Why Relying Heavily for LNG on Just Three Suppliers Could Be Dangerous

Energy

Summary:

Greater supply diversity, even from tricky locations, improves overall energy security.

Australia, the US and Qatar are safe and secure investment destinations, right? They had better be, since by 2030 they could account for 70 per cent of global liquefied natural gas exports, up from 61 per cent today.

However, recent events down under should make LNG customers beware.

On Wednesday, workers at the North West Shelf LNG plant in Western Australia voted 99 per cent in favour of industrial action. Employees of Woodside Energy and Chevron at the Wheatstone and Gorgon facilities are bargaining and could also decide to strike. In the face of higher inflation, they want pay rises, and guarantees that contractors will not take some of their workload.

A two-month pay dispute last year shut down Shell's Prelude floating LNG plant, which had earlier suffered lengthy technical problems. The Columbia Centre on Global Energy Policy notes that north-west Shelf, Wheatstone and Gorgon together account for about 10.5 per cent of global LNG exports, so a similar halt would seriously dent gas markets.

Depending on the vote, personnel would probably down tools towards the end of this month. The Labour government is broadly supportive of the trade unions. But it also has to support its European and Asian allies at a time of great geopolitical delicacy.

What happens in the Pacific will not stay there.

Europe buys hardly any LNG from Australia, because of the long transport distance. But to replace any Australian shortfall, Japan, China and others will buy flexible LNG from the US, diverting it from Europe.

European gas prices jumped 40 per cent overnight on Wednesday to a two-month high on news of the strikes, before giving up some gains on Thursday. Europe's gas storage is almost full today, but it still needs large LNG imports during winter.

Of course, a deal may be reached soon. Nevertheless, leaving aside the specifics of labour relations, it is dangerous to rely too heavily for a crucial commodity on just three suppliers, however good their track records.

Australian labour discontent might be a short-lived or episodic phenomenon.

However, in March, Takayuki Ueda, chief executive of Inpex, a leading Japanese oil and gas company, warned his hosts at the Australian parliament in Canberra that their country was "quietly quitting" the LNG business. Japan gets 40 per cent of its gas from Australia, so it is naturally concerned.

A study by the Oxford Institute for Energy Studies finds that longer-term Australian LNG output is threatened by a dearth of new projects and gradual declines in reserves. Exploration for new gas and progress on LNG ventures have dwindled in the face of environmentalist and community opposition, lengthy timelines and complex regulation, and high labour costs.

Gas prices in eastern Australia have soared because of inadequate new supply, and the government has consequently introduced a price cap and considered restricting LNG exports, which would dent the country's reputation for reliability.

Canberra has also upset investors and Japanese customers by introducing new limits on greenhouse gas emissions, including for projects in the middle of development.

The other two leading global LNG players present their own risks.

Qatar has a perfect history as a reliable supplier, but it shares its major gasfield with Iran, and nearly all its exports have to pass through the Strait of Hormuz. It is also not a flexible seller, preferring long-term contracts with fixed delivery destinations.

Why Relying Heavily for LNG on Just Three Suppliers Could Be Dangerous_1

This makes the US the most adaptable large LNG exporter. It benefits from an entrepreneurial mindset, gas feedstock supply from a huge variety of onshore fields, and the presence of several competing exporting companies.

However, in June last year, the Freeport LNG plant, one of the US's largest, suffered a serious accidental explosion, just as Russia's war in Ukraine was sending global prices soaring. The facility fully restarted only in March. Nearly all American LNG export facilities are lined up along the Gulf of Mexico coast, exposed to hurricanes and storm surges as the world heats up and sea-levels swell.

A less serious but curious problem surrounds the Venture Global plant at Calcasieu Pass in Louisiana, which has sent out more than 170 cargoes, yet failed to supply Shell, BP and others under long-term contracts, claiming its power supply requires repairs. Its customers suspect it was choosing instead to sell on the higher-priced spot market.

However, it is domestic politics that could pose the biggest risk to future US LNG exports. The Democratic Party is under increasing pressure from its left wing to crack down on the fossil fuel industry, so future projects may face growing opposition. If new drilling is constrained and domestic gas prices soared, complaining consumers and industries might seek to limit exports. And a Democratic or Republican White House might restrict supplies to a geopolitical adversary, notably China.

Unlike Opec in oil, no country holds substantial spare LNG production capacity.

Russian gas through pipelines used to play the balancing role for Europe, but that is now kaput. Russia itself also accounts for about 7.5 per cent of world LNG supply, but there is increasing talk about banning that too from Europe, and sanctions and lack of finance and technology access will impede future planned supply from the Russian Arctic and Far East.

This creates an opportunity for new LNG players to ensure diverse and reliable supplies.

Adnoc is developing a new export facility at Ruwais in Abu Dhabi's western region, and Canada one in British Columbia, an easy sail to Japan.

Some entrants are riskier: the East Mediterranean, with its complex and combustible politics; Mozambique, with a recent Islamist insurgency around the proposed facility in its north, Tanzania, a project revived after years of delay by government inertia; Mauritania and Senegal.

Greater supply diversity, even from tricky locations, improves overall energy security.

Western LNG importing countries are very averse to funding new fossil fuel projects. But they should at least support African LNG plants, in combination with stringent greenhouse gas limits. The alternative is a turn back to secure but much dirtier coal, both in Europe and Asia.

European governments used to tremble before the coal unions; now they need to ease worries over gas labour activists on the other side of the world.

Source: The National News

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Why Relying Heavily for LNG on Just Three Suppliers Could Be Dangerous

Source: The National News

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