(Clyde Russell is a Reuters columnist. The views expressed are his own)
By Clyde Russell
LAUNCESTON, Australia, March 30 (Reuters) - It’s somewhat ironic that as Australia ramps up to being the world’s biggest exporter of liquefied natural gas (LNG), domestic industries are under threat from not being able to source the fuel.
A combination of new LNG plants, exploration moratoriums and a successful anti-gas campaign means that industry and residential users in the three most populous states, New South Wales, Victoria and Queensland, may struggle for natural gas supplies within the next two years.
The first of three coal seam gas to LNG plants in Queensland starting shipping cargoes in December last year, and the others are due to start producing later this year.
These are the first LNG plants in the world to be supplied from gas extracted from coal seams, a process that requires hundreds of wells dotted across what is a predominantly farming landscape in the hinterland of Australia’s east coast.
There are four more LNG projects under construction in the north and west of Australia, but these use conventional offshore wells and those regions aren’t linked by pipeline to the eastern seaboard, where more than 80 percent of Australians reside.
The three new coal-seam LNG plants will result in a more than tripling of natural gas demand in eastern Australia by 2016, with data from utility AGL Energy saying it will rise to 2,100 petajoules (PJ) per annum from 694 PJ in 2013.
The 2016 demand forecast equates to about 37.8 million tonnes of LNG, and the three new coal-seam supplied plants have a combined capacity of about 25.8 million tonnes per annum.
Up to now the domestic gas market in eastern Australia has largely been supplied from conventional wells in central Australia, and offshore platforms in the Bass Strait between the mainland and the island state of Tasmania.
The eastern states are linked by a pipeline network and the market has been characterised by long-term contracts at fixed prices, which has helped underpin industrial users such as glass and paper manufacturers, as well as retail customers.
Prices for domestic gas have also been below that for LNG in Asian markets, although the collapse of spot LNG prices LNG-AS to record lows of $6.70 per million British thermal units (mmBtu) last month has brought the two closer together.
The problem for domestic users is that many of the long-term contracts are expiring in the next few years and they have found that suppliers are unwilling to enter new long-term contracts, or will only do so at prices that are higher than equivalent LNG costs.
One manufacturer at last week’s Australian Domestic Gas Outlook conference in Sydney was adamant that the market has failed and his business is at risk of closure without certainty and stability of natural gas supply.
From his perspective, natural gas was being diverted away from the domestic market and to the export-focused LNG plants, even though the companies running these projects claim to have sufficient reserves to meet their supply needs.
What became clear at the conference was that domestic prices will inevitably rise to meet LNG prices, although whether these are long-term, oil-linked LNG prices or the more volatile spot price is something that remains to be determined.
The other main problem for domestic users is the lack of new supply being developed that is aimed at the local market.
Part of this is because of onshore exploration and production moratoriums in New South Wales, Victoria and Tasmania.
These bans have been put in place by politicians nervous over the impact of anti-coal seam gas and hydraulic fracturing campaigns run by a combination of environmental and farming groups.
With no new production slated to come onstream, there is the real risk that as the LNG plants ramp up, natural gas that previously supplied the domestic market will be sucked up by LNG, leaving domestic users unable to obtain supplies at what they would consider competitive prices.
New South Wales had a state election at the weekend where the ruling Liberal Party was returned to power.
But the opposition Labor Party had campaigned on halting a major coal-seam gas project run by Santos, Australia’s largest onshore producer.
While Labor’s defeat ensures the immediate safety of the project, it may be that Santos assesses the political risks of continuing as too great, given the chance that the opposition party may win the next election, due in four years.
The key for Australia’s domestic gas market is to develop new sources of supply that will ensure that the needs of LNG plants and local users will be met.
The only way to do this is to get politicians in New South Wales and Victoria to stand up to the environmental and farming lobbies, by convincing communities that the science and regulation of extracting gas from coal seams is sound and reliable.
Other than that, the domestic gas industry, from producers to consumers, has to convince the community and politicians that the cost of losing what remains of Australia’s manufacturing industry outweighs the negligible risks of extracting gas.
Editing by Michael Perry