WA likely to beat LNG challenge

Many analysts predict that by 2020 Australia will overtake Qatar as the world’s leading LNG exporter and, with Western Australian LNG exports accounting for 87 per cent of the national total in 2011, the state will play a critical role if this target is to be met. 

WA’s favourable location, abundance of conventional gas resources and stable economic, fiscal and legal environment has enabled it to become a leading exporter of LNG to the lucrative and resources hungry Asian market, in particular Japan, China and Korea.  

However, despite a trend of robust year-on-year pricing and export growth, the state’s future as a leading LNG exporter faces considerable international and domestic pressure.

The global LNG market is in a state of change.  While almost unthinkable five years ago, North American LNG exports, fed by a booming domestic ‘unconventional’ gas industry, will soon compete with Australian LNG for sales into Asia.

Unlike the United States, Asia does not currently have a generally accepted benchmark price for LNG.  

Instead, pricing is based on the Japan Crude Cocktail pricing formula, which is the aggregate of custom-cleared oil prices imported into Japan.  

Against a backdrop of high international oil prices, the price of Asian LNG imports has risen sharply, with the average cost of Japanese imports from Australia doubling since its trough in 2009.  The high Japan Crude Cocktail cost contrasts starkly with Atlantic Basin LNG imports, which are priced by reference to the US Henry Hub gas price.  

Henry Hub is at an historic low, primarily due to the significant growth in the US unconventional gas production and low domestic energy demand.  

As a result, and even after taking into consideration increased shipping costs associated with importing Atlantic Basin LNG into Asia, the economic proposition for Asia’s LNG buyers is compelling.  

The ramifications of this are slowly beginning to show, with powerful Japanese buyers, including Osaka Gas and Chubu Electric recently signing LNG offtake deals with North American exporters, presumably attracted by their competitive pricing structures.

WA’s LNG projects also face domestic pressure, both from increased competition from other Australian LNG projects (Queensland could potentially add up to 50 million tonnes per annum of additional LNG capacity a year from its new coalseam-to-LNG projects) and increasing social and political pressure associated with each new development.

Add to this the high cost of development and construction in the Pilbara and Kimberley regions and the scale of the challenge becomes clear.

As buyers look to adopt a broader portfolio-based approach, allowing them to capture additional value through international arbitrage opportunities, the traditional trading lines may begin to blur.  

However, underpinned by a history of reliable LNG export and increasing demand from the Asian economies, (including Japan’s need to replace its former nuclear load), the future of the WA LNG industry appears positive and the prediction of Australia as the next leader in LNG exports, achievable.  

• Iain Hardie is a senior associate and  Angus Jones a partner with law firm Allen & Overy.