Analysis: James Price Point ... dead before dying

Political and environmental pressure on the state government, whichever side wins on Saturday, will have no effect on the future of the onshore gas processing centre proposed for James Price Point in the Kimberley – the global gas glut has already killed it.

No-one in government will admit that is the case but you only have to look at what’s been happening in Japan and the U.S. to see the problem for all Australian gas-export projects.

In a few words, Australia has priced itself out of the market with a domestic cost structure that is amongst the highest in the world, just as the price of globally-traded LNG starts to fall.

That’s why companies proposing to develop LNG projects off the WA coast are shelving plans drawn up over the past few years and casting around for cheaper options, with the current leader being floating barge technology of the sort Shell is building for its Prelude gas deposit off the Kimberley coast.

Whether Australian governments or the union movement likes it, the choice for future offshore LNG projects will be limited to extremely cost efficient proposals because of the potential for new sources of gas to steal markets in Australia’s backyard market of Asia.

What that essentially means is the rise of floating production systems that are largely built in Asia, floated to Australia where they will liquefy gas for export back to Asia, perhaps never coming within sight of the Australian coast and employing a handful of local people.

Ironically, the country responsible for creating Australia’s LNG business is the country most likely to do the most harm to the next generation of possible (but unlikely) projects; Japan.

Back in 1980 it was a series of contracts from Japanese power utilities which underpinned the finances of the original North Rankin project of Woodside and partners.

Today, it is Japan which is offering generous financing terms to gas-project developers in the U.S., including a proposal lobbed last week by Japan’s newly-elected Prime Minister, Shinzo Abe, to provide more than $10 billion in credit guarantees to fund LNG projects using surplus U.S. gas.

That financing offer was a dramatic demonstration of how the gas world has been flipped over by the shale-gas revolution which is only just arriving in Australia.

In the U.S., the use of directional drilling and rock-fracturing technology has opened up vast deposits of once trapped gas which no-one believed could be extracted but which have flooded the domestic U.S. market, driving the gas price down by more than 70 per cent to around $4 per million British thermal units.

Japan, which is the world’s biggest LNG importer, wants a share of that cheap U.S. gas and, while it will not get it for $4/mbtu, a senior economist at Japan’s Institute of Energy Economics, Akira Yanagisawa, estimates that accessing the U.S. gas market could cut Japan’s LNG bill by 10 per cent, or more than $6 billion a year.

Abe’s offer of credit guarantees is just one of many recent developments in the fast-moving gas world which is putting pressure of all Australian LNG projects, forcing the companies behind those projects to pause and consider whether Australia is still an attractive investment destination.

Another development which underlines the point about all Australian LNG projects being under pressure (including the coal-seam gas projects in Queensland) is a demand from LNG customers that the gas-pricing mechanism be changed.

Rather than price LNG in comparison to a basket of crude oils, the basis on which all current LNG contracts are structured, the future will see LNG priced in comparison with other sources of gas.

Of particular concern to Australia is a suggestion from Asian LNG buyers that the new benchmark be the U.S. standard known as the Henry Hub price and named after a gas distribution centre in the state of Louisiana.

That suggestion, which is an opening shot in a marketing game that the Japanese love to play, will not work because of the vast differences between the U.S. and Asian energy markets.

But, it is a warning that gas buyers in Asia can see a way in which they can drive down the price they pay for LNG in the future and unless Australia can be competitive there will be no new LNG developments, onshore or offshore.