising fuel costs, particularly natural gas.

While planned U.S. LNG exports of 60 million tonnes a year still represent a relatively small amount of total U.S. natural gas production, it means that there will be more competition for supplies among users, with the possible consequence of higher prices, assuming output doesn't grow at a faster pace.

This doesn't mean that the United States would be better off economically if it disallowed LNG exports.

What it does mean is that similar to Australia there will be winners and losers, not just mainly winners as could be currently argued is the case for U.S. shale gas.

In Australia the winners so far have been engineering construction firms and their employees building the LNG plants, while energy companies owning the plants as well as the government should become winners once exports commence.

Losers have been the industrial and residential gas and electricity customers, and possibly the environment as a cleaner fuel is now losing out to coal.

While Australia and the United States have different dynamics around their natural gas industries, it may not be unreasonable to assume some convergence of issues the closer U.S. LNG shipments come to reality.

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Comments (1)
WayneP wrote:
It’s interesting that the US govt seems to be giving LNG exporters the same treatment as the Keystone Pipeline. Delay, Delay, delay.

Feb 10, 2014 6:03pm EST  --  Report as abuse
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