Australian Spotlight - August 2024

Many see LNG as a bridge to greener energy. Less emissions than coal and more reliable than wind and solar. For Australia it has come out of nowhere to be a golden bridge. But there is debate over how long that bridge will stretch. It may end sooner than most think. Australia, however, may have got its timing just right. 

The rise of LNG exports

For a long time natural gas was the poor cousin of oil and coal. Being a gas, it was harder and more expensive to extract, store, and transport. However, the OPEC oil shocks in the 1970s along with improvements in technology reignited interest in natural gas. The level of proven gas reserves have nearly tripled since 1980 while consumption of natural gas increased by 40% between 1975 and 1985 and is now more than triple its 1975 level. Consumption in the Asia-Pacific has increased by over 22x since 1975 and has tripled since 2000.

Up until 2020, pipeline exports dominated (see chart below). For decades, countries like Russia, Norway, Netherlands, Canada, and Algeria were able to export their excess gas to neighbouring countries by pipeline. The gas did not need to travel so far.

However, not every country lives next door to a friendly neighbour with huge gas supplies. Thus, as Japan, South Korea, and then China began to grow rapidly they looked to countries like Australia and Qatar to develop LNG export industries. The first LNG tanker was a WW2 US cargo ship in 1959, today fleets of dedicated LNG tankers ply the worlds’ oceans. 

More recently, the war in Ukraine has forced Europe to substitute some pipeline gas from Russia with LNG from the US and Qatar.   

The United States has long been the biggest producer and consumer of natural gas but until recently it consumed most of what it produced. In the early 2000s it even built LNG import terminals because domestic demand and pipeline exports from Canada were not expected to meet future US demand.

Fracking changed everything. The new technology (along with a higher oil price) unlocked previously uneconomic reserves of gas and oil. And once the US started to build LNG export terminals it has quickly moved towards the top of the list for global gas and LNG exports.  

The rise of Australia’s LNG exports  

The discovery of large gas fields in Australia’s North West Shelf in 1971 and 1972 (see map below) proved good timing with the Opec Oil shocks quickly increasing their economic importance. AUD 7.1 billion was invested in the first two phases, including sizable investment from Japan. At the time it was one of the largest oil and gas projects under construction in the world.

The first phase saw production for the local West Australian market in 1984 with transport by pipeline. LNG exports to Japan began in 1989, marking Australia’s first entry into the LNG market.

Japan remains Australia’s biggest LNG export partner but China has grown in importance, followed by South Korea and Taiwan (see  chart below).

While Australia’s gas fields are more expensive than the fields of its main competitors, its proximity to Asian markets, political stability, reputation for stable supply, and mature fields (with fixed costs far in the past) has made Australia a top choice for its Asian customers. For example, it takes around 7 days to ship LNG from Western Australia to Japan while it takes 12 to 14 days from Qatar, and 22 to 34 days from the US Gulf Coast to Japan.  

LNG production and exports have increased significantly since 2015, more than doubling Australia’s share of global LNG exports. This was enabled by an increase in exploration and production expenditure between 2006 and 2015 (see chart below) which was a reaction to increasing demand from Asia and an increasing oil and LNG price . Over AUD 250 billion was invested in upstream and downstream LNG facilities between 2010 and 2020.

As a result, LNG exports are now Australia’s second most valuable export at AUD $92 billion, comprising nearly 20% of Australia’s export earnings (2022-23).

LNG’s role in the green transition

“Our trade partners have made large investments over decades in Australia’s resources industry. They are relying on Australian gas to transition their economies to net zero.” Madeleine King, minister for resources.

Much of the recent increase in global demand for LNG is due to countries switching from coal to gas for generating electricity. While LNG is a fossil fuel, electricity generated from gas produces 40% less GHG emissions compared to coal over the full lifecycle. Further, improvements in technology, the use of renewable energy, and carbon sequestration will reduce the level of emissions from the extraction and liquefaction of gas, which for Australian producers contributes around 76% to 83% of the GHG emissions from LNG. For example, the Gorgon gas field in Western Australia has stored over 9.5 Mt of carbon dioxide from its gas reservoirs since 2019. Currently it is the largest such carbon storage facility in the world. 

LNG also provides an ideal foil for intermittent renewable energy like wind and solar because an LNG power station can be brought online quickly and at any time of the day to fill in any supply shortfalls or sudden increases in demand.

Declining future demand

While LNG will provide a bridge to a greener energy future, many believe that it will not have a role in that future. It will likely be replaced by new-generation nuclear reactors, improvements in battery technology (such as the world’s first large-scale in South Australia), pumped hydro, biogas, green hydrogen, and even nuclear fusion. For example,  in 2022, almost 40% of Denmark’s gas consumption came from biomethane gas. Natural gas will be relegated to a few industrial uses where it cannot be easily replaced like the extraction of lithium from hard rock or as an input into other chemicals.

Accordingly, future demand scenarios  by the IEA based on announced (APS) and stated national climate policies (STEPS), and policies needed for net-zero carbon by 2050 (NZE) show flat to declining demand for LNG out to 2050 (see chart below). In contrast Shell’s base scenario sees demand growing strong into the 2040s on the back of increasing demand in China, Vietnam, Thailand, Philippines, and Bangladesh .

The IEA scenarios would see Australia’s share of LNG exports fall, particularly as Qatar increases production. Under the NZE scenario, Australia’s share of global LNG exports would fall from 19.6% in 2022 to 9.4% in 2050. In contrast, Qatar’s share would increase from 20.2% to 44.4%. Qatar would also benefit from its lower intensity of GHG emissions for its LNG exports.

These scenarios however do not factor in the strong bilateral trade relationships between Australia and Japan and other Asian countries with respect to LNG. Trade is more than money and emissions.

 Australia peaked at the right time

For some, the above scenarios may paint a disappointing picture of future LNG exports for Australia. However, as is the case with iron ore, Australia has timed its development of LNG exports to perfection.

Australia does not have the reserves of the US or Qatar (green bar in the chart below) but it has better maximised its production (blue) and exports (purple) at the period of peak or near-peak global demand. Relative to 2022 production levels and proven reserves as of 2020, Australia has less than 16 years of gas reserves left, Qatar has 138 years.

However, the Australian LNG industry will not disappear in 15 or so years. As international investments by Woodside Petroleum in Senegal, Mexico and the US show, Australian LNG companies will leverage their expertise into the future even as gas fields in Australia diminish.

Australia is riding the perfect wave of LNG exports and can be satisfied that it has made the most of this once-in-a-generation opportunity. Like it has with coal, iron ore, and lithium.