Account Information

  • My Account

    Manage all your subscriptions, update your address, email preferences and change your password.

  • Help Center

    Get answers to common service questions, ask the analyst or contact our customer service department.

  • My Stock Talk Profile

    Update your stock talk name and/or picture.


Natural Gas Exports to Power Australia’s Economy

By Ari Charney on August 15, 2013

Australia’s resource boom may be peaking, but there’s still at least one pocket of strength remaining: liquefied natural gas (LNG). In recent weeks, I’ve often wondered which sector is poised to take over from the mining industry and boost Australia’s economy until commodity prices rebound. And while LNG trade isn’t quite substantial enough to take up that mantle, it will still add significant value to the economy in the years to come. In fact, some analysts believe that LNG will be Australia’s main source of export growth over the medium term.

According to the latest edition of BP’s “Statistical Review of World Energy,” in 2012, Australia ranked 18th in the world for natural gas production, with a total output of 49 billion cubic meters. But it only consumed 51.8 percent of its production, leaving it free to store or export much of the balance.

Indeed, last year, Australia ranked 3rd in the world for global LNG trade, with exports totaling 28.1 billion cubic meters. While Qatar’s exports of 105.4 billion cubic meters dwarfed that number, Australia’s exports trailed second-place Malaysia by just 3.7 billion cubic meters, or 13.2 percent.

The two biggest consumers of Australian LNG are China, which imported 4.8 billion cubic meters from Australia, and Japan, which imported 21.6 billion cubic meters. While China is a major natural gas producer itself, ranking 7th in the world for total production, last year its demand exceeded domestic production by 34.1 percent, or 36.6 billion cubic meters.

And Japan imports virtually all of its natural gas, while at the same time, its demand has soared since the Fukushima Daiichi nuclear disaster in early 2011 prompted the country to idle its nuclear plants in favor of gas-fired power generation. Japan’s natural gas consumption jumped 23.5 percent over the past two years, to 116.7 billion cubic meters.

Although Australia is in proximity to other major natural gas consumers in the region, it’s yet to establish meaningful LNG trade with India or South Korea, which last year imported 20.5 billion cubic meters of LNG and 49.7 billion cubic meters of LNG, respectively. So these two countries offer opportunities for potential growth.

Of course, Australia’s LNG exports face stiff competition in the region from other prolific producers, including Russia, Indonesia, Brunei, Nigeria and the United Arab Emirates, among others, in addition, of course, to Malaysia and Qatar.

And Australia will eventually face additional competition from the US and Canada, once these major producers, who rank 1st and 5th, respectively, in global natural gas production, finally get their LNG export infrastructure in place. However, that’s still at least a few years away.

But even with the energy renaissance that’s currently underway in the US thanks to the shale plays, US demand for natural gas still exceeded production by 6 percent last year. In fact, demand has exceeded production in each of the past 10 years, though that gap has narrowed considerably from its level of 21.7 percent in 2002.

Still, the economics driving supply and demand in the US will likely change, with prices rising once domestic producers are able to tap a global market, where the prevailing price is much higher. For instance, while natural gas currently trades near $3.39 per million British thermal units (MMBtu) in the US, LNG imports presently trade near $16.56 per MMBtu in Japan. However, once the US starts exporting LNG, not all of that price differential will be pure margin, as the minimum cost to liquefy and ship natural gas overseas will likely be around USD10 per MMBtu.

By contrast, Canada’s natural gas production has exceeded its domestic demand in each of the past 10 years, though its annual production has steadily dropped from 187.9 billion cubic meters in 2002 to 156.5 billion cubic meters last year, a decline of 16.7 percent. Even so, the most recent level of production still exceeded consumption by 55.4 percent, or 55.8 billion cubic meters. So of these two nations, Canada could stand to benefit the most once it establishes its presence in the global LNG market.  

Meanwhile, the Australian dollar has fallen sharply in US dollar terms this year and currently trades near USD0.91, down 14.1 percent since its year-to-date high in early January. The Aussie had traded above parity with the dollar for much of the past two years, so a sustained decline, which most economists expect, should give it a competitive edge in the global market, particularly since natural gas is priced in US dollars.

With the Reserve Bank of Australia (RBA) currently in an easing cycle, the Aussie will face further downward pressure with each additional rate cut. Last week, the RBA lowered the cash rate by 25 basis points, to an all-time low of 2.5 percent. And most traders expect at least one more rate cut before the end of the year.

In fact, economists forecast a steady decline for the Aussie through 2016. While Bloomberg’s survey of economists shows the average forecast is for the Aussie to decline to USD0.86 by 2016, Credit Suisse famously forecast a low of USD0.73 by then, though that call is an outlier.

A declining currency could also make it more affordable for producers to undertake major LNG project in the country. Rising labor costs, high regulatory expenses, and unfavorable exchange rates have compelled numerous domestic producers to look for projects overseas. Indeed, Sanford C. Bernstein & Co has estimated that Australian projects typically have cost overruns ranging from 15 percent to 50 percent.

The trend for producers to head overseas was underscored by Woodside Petroleum’s (ASX: WPL, OTC: WOPEF) decision to scrap its USD45 billion onshore LNG project earlier this year. More recently, however, the government relented by granting the company permission to develop a more economic floating LNG processing facility offshore.

Despite these challenges, Australia’s Bureau of Resources and Energy Economics predicts that the country’s LNG export earnings will rise fivefold over the next five years, to AUD61 billion. That would make LNG second only to iron in terms of export revenue.

There are currently seven major LNG projects under development, and another three already in operation. The scale of these projects means that Australia could even overtake Qatar as the top global LNG exporter by the end of the decade.

According to the New York-based consultancy McKinsey & Co, from 2015 to 2025, these projects could add 2.6 percent per year to Australia’s gross domestic product (GDP), for a total of AUD520 billion, and create 180,000 jobs. A second phase of projects could add another AUD320 billion beyond that, though this forecast has greater uncertainty due to a rise in global competition.

So while we’ve been speculating that Australia’s real estate sector could help boost the economy, LNG is already much more certain to do so.

Stock Talk — Post a comment Comment Guidelines

Our Stock Talk section is reserved for productive dialogue pertaining to the content and portfolio recommendations of this service. We reserve the right to remove any comments we feel do not benefit other readers. If you have a general investment comment not related to this article, please post to our Stock Talk page. If you have a personal question about your subscription or need technical help, please contact our customer service team. And if you have any success stories to share with our analysts, they’re always happy to hear them. Note that we may use your kind words in our promotional materials. Thank you.

You must be logged in to post to Stock Talk OR create an account.

Create a new Investing Daily account

  • - OR -

* Investing Daily will use any information you provide in a manner consistent with our Privacy Policy. Your email address is used for account verification and will remain private.