Australia Shale Gas Dream – An Emerging Hope Amidst Strong Headwinds

  • Sep 16, 2020 AEST
  • Team Kalkine
Australia Shale Gas Dream – An Emerging Hope Amidst Strong Headwinds

Summary

  • Australia has been dominating the global LNG scenario for a while, thanks to a large upstream investment from local operators.
  • The investment confidence has been stimulated by a stable tax and fiscal system, strategically advantaged location, and repeated evidence of the prospectivity for large-scale discoveries.
  • However, the future challenges and dormancy of Australia shale gas dream now pose strong headwinds for the domestic LNG sector.

The oil & gas industry across the continent has enjoyed a considerable global investment boom over the last decade with a $305 billion of investment in LNG megaprojects, setting the continent on course to become the world’s largest exporter of LNG.

A sustainable investment period from 2010-2020 has provided an impetus to the domestic LNG production, which grew by more than 140 per cent in the decade of 2010-2020.

Also Read: LNG Export to Stagnate Over the Long-Run Amidst Sizeable Global Trade

As per the assessment of Wood Mackenzie, by the end of the year 2020, a total of $473 billion will have been invested in the industry since 2010, increasing upstream investments with the development of LNG backfill opportunities at Darwin and North West Shelf LNG, expansion at Pluto and associated upstream development at Scarborough.

What’s Driving Australia’s Upstream Success?

Proven Hydrocarbon Resource Base

According to Wood Mackenzie’s database, Australia had produced over 18 billion barrels of crude oil, natural gas, and natural gas liquids from nine major basins (as of October 2019). Also, the database suggests that ~ 40 billion barrels of such products remain.

  • In terms of commercially exploitable reserves, Australia holds about 2.6 billion barrels of crude oil and NGL reserves, representing 0.3 per cent of liquid reserves across the globe.
  • Moreover, the continent hosts 156 trillion cubic feet of the natural gas reserve, which represents ~ 1.7 per cent of global gas reserves, excluding 68 trillion cubic feet of technical reserves.

LNG Market Opportunity

The growing energy demand across the globe, especially in emerging Asia like India, and China has driven a strong increase in gas demand and particularly LNG due to its suitability for long-distance transportation.

To Know More, Do Read: China and Taiwan- The Emerging Catalyst In the Global LNG Demand Growth Curve

  • And, due to its advanced geographical position, Australia has been able to position itself technically and commercially to meet this demand, emerging as a top LNG exporter by surpassing Qatar and the United States.
  • Also, projections sanctioned between 2007-2013 have delivered more than 60 million tonnes per annum of additionally LNG since 2015, adding to the considerable production capacity of the North West Shelf and Darwin.
  • At present, there have been three clusters of LNG plants, namely, Gladstone, Darwin, and the Carnarvon basin, across the continent; and the supply comes from both conventional and unconventional sources such as coal seam and shale formations.

Regulatory Stability

The investment decision concerning LNG, especially of megaprojects, is often considered across the continent, and the Australian LNG success has been supported by a comparatively stable policy and regulatory environment.

  • The stability of the taxation arrangements has been a pivotal contributing factor in attracting waves of upstream investment, leading to a boom in LNG production and the continent wearing the crown of the top LNG exporter, surpassing Qatar.

To Know More, Do Read: Australia Set to Surpass Qatar Over LNG Exports; Domestic Natural Gas Conditions To Derail the Projections?

Future Challenges and Shale Gas Dream

Contracting Upstream Investment

The global upstream investment has contracted significantly with the recent plunge in oil and gas market due to COVID-19 issues, and many industry experts anticipate that it would not return to its peak levels, witnessed around 2014.

  • As per Wood Mackenzie, the global upstream investment would contract to $534 billion in 2020.
  • The decline in upstream investment demand is primarily driven by the key focus of operators on cost reduction in the wake of the low oil price scenario. Currently, many upstream operators are focusing on free cash flow while prioritising dividend payments over investments.

To Know More, Do Read: Chevron To Offload Its Stake in NWS JV; Market Sees Woodside a Potential Buyer

  • Apart from that, global oil and gas companies are also witnessing increasing pressure to make tangible, strategic commitments towards decarbonisation, leading to the prioritisation of traditional assets with lowest-cost and highest returns.

Moreover, the increasing need for ESG disclosure also adds another layer of complexity on the upstream investment process.

To Know More, Do Read: Australia To Jostle Qatar for the LNG Crown; How Long Would the Reign Last?

Surmounting International Competition

Australia, which dominated the LNG space in the status quo, has not reached any new LNG investment sanction since 2013; and in the meantime, a flood of cheaper, more flexible projects such as Freeport, Cameron, Corpus Christi, and Sabine Pass Train 5, have moved to development across the United States.

  • High costs and cheaper competition now threaten Australia’s ability to compete for the next wave of upstream investment.
  • Moreover, higher above-ground costs and logistical challenges imply that the continent could now struggle to economically develop its unconventional sources such as coal seam and shale gas, which are also coming on the radar of environmentalists.

In the recent past, there was heavy media coverage on the news that opening up a potentially huge shale gas region in the Northern Territory would increase the GHG emissions after the report from the environmental lobby group Lock The Gate tested multiple scenarios over the development of the McArthur Basin and Beetaloo sub-basin.

The report suggested that extracting ~ 500 trillion cubic feet of gas from them could increase 20 per cent or 75 per cent to Australia’s total emissions.

Moreover, APPEA in its media release advocated for shale development and suggested that the development in the Northern Territory would deliver new jobs, local contracts and increase government revenue.

As per the analysis of ACIL Allen Consulting Services (as cited by APPEA), the shale gas development could create over 500 new jobs, boost the NT economy by $5.8 billion and generate up to $3.7 billion in taxes and royalties for the Territory over the same period.

In a nutshell, the LNG success of the continent has largely been achieved due to companies being able to commit significant investment to the country over a long period; however, the low oil price scenario and defensive mode of operators now endangers the LNG regime of the continent.

Also, the shale gas dream of the continent is yet testing the sidelines with many ESG related issues and higher cost curve as compared to international peers hampering the investment decision.

 

There is no investor left unperturbed with the ongoing trade conflicts between US-China and the devastating bushfire in Australia.

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