The relative attractiveness of US LNG exports—is the threat to Australian projects real?

Abstract

The competitiveness of Australian LNG projects against US projects has been a subject of much debate; however, as oil prices have fallen since mid-2014, the debate has shifted from the relative commercial terms of the LNG sales contracts to the relative cost of supply. Falling oil prices have decreased the price of LNG in the traditionally oil-linked price markets of Asia. A lower cost of LNG will increase the demand for gas, especially in the power generation sector. New gas supplies would be required to meet increased demand, but the new supply must be at a competitive cost. The market price will be set by the marginal cost of incremental supply. Legacy projects in Southeast Asia, the Middle East and Australia are unable to increase their volumes. The only other source of incremental supply that can profitably sell at these lower prices are new projects in the US Gulf Coast. Australian greenfield projects will not be able to sell at these prices as they suffer from high capital expenditure (capex), high feed gas prices and high operating costs. In contrast, US Gulf Coast LNG projects are being constructed at significantly lower unit costs, have access to massive low-cost shale gas volumes and will operate at low costs using standard technology. These projects are ideally placed to operate in the lower priced environment, irrespective of the LNG sales contracts’ commercial terms.