"LNG Imports Look Inevitable for Major Gas Exporter Australia"

Australia, once the world's largest LNG exporter, is now on the brink of importing the very fuel it has long supplied to the global market. This shift is driven by a combination of domestic gas shortages, declining production, and the high cost of LNG imports. The construction of a $1 billion import terminal at Port Kembla in New South Wales is expected to ease projected gas shortages, but the economic and environmental implications of this move are significant.

The Australian gas industry shipped 81 million tonnes of LNG overseas in 2022-23, yet the country is now facing domestic shortages and soaring gas prices. The Australian Energy Market Operator (AEMO) was forced to consider intervening as sub-zero temperatures across eastern states this winter triggered a risk there wouldn’t be enough gas. This underscores the vulnerability of the current gas market and the need for increased pipeline capacity to bring enough Queensland coal-bed methane south, as well as the expansion of Australian pipeline operator APA's 440 TJ/d South West Queensland pipeline, which could be approved in early 2025, raising gas security.

The construction and operation of the Port Kembla import terminal in New South Wales could significantly influence the broader Australian gas market. The terminal is expected to ease projected gas shortages in the coming years by providing an additional source of supply. According to the information provided, the terminal could cover New South Wales' entire winter demand of about 481 TJ/d, excluding gas-fired generation. This is crucial as New South Wales is largely reliant on the ExxonMobil-operated Gippsland basin joint venture for supply, and the closure of a 400 TJ/d plant at the formerly 1,150 TJ/d Longford facility this year has accelerated concerns about gas supply.

However, the impact of the terminal on gas prices is still unclear. Energy analyst Tom Quinn has stated that if the terminal does purchase gas from overseas, it will likely be more expensive than other forms of gas, such as the energy from existing domestic gas pipelines. This is supported by data showing that LNG imports cost up to 25% more than pipeline gas, with the AVX — Argus' assessment for month-ahead spot gas deliveries to Victoria — averaging A$12.46/GJ in 2024 to 27 December, while the Argus Gladstone fob price — an LNG netback indicator calculated by subtracting freight and costs associated with production from the delivered price of LNG to Asia-Pacific — averaged A$16.03/GJ for the same period.

The terminal could also play a role in alleviating projected gas shortages by providing a backup supply during extreme weather events and unplanned outages. The Australian Energy Market Operator (AEMO) was forced to consider intervening as sub-zero temperatures across eastern states this winter triggered a risk there wouldn’t be enough gas. The terminal could help to mitigate this risk by providing an additional source of supply.

However, the terminal's role in alleviating gas shortages is not without controversy. Some analysts, such as Rod Campbell, have argued that the terminal is the latest evidence that the market has been set up to "scam" Australians, and called for an acceleration in electrification. Campbell has stated that "In the past 10-15 years Australian gas production has tripled, yet we’re talking about gas shortages and needing to import gas."

The economic implications of Australia importing LNG are significant. The cost of importing LNG into Australia is significantly higher than domestic pipeline gas. For instance, the AVX—Argus' assessment for month-ahead spot gas deliveries to Victoria—averaged A$12.46/GJ in 2024, while the Argus Gladstone fob price—an LNG netback indicator—averaged A$16.03/GJ for the same period. This means that LNG imports cost up to 25% more than pipeline gas, making them the most expensive form of gas for producing electricity.

The environmental implications are also significant. The import of LNG could lead to increased emissions, as the process of liquefying, transporting, and re-gasifying natural gas is energy-intensive and contributes to greenhouse gas emissions. Furthermore, the continued reliance on fossil fuels like LNG could hinder Australia's efforts to transition to a more renewable energy grid, as outlined in the Future Gas Strategy. The strategy emphasizes the need for new sources of gas supply to meet demand during the economy-wide transition, but it also acknowledges that gas and electricity markets must adapt to remain fit for purpose throughout the energy transformation.

In terms of energy security, the import of LNG could provide a short-term solution to gas shortages, but it also highlights the need for a more robust and diversified energy infrastructure. The Australian Energy Market Operator (AEMO) was forced to consider intervening as sub-zero temperatures across eastern states this winter triggered a risk there wouldn’t be enough gas. This underscores the vulnerability of the current gas market and the need for increased pipeline capacity to bring enough Queensland coal-bed methane south, as well as the expansion of Australian pipeline operator APA's 440 TJ/d South West Queensland pipeline, which could be approved in early 2025, raising gas security.

Trade relationships could also be affected by Australia's decision to import LNG. As one of the world's largest LNG exporters, Australia has established strong trade relationships with countries like China, Japan, and South Korea. The import of LNG could potentially strain these relationships, as it may be seen as a shift away from traditional export markets. However, it could also open up new opportunities for trade, as Australia could potentially import LNG from countries with excess supply, such as the United States or Qatar.

The increasing global LNG supply, particularly from projects like LNG Canada Phase 1 and Qatar North Field East expansion, is expected to have significant implications for Australia's domestic gas market and pricing dynamics. According to the information provided, a wave of new LNG supply is anticipated, with global exports projected to reach 440mt (605bcm) in 2025, 480mt (660bcm) in 2026, and 620mt (855bcm) by 2030. This represents an almost 50% increase above 2024 levels. The recent start-up of projects in the US marks the beginning of this wave, with material additions expected from projects like LNG Canada Phase 1 (14mtpa, mid-year start-up) and Qatar North Field East expansion (32mtpa, phased ramp-up with first cargoes expected in late 2025).

This influx of new LNG supply is likely to drive down global gas prices, as evidenced by the revised European gas price forecast. The 2025-26 European gas price forecast has been increased by 18% to $11.50/mmbtu, primarily due to higher near-term pricing amid colder weather and incrementally tighter balances into summer. However, despite this increase, the forecast remains 20% below the forward curve for 2025 and even lower in the summer months. For 2026, the estimate moves up 7% to $9/mmbtu, remaining 28% below the forward curve due to the expectation of incoming LNG supply.

In Australia, however, the impact of these lower global prices may not be as beneficial. The cost of importing LNG into Australia is significantly higher than domestic pipeline gas. For instance, the AVX—Argus' assessment for month-ahead spot gas deliveries to Victoria—averaged A$12.46/GJ in 2024, while the Argus Gladstone fob price—an LNG netback indicator—averaged A$16.03/GJ for the same period. This means that LNG imports cost up to 25% more than pipeline gas, making them the most expensive form of gas for producing electricity.

Furthermore, the Australian domestic gas market is already facing challenges due to the country's reliance on LNG exports. The Australian gas industry shipped 81 million tonnes of LNG overseas in 2022-23, leading to concerns about domestic shortages and soaring gas prices. The construction of a $1 billion import terminal at Port Kembla in New South Wales is expected to ease projected gas shortages, but the source of the LNG and its impact on prices remain unclear. The terminal could potentially import gas from overseas or from northern states, but the cost implications are significant. Energy analyst Tom Quinn has described the import terminal as "madness," exposing government failures in forcing companies to reserve enough gas to keep heaters going during winter.

In summary, while the increasing global LNG supply may lead to lower gas prices internationally, Australia's domestic market is likely to face continued challenges due to the high cost of LNG imports and the country's reliance on LNG exports. The construction of import terminals and the potential for higher gas prices due to extreme weather events and unplanned outages further complicate the pricing dynamics in Australia.