- Regulation forcing portion of natural gas production to domestic market likely in the medium term
- Currency value growth increasing project costs
Australia’s LNG Investors: Don’t Expect Government Relief in Face of Soaring Costs, Warns Analyst
LONDON, UK (GlobalData), 22 May 2013 - While the Australian LNG sector has massive financial potential, ballooning development costs, driven by the prodigious strength of the Australian dollar, are continuing to chip away at profit forecasts. But despite the emergence of such a challenging macroeconomic environment, the national government is unlikely to offer concerned investors any respite, says an energy expert with research and consulting firm GlobalData.
In the firm’s latest report*, Jonathan Lacouture, the firm’s lead upstream analyst for the Asia-Pacific region, says that the Australian government has neither the financial motivation nor the political will to make concessions for the LNG industry:
“The government’s share of production revenues is already relatively low, and currently emissions targets stand as the primary focus of energy policy in Australia. Furthermore, the substantial capital costs required to develop onshore LNG plants have caused a surge in the amount of floating LNG projects in the country.
“This has sparked opposition amongst labor organizations as the construction of these vessels takes place in shipyards in Southeast Asia, completely circumventing the Australian economy and thereby lessening government incentives to stimulate these developments.”
With seven onshore and five floating LNG facilities under construction, Australia stands to become the foremost exporter of gas in the Asia-Pacific region. However, a currency that has increased 20% in value since 2009 and which looks set to remain strong has caused the price of domestic labor, equipment, and services to spike in recent years, and LNG project budgets have expanded accordingly. Estimated capital costs at Greater Gorgon, the largest energy project in the world, have ballooned from US$39 billion to US$52 billion in the last year. At the Browse LNG project, onshore plans were abandoned in favor of a floating option, despite US$2 billion having already been spent.
With energy companies preferring to export to countries with higher purchasing prices, such as Japan and Korea, Australia is currently left ironically short of supplies for the local market. As a result, Lacouture believes policymakers could further add to investor woes in the next 5-10 years by introducing an obligatory domestic sales quota:
“While current federal policy rules out any universal domestic market obligation in the short term, some level of regulation forcing significant projects, especially those with FLNG facilities, to allocate a portion of their output for local market seems likely in the medium term,” says the analyst.
“Although Australia’s upstream hydrocarbon industry has proven itself as one of the most fruitful in the world, the investment climate may continue to sour. These types of market regulations, coupled with punishingly high carbon taxes, would significantly affect the profitability of LNG and FLNG developments. Construction of facilities and infrastructure processing gas and then conveying it into local pipeline networks will increase capital expenditures while the loss of LNG sales volumes would choke revenue streams.”
