US think tank warns on LNG future

Australian oil and gas plays Woodside Energy and Santos must act swiftly as the global market for LNG declines, according to a report from the Institute for Energy Economics and Financial Analysis.

A briefing note by the US-based not-for-profit think-tank warned decline in the LNG market was already on the way for local producers and predicted a global glut in the second half of the decade.

While the rhetoric close to home has centred on the importance of Australian LNG to the energy transition in Asia, the IEEFA warned that demand through the region was on the wane.

The report said Japanese demand for LNG had dropped 34 per cent since 2014 as the energy source was usurped by renewables and nuclear, and claimed the Japanese market was on-selling overcontracted LNG overseas.

The IEEFA also highlighted concerns over the markets in China and South Korea, and claimed the cost of producing gas in Australia would leave it out of favour in a global market.

“Australia is a relatively high-cost gas producer compared with other countries such at Qatar and the US, which dominate upcoming capacity increases,” it said.

“Under these global conditions, it is likely that Australian gas companies are entering a declining market for their LNG.”

The Biden administration took steps earlier this year to pause approvals for new LNG exports from the US but remains the world’s number one exporter and expects its exports to double by the end of the decade.

An increase coupled with a drop in global demand would have ramifications for local producers.

The IEEFA singled out Woodside and Santos as two companies which needed to adapt their strategies quickly – either quickly divest from the industry or ‘harvest’ – cutting costs to maximise profit from current investments.

“For companies that choose to continue their oil and gas operations, high exit barriers, falling sales and oversupply are likely to lead to ‘fierce price warfare’,” the report said.

It called for the oil and gas producers to reassess their strategy, processes and culture.

“Santos’ CEO still has a growth incentive, and growth is a key component of the performance scorecard for Woodside’s CEO and executive remuneration,” IEEFA said.

“Now would be a good time for companies to review the skills and capabilities of their management teams and boards to assess how well equipped they are to manage this transition.”

The warnings come as Woodside progresses towards LNG production from its Scarborough gas field in 2025, in a move billed to provide reliable energy to Australia and the world.

Santos, which is developing the Barossa project in South Australia, is targeting new production the same year. The company’s Reindeer field is running low on gas.

The two firms held talks over a potential merger late in 2023 but put a line through a deal in the first weeks of the new year.