EIGHT LNG megaprojects have begun construction in Australia since 2007, with half now producing.
This wave of developments will see Australia ascend to be the world largest liquefied natural gas exporter – overtaking Qatar – by the end of the decade.
This has included two global LNG ‘firsts’: LNG supplied by coal seam gas (or CBM) and the world’s first large scale floating LNG facility.
On a look forward basis, this production should deliver over US$150 billion in value to industry and over US$50 billion to the Australian government (NPV10 valued at US$36/bbl Brent in 2016 rising to long term US$70/bbl by 2020).
But the concurrent development of such large resource projects in remote locations has proved more challenging than anticipated, and delivery has fallen far short of expectations.
Cost escalation and schedule overruns have hit project economics hard, which has been compounded by the collapse in oil price just as projects are starting up.
With lifecycle project returns only averaging around 7.1 per cent, most projects have not met investment hurdle rates, with the east coast projects fairing the worst due to their challenging and costly coal seam gas supply (valued at US$36/bbl Brent in 2016 rising to long term US$70/bbl by 2020).
The average lifecycle breakeven price for Australian projects is above US$12 per million British thermal Units (mmbtu), while recent market prices are below US$5/mmbtu.
If these price levels were to be maintained, some projects will simply not pay back their capital.
Even before the oil price drop, Australia had earned a reputation for high costs, with most projects standing at the high end of the global LNG cost curve.
This has been a major contributory factor to Australia not seeing any new LNG project sanctions since 2012.
And the local cost deflation the Australian sector has seen to date has not been sufficient to improve Australia’s relative competitive position.
With the world entering an oversupplied LNG market, only the lowest cost projects will proceed, creating a bleak outlook for Australian greenfield LNG final investment decisions (FID).
However, this isn’t the end for Australian LNG. The existing projects have 20 plus year lifetimes that will ride out commodity price cycles.
With short run marginal costs below US$2/mmbtu for most projects, Australia will continue to produce LNG even through depressed markets, churning out cash to investors and government.
While greenfield projects look unlikely, Australia will have US$160 billion of LNG infrastructure in place, providing a competitive advantage to supply new volumes leveraging off the existing infrastructure base.
Australia will be able to place additional incremental LNG volumes into the market at competitive costs, through project debottlenecking, the backfill of plants as they come of plateau production from 2023, and brownfield train expansions in the future.
Debottlenecking alone could account for an additional 4 million tonnes per annum of Australian LNG production over the next decade – equivalent to a new LNG train – at costs competitive with the lowest cost pre-FID LNG projects globally.
However, realising backfill and brownfield expansion train developments will require either significant M&A activity or a greater level of industry collaboration and infrastructure sharing than seen in the past.
Global mergers and acquisitions activity has dropped off with the decline in oil prices, and is unlikely to pick-up until sellers become more willing to accept lower transaction valuations.
And while Australia has a poor record of LNG infrastructure sharing, the oil price drop has provided the impetus for industry to start seriously looking at collaboration to reduce costs.
We are now witnessing nascent collaboration initiatives underway across the east and west coast.
Rising to the LNG collaboration challenge will be key to Australia realising over US$10 billion in project value over the next decade.