LNG

The Australian Government said that given the inherent seasonal variability in European natural gas consumption driven by heating demand, there remains a risk of further price volatility in 2023 as seasonal conditions change.

The European Union currently lacks the firm liquefied natural gas contracts needed to fully offset lost Russian pipeline gas volumes, which will force the bloc to source its marginal LNG supplies from global spot markets when needed, according to the latest Australian “Resources and Energy Quarterly” from the Office of the Chief Economist.

“As such, LNG markets are expected to remain in moderate shortfall over 2024 and early 2025, as Europe continues to replace lost Russian pipeline gas with LNG imports,” stated the report.

“Our base case is for Asian spot prices to average US$14/MMBtu over the outlook period, with risks skewed to the upside for the reasons mentioned above,” added the report.

“While this price is well below levels averaged over 2022 (US$33/MMBtu), it is still double the five year, pre-2020 average of US$7/MMBtu,” stated the report.

Export plants

Australia itself has 10 LNG export plant and in 2022 shipped 82 million tonnes of LNG valued at A$91 billion (US$60.55Bln).

The report forecasts that national LNG income will fall through fiscal 2024-2025 to A$60Bln (US$40Bln), with volumes also easing to 79MT over the same period.

“While volatility in LNG markets could re-emerge over the Northern Hemisphere winter and boost spot sale earnings, the base case is that lower energy prices will cause the value of Australian LNG exports to fall,” said the report.

The cargoes last year were mainly delivered to Asia and with 80 percent of volumes being unloaded in Japan, China and South Korea.

Around 75 percent of the cargoes were sold under long-term contracts.

The Australians believe that global LNG trade is expected to grow by 13 percent, or 51MT, over the two-year outlook relative to 2022.

Almost half of the growth (24MT) will come from newly commissioned US LNG plants, while facilities in Nigeria will also contribute 7MT.

Forecasts indicate that most of the new production should be sold to Europe, which is expected to increase its LNG imports from 121MT to 147MT between 2023 and 2025, respectively.

ASEAN volumes

“But ASEAN, Australia’s closest export market, will likely be the second-largest source of demand growth as Vietnam and the Philippines start importing LNG, with total ASEAN demand rising by 11MT over the outlook (two-year) period,” added the report.

The report explained that despite the favourable environment for LNG producers, the outlook for Australia was mixed.

“Australian LNG exports are forecast to fall marginally, as existing facilities face difficulties back-filling their operations with gas from new reserves,” said the report.

“At the same time, investment in offshore exploration remains low despite high commodity prices, which could impact Australian gas production beyond the outlook period,” it declared.

The Australian Government’s quarterly energy review said that the nation’s 2023 liquefied natural gas production was expected to “stabilise” at around 80 million tonnes from about 83MT last year as output from the Pluto LNG Train II expansion offsets falling production from the Northwest Shelf facility.

Both of the liquefaction and export plants are operated in Western Australia by Woodside Energy.

Australia’s previous strong result was driven by record-high utilisation rates at Australia’s West coast plants amidst high international LNG prices.

For example, Wheatstone, Gorgon, and Pluto LNG (one-third of Australia’s total LNG capacity) are estimated to have operated at a combined utilisation rate of 110 percent in 2022.

“The impressive result was enough to offset lost production at Darwin LNG due to field depletion in the Bayu-Undan basin and at Prelude LNG, which experienced unplanned outages throughout the year,” explained the report from the Office of the Chief Economist in Australia

It added that Australian LNG export revenues were forecast to reach A$91 billion (US$60.67Bln) in 2022-2023, on higher global energy prices and a lower Australian dollar.

“As global energy markets reorganise, earnings are forecast to fall steadily (in real terms) - to A$45 billion by 2027-2028,” said the report.

The report noted that global LNG trade increased by 5.5 percent last year to an estimated 395MT.

Europe's role

“Europe has now emerged as the key driver of import growth and is forecast to maintain this position across the outlook period. Rising European demand will likely come at the expense of Asian consumption, which is typically more price sensitive,” said the report.

“Throughout 2022, many Asian buyers were priced out of the market by European importers. Other buyers, mainly in China, appear to have resold their contracted US cargoes to European markets to arbitrage the higher European prices,” it explained.

“Remarkably, record-warm winter temperatures and a steady flow of LNG imports from the US, has seen European storage reach its highest levels in recent history, alleviating the risk of an immediate gas shortfall and easing pressure on LNG prices,” said the report.

However, the view from Canberra is that global gas markets are forecast to remain “tight and volatile” until the end of 2024 as Europe continues using LNG to compensate for lost Russian pipeline gas.

The tight supply conditions are then forecast to ease in 2025 and 2026, as new US and Qatari liquefaction facilities come on stream.

East Europe

“The steady flow of US LNG and record-high winter temperatures reduced the drawdown of European storage inventories over the 2022-23 winter,” said the report.

“These two conditions eliminated the risk of an immediate shortage and have improved the likelihood of healthy storage injections over the 2023 refilling period,” it added.

Europe is now forecast to capture most of the world’s growing LNG supply over the outlook period.

European LNG imports are forecast to reach 142MT in 2023, double the figure in 2021 as Germany, Belgium, Italy and Greece commission new LNG import facilities to offset lost Russian pipeline gas.

Imports are also projected to rise to 178MT by 2028, as new pipeline interconnectors in the Czech Republic, Bulgaria and Slovakia allow LNG importing countries to export gas to Eastern and Central European markets.

Australia, a main exporter of LNG to Asian nations, said the spot price was recovering at a modest rate and heading for former higher levels, only partially offsetting the lower prices on the bulk of LNG supply which is still in the grip of weak oil prices.