East coast gas 'shortage' only a question of price: UBS
Shell's and Origin Energy's LNG projects in Queensland have more than enough spare gas to supply the east coast market but will only do so if returns from domestic sales are better than from spot LNG sales, according to UBS energy analyst Nik Burns.
The ability for Shell's QCLNG project and Origin's APLNG venture to divert gas from LNG export to the domestic market means no shortage is likely to develop, although local gas prices may be higher than some manufacturers can afford, Mr Burns said on Tuesday.
"There is no shortage of gas on the east coast of Australia, but there is a shortage of cheap gas," Mr Burns told reporters.
The UBS analysis comes just ahead of the introduction of the government's controversial "domestic gas security mechanism", which could cap LNG exports if it is triggered. But ironically the design of the mechanism means it would affect only Santos' GLNG venture, rather than the two Queensland LNG projects that have extra gas to sell.
Mr Burns said, however, he didn't expect the mechanism to be triggered for 2018, given the ability for the other two LNG producers to divert gas into the east coast market.
That point was also made by the Australian Energy Market Operator in its revised assessment of the supply-demand balance, which now puts the market is "finely balanced", in contrast to a March outlook that showed a supply shortfall.
UBS calculates that QCLNG may have up to 150 petajoules of gas available for sale this year to local buyers, based on the lower rate it is running its export plant in Gladstone at compared to last year. That represents more than a quarter of the whole east coast domestic market of about 580 petajoules.
Mr Burns noted that Shell is running QCLNG at just 6.2 million tonnes a year so far this year, down from 8.5 million last year, amid weak prices for LNG sold on the spot market.
"There's been a deliberate strategy there by Shell to choke back the output," Mr Burns said.
"It is quite clear we are in a global oversupply of LNG. Our view is that QCLNG is one of the most expensive sources of LNG for Shell. Therefore it makes sense to choke back on the project that has the lowest margins."
APLNG, meanwhile, has earmarked 67 petajoules of sales into the spot Asian LNG market for 2017-18, Mr Burns said, citing figures from Origin in February.
That gas could also be diverted into the domestic market.
"That gas could easily be diverted to the local market if the price is right," Mr Burns said.
He said local buyers would need to pay the equivalent price of a spot LNG netback for the two LNG projects to sell surplus gas locally instead of exporting it. At current Asian spot prices of $US5.50 per million British thermal units, that would be about $8.30 a gigajoule delivered to Sydney.
Mr Burns said it would still be difficult for local buyers to get a long-term gas supply contract longer than about two years.
He also cautioned that an increase in the spot LNG price in Asia would alter the equation and mean that the Queensland ventures would need a higher price in the local market to divert gas from export sales.
UBS is forecasting east coast industrial buyers will need to pay $9-$11 a gigajoule for gas on average over the next five years, much higher than the typical $6-$8/GJ of recent years.
That should be high enough to stimulate investment in new gas fields, but could be out of reach for some manufacturers, leading to "demand destruction" in the local market, Mr Burns said.
Thursday, June 29, 2017
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