Financial Review
Shale threatens LNG exports

Monday, December 10, 2012

A report to the US government on the economics of a liquefied natural gas export industry fuelled by America's shale gas boom has confirmed conventional wisdom.

Exports of LNG would be good for the US economy as a whole, under all scenarios studied, and the more the better.

Reassuringly for Australia's LNG exporters and workers, any American LNG export industry will ramp up slowly, and not add hugely to the global supply of LNG.

Still, there are good reasons for Australia to be watchful. The shale revolution has a record of surprising on the upside. No conventional wisdom predicted it. Five years ago America feared a rising LNG import bill.

Now America is on track to overtake Russia as the largest gas producer by 2015, the International Energy Agency says, even as companies such as BHP Billiton shift drilling rigs from gas-rich shales to currently more valuable oil and liquids-rich shales. It has already overtaken Russia, Iran and Qatar to hold the largest estimated reserves.

Efficiency of shale gas production is accelerating. For example, productivity per rig rose sevenfold from 2007 to 2012 at the Fayetteville shale in Arkansas, an analyst at Denver-based Bentek Energy, Tony Sweet, told a coal trading conference last week.

Shale is an industry still in its infancy. We should beware of predictions about its potential.

Even if Australian volumes are safe, LNG's price link to oil looks shaky. Gas prices in the US track coal prices, not oil. As shale gas penetrates global LNG markets, some convergence will occur. Unconventional gas can transform energy markets by putting downward pressure on prices, IEA deputy director Richard Jones told a shale conference in Houston in September.

That may be an issue for later this decade and the 2020s, by which time Australia's labour cost and currency premiums might have disappeared. Or they may not. Best not to rest on our laurels.

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