Despite the emergence of challenging macroeconomic conditions in the Australian LNG sector, investors should not count on government respite, says research and consulting firm GlobalData.
With seven onshore and five floating LNG facilities under construction, Australia stands to become the foremost exporter of gas in the Asia-Pacific region.
While the Australian LNG sector has massive financial potential, it’s thought that ballooning development costs, driven by the prodigious strength of the Australian dollar, are continuing to chip away at profit forecasts.
A currency that has increased 20% in value since 2009 and which looks set to remain strong has caused the price of domestic labor, equipment, and services to spike in recent years, and LNG project budgets have expanded accordingly. Estimated capital costs at Greater Gorgon, the largest energy project in the world, have ballooned from US$39bn to $52bn in the last year.
Despite the emergence of such a challenging macroeconomic environment, the national government is unlikely to offer concerned investors any respite, says an energy expert with GlobalData.
In the firm’s latest report, titled Australia Upstream Fiscal and Regulatory Report, the firm’s lead upstream analyst for the Asia-Pacific region, Jonathan Lacouture, says that the Australian government has neither the financial motivation nor the political will to make concessions for the LNG industry.
He said, “The government’s share of production revenues is already relatively low, and currently emissions targets stand as the primary focus of energy policy in Australia. Furthermore, the substantial capital costs required to develop onshore LNG plants have caused a surge in the amount of floating LNG projects in the country.”
“This has sparked opposition amongst labour organisations as the construction of these vessels takes place in shipyards in Southeast Asia, completely circumventing the Australian economy and thereby lessening government incentives to stimulate these developments.”
With energy companies preferring to export to countries with higher purchasing prices, such as Japan and Korea, Australia is currently left ironically short of supplies for the local market.
As a result, Lacouture believes policymakers could further add to investor woes in the next 5-10 years by introducing an obligatory domestic sales quota.
“While current federal policy rules out any universal domestic market obligation in the short-term, some level of regulation forcing significant projects, especially those with FLNG facilities, to allocate a portion of their output for local market seems likely in the medium-term,” said the analyst.
“Although Australia’s upstream hydrocarbon industry has proven itself as one of the most fruitful in the world, the investment climate may continue to sour. These types of market regulations, coupled with punishingly high carbon taxes, would significantly affect the profitability of LNG and FLNG developments.”
He added, “Construction of facilities and infrastructure processing gas and then conveying it into local pipeline networks will increase capital expenditures while the loss of LNG sales volumes would choke revenue streams.”