Australia’s ‘golden age of gas’ falls short of hype after decade of LNG exports

When the first shipment of LNG left Gladstone in 2015, billions in investment, revenue, and royalties were expected. 10 years on, few have benefited, with some companies, such as domestic gas consumers and Australian manufacturers, actually ending up worse off.

Exporting LNG from Queensland’s coal-seam gas reserves tied eastern Australia’s gas market to volatile international trade, and domestic gas prices have tripled as a result.

In a new report, Kevin Morrison, IEEFA’s Australian gas Finance Analyst, examined: “According to the RBA, prices are likely to remain higher than pre-2015 levels for decades to come. Correspondingly, gas demand in eastern Australia has dropped to a 25 year low. This reflects the closure of petroleum refineries, the loss of minerals and chemicals processing capacity, and the impact of worsened economic conditions, including higher gas prices, on smaller manufacturers, which have forced some plants to close.”

In addition, two of Gladstone’s three LNG plants have had to source gas from other gas producers to meet their production quotas, diverting further supplies away from domestic consumers.

The highly contentious royalty regime has failed to deliver the riches the Queensland government was banking on, by up to two-thirds of state budget projections in some cases.

Kevin Morrison added: “Royalties from the gas production for LNG exports have been largely below expectations for most of the past decade.”

For the first seven years, the LNG ventures paid just 2.3% of their total export revenue in state gas royalties. This has since risen to 5% due to the combined effects of a royalty rate increase in 2021 and the global price spike caused by the war in Ukraine a year later.

Despite this belated boost, the Queensland government’s profit pales in comparison with global industry standards, even when federal corporate taxes are considered. The International Energy Agency estimates about half of the US$3.5 trillion in annual global oil and gas revenues has flowed to governments since 2018.

Meanwhile, only three of the eight proposed LNG plants were built, and they have been plagued by delays, cost blowouts, billions in asset write-downs, and poor financial returns for investors. Rates of return for three LNG projects range from 3.4% to 7.7%.

Kevin Morrison continued: “All are well below contemporary investment hurdle rates for European and US oil and gas companies of 11% to 30%.”

Queensland’s LNG exporters face strong headwinds as cheaper LNG supplies from Qatar and North America flood the global market in coming years, driving down prices and increasing competition.

Heavy reliance on China, which buys 60% of the state’s LNG, is a key concern as the looming global gas glut will coincide with the renewal of Queensland’s export contracts.

Morrison concluded: “Future demand from China is uncertain, with potential for significant gas over-contracting by 2030, putting in question contract renewals. In the long term, large volumes of uncontracted LNG and increased competition mean Australian LNG exporters could find it more difficult to secure firm sales and purchase agreements to replace expiring contracts. In this context, it will be hard for the Queensland LNG industry to justify continuing to take gas away from a tight domestic market to supply its international consumers.”

Read the article online at: https://www.lngindustry.com/liquid-natural-gas/06022025/australias-golden-age-of-gas-falls-short-of-hype-after-decade-of-lng-exports/