Opinion: Australia's LNG industry worries it will miss the huge opportunities from Iran war

Australia's liquefied natural gas sector is both un-investable and the greatest opportunity for growth, and that's according to the industry itself.

The dichotomy isn't as contradictory as it may first appear, as the industry is effectively saying there is a window during which the world's third-largest exporter of LNG can either grow, or it can stagnate and slowly drift into decline.

Senior industry executives speaking at the annual Australian Energy Producers (AEP) conference this week were all singing from the same song sheet, repeatedly hammering their view that Australia needs to get its policy settings correct in order to restore confidence and spur renewed investment.

It's to be expected that the major companies that dominate Australia's LNG sector will advocate strongly for the best outcomes for their shareholders, while still claiming to be major contributors to the country as a whole through taxes and royalties, jobs and investment.

What is less clear is how big the benefit to Australia will be if the federal and state governments effectively give the industry what it wants, namely less burdensome regulation, faster project approvals and a steady fiscal regime that is internationally competitive.

The industry says that it needs an easier regulatory environment and fiscal certainty to unlock new investment, but there are questions about how much new investment will be unlocked even if it does get governments to do what it wants.

There is the potential to develop the Beetaloo Basin in the Northern Territory, described as a world-class onshore shale play similar to those that turbocharged U.S. natural gas production and led to the United States overtaking both Australia and Qatar to become the biggest LNG exporter.

In theory, the Beetaloo could provide enough natural gas to shore up the domestic market and provide feedstock for additional LNG trains at the two existing plants in Darwin.

There are also other basins onshore in Queensland state that could be developed to provide more gas to both the three existing LNG plants in the state, as well as the domestic market in the populous southern states of New South Wales and Victoria.

But the point is that even if these fields are developed, it will take years for them to come online, and possibly decades for them to earn back the invested capital, which will be recouped before there is any significant contribution to company tax revenue.

TAX ISSUES. In some ways the problem the LNG sector is facing in Australia is the result of the way it was developed.

Australia took a policy decision to allow private companies to develop the natural gas resources for export as LNG, and up to $400 B has been invested in the past 15 years to lift Australia's export capacity to around 87 metric MMtpy.

That capital is now in the process of being recouped, meaning that the industry doesn't pay as much corporate tax as some politicians and lobby groups believe it should.

It does pay royalties and other taxes, and AEP leaders repeated numerous times at the conference that the industry is the second-largest corporate contributor to the federal Treasury, but even so, it's hard for them to combat claims that they should be paying more.

This is especially the case given the boost to revenues they are currently enjoying because of the impact of the Iran war, which has seen Qatar's LNG locked out of the global market through the effective closure of the Strait of Hormuz.

The loss of 20% of global LNG supplies has led to sharply higher spot prices LNG-AS for the super-chilled fuel in Asia, with the assessment of $17.80 per million British thermal units (MMBtu) from last week being 71% higher than the $10.40 that prevailed in the week prior to the U.S. and Israeli attack on Iran on February 28.

Some of the higher prices will be captured by the Petroleum Resource Rent Tax, which rises in line with prices, but the industry is still vulnerable to accusations it is making super profits and not sharing them with Australians.

The industry successfully fought off a campaign for last week's federal budget to include a 25% tax on LNG exports, but the issue is unlikely to go away as long as LNG prices remain elevated.

But the industry is confident it is winning the debate, and this is partly because LNG is now seen as one of the few levers Australia has to encourage its partners to continue to supply liquid fuels such as diesel and gasoline.

Australia imports over 80% of its liquid fuels but is also a major supplier of LNG and coal to Asian countries such as South Korea, Japan, Malaysia and Singapore, from which it buys its diesel, jet fuel and gasoline.

This is a serendipitous outcome for the industry, but it does allow it to say how vital it is for Australia's overall energy security.

Whether this heightened public awareness of the need for fuel security is enough to cause the federal government to bend to the industry's wish list remains to be seen.

The opinions expressed here are those of Clyde Russell, a columnist for Reuters.

 

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