--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
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
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
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
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
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
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.