Australian LNG to balance Asian demand recovery with climate challenge in 2021
In 2021, Australia’s LNG sector will see delayed projects scrape through, companies will reinforce their carbon credentials, domestic gas policies may continue to have no clear path ahead and the government could come under pressure for its weak climate change policy after last year’s devastating wildfires.
The factors that impacted the country’s LNG exports in 2020, such as demand destruction caused by the coronavirus pandemic and technical issues at Prelude, Gorgon LNG and Wheatstone, are likely to continue into early 2021 at least.
However, a recovery in Asian LNG demand should offset the revenue impact of low oil and LNG prices, allowing key producers like Woodside, Origin and Santos to revive capex spending and reach a final investment decision for some of the LNG backfill and import projects suspended in 2020.
The three key export backfill projects to look out for in 2021 are Santos’ Darwin LNG Barossa project, Mitsui’s Waitsia, and Woodside’s Scarborough, and at least one or two of the five planned LNG receiving terminals on Australia’s eastern seaboard.
“After doing everything possible to tighten belts this year, Australian operators will open their wallets and start spending,” Wood Mackenzie senior analyst Daniel Toleman said. “The backlog of FIDs will begin to clear as a fresh round of projects are sanctioned. But for this to occur, there has to be continuing improvement in the macro-environment and prices trending up,” he added.
The 3.7 million mt/year nameplate capacity Darwin LNG is expected to halt production in 2022 as the Bayu-Undan field is depleted, but Santos plans to extend the life of the field and narrow the time between its depletion and start-up of the Barossa backfill project, according to the December report from the office of Australia’s chief economist.
Santos deferred the FID for Barossa twice in 2020. While it’s currently pegged at the first half of 2021 — which would likely see first gas in the first half of 2025 — Santos’ CEO Kevin Gallagher has said he wants offtake agreements in place before FID. In December, Santos struck a deal with Japan’s Mitsubishi for 1.5 million mt/year of LNG from the project.
Australia’s chief economist also noted that the Scarborough to Pluto LNG project is the “only substantial expansion” to Australia’s LNG capacity currently in the investment pipeline.
Besides project economics, 2021 will see some challenges for these FIDs — Sino-Australian tensions with the Chinese hesitant to sign onto Scarborough, competition from Qatar’s aggressive marketing for its expanded capacity and the need for projects to be carbon neutral, such as Barossa LNG whose Moomba CCS project will be needed to support the plan.
As a result, Toleman expects that Santos’ Moomba CCS project may not be sanctioned in 2021 despite it being FID-ready and economically attractive. Santos will need to be sure carbon credits can be used to offset the CO2 emissions, he said.
Out of the five LNG import projects, Toleman expects Australian Industrial Energy’s Port Kembla Gas Terminal to clear FID as soon as the first quarter of 2021. It has agreements to receive 46 cargoes/year and may start seeing them as soon as the end of 2022.
Others like AGL’s proposed Crib Point project could see growing challenges from environmental groups in 2021, with the AGL project currently subject to an inquiry for which a report is due by Feb. 24, according to Adelaide-based consultancy EnergyQuest.
AUSTRALIA’S CLIMATE CHALLENGE
Meanwhile, the Morrison government has come under fire for its inexact plans to drive a “gas-fired” economic recovery. It also faces criticism for lacking a strong climate change policy, having been snubbed by the UK as host of the Climate Ambition Summit and losing an ally in Donald Trump in resisting a net zero emissions target.
EnergyQuest described Morrison as “assiduously avoiding” tougher emissions targets and said world events may have left him behind and render what he does or doesn’t do on the issue now largely insignificant for the future decisions of oil and gas producers, as emissions reduction has already pushed its way to the top of the agenda for Australian oil and gas companies without having been driven by national policy.
“Carbon is no longer a ‘shadow price’ in investment decisions, regardless of what the Morrison government or the Labor Party do about emissions targets,” EnergyQuest said.
Australia could end up being the last developed country without a long-term plan for net zero emissions by 2050.
Lastly, Australia may not emerge as the world’s largest LNG exporter.
From December 2019 to December 2020, Australia’s government cut its forecasts for the country’s LNG exports for fiscal 2020-2021 (July-June) from 81.3 million mt to 75.6 million mt.
While the government has claimed that Australia had topped Qatar to become the world’s largest LNG exporter in 2019, actual shipping volumes fell short.
S&P Global Platts Analytics data showed that Qatar exported 78.7 million mt of LNG in 2019 and 79.3 million mt in 2020, compared with Australia’s exports of 73.5 million mt in 2019 and 75.2 million mt in 2020.