Australia may have to accept lower prices as other suppliers come on stream, MICHAEL RICHARDSON writes
When Japan was hit by a devastating earthquake and tsunami in March last year, forcing the shutdown of the entire nuclear power industry, it created a gaping hole in the energy supply system of the world's third-biggest economy.
In racing to make up for the loss of nuclear power that provided about 30 per cent of Japan's electricity, fuel importers turned chiefly to LNG, natural gas that is super-cooled into condensed liquid form so that it can be transported over long distances by sea in special tankers. Use of LNG in the first quarter of 2012 was up by just over a third on the same period in 2011, making Japan the largest consumer of LNG in a high-value international trade that is on the verge of major expansion. Japan is looking mainly to Australia, the Middle East and North America for extra supplies.
For Asia, greater competition and diversity in gas supplies may lead to substantially lower prices for electricity generation, industry, business and home use over the next couple of decades. This would provide a major boost for Asian economies while reducing the region's heavy reliance on polluting coal by substituting cleaner-burning gas. Global warming emissions would also be reduced.
The main energy-importing economies of Asia, led by China, South Korea and India as well as Japan, are turning to gas to take advantage of vast new supplies, particularly from North America but also from recent discoveries in the Africa-Indian Ocean region.
Releasing its latest forecast at a gas conference in Kuala Lumpur on June 5, the International Energy Agency said consumption of the fuel could rise by 17 per cent by 2017. ''Asia will be by far the fastest-growing region, driven primarily by China, which will emerge as the third-largest gas user by 2013,'' the report said.
Of course, global gas demand may be stymied by a prolonged economic slowdown. But if the surge in gas production and exports takes place on anything like the scale predicted, it is expected to reshape the international gas trade which is currently dominated by a small group of leading exporters including Russia, Qatar, Australia, Algeria, Indonesia and Malaysia.
As competition intensifes, the old system of selling LNG under long-term contract indexed to the price of oil will be supplemented and perhaps eventually replaced by flexible, market-driven supply arrangements that more closely reflect the cost of gas. LNG producers in Australia may have to settle for lower prices and new export projects may find it more difficult to raise the large amounts of capital to become operational.
One key to the future of the global gas trade will be the extent to which North America emerges as a gas exporter. Vast reserves of gas from shale rock that have been unlocked in the United States over the past few years have flooded the market there, pushing prices far below levels in Asia and Europe and providing a strong incentive to sell surplus US gas overseas.
Canada, too, has extensive reserves of shale gas waiting to be tapped. At least a dozen companies in the US and Canada are seeking, or planning to seek, government approval to build multi-billion dollar LNG terminals to export gas.
The main target is Asia, where the landed price of LNG is much higher than the US Henry Hub benchmark price. US gas prices have fallen by almost 80 per cent in the past four years, following the rise in production from underground shale formations.
So far, only one LNG shale export project has been approved in the US. But the prospect of selling relatively cheap US gas to Asian competitor economies, especially China, has sparked political debate. Critics contend that large-scale exports would increase prices at home and undermine the advantages to the US economy from low-cost gas. Supporters of export expansion argue that it would build a profitable industry for the US and tie America more closely to Asia, one of the fastest growing regions of the world. They also argue that there is so much shale gas in North America that exporting the surplus would not have much of an impact on domestic prices.
The US energy department is assessing how exports could affect job creation, trade and the local price of natural gas. It is expected to release the findings later this year.
Thanks to shale, the US overtook Russia in 2010 as the world's largest gas producer. Whether North America emerges as new gas exporting superpower is still an open question. Asian economies looking to gas for cleaner growth will be hoping that it does.
