Good news and bad news for Australian oil and gas

We have just released the March EnergyQuarterly report, which brings together all of the statistics on Australasian oil and gas reserves and production for 2014, together with analysis of the latest developments.

Overall petroleum production reached record levels in 2014 and spending on new LNG projects continued at elevated levels as new projects near completion. The first LNG cargoes from Gladstone marked a milestone, achieved in just over four years since project sanction in October 2010. We hear a lot about budget blowouts and project delays but there has not been much commentary about this remarkable achievement, soon to be replicated on both east and west coasts. When the projects are completed, the total investment in Australian LNG will be close to $240 billion, about 30-times the current value of investment in the Snowy Mountains Scheme and completed in much quicker time.

Unfortunately the slump in the oil price has cast a pall over these achievements and created widespread uncertainty for those in the industry who have worked so hard over the last five years. The fall in the oil price is a theme that runs through the report.

However it is not only the oil price that is creating challenges. Gas consumption is down just about everywhere. China was seen as the big opportunity for gas, a bottomless pit of gas demand to reduce pollution. However the iron laws of economics apply in China as everywhere else. Higher Chinese gas prices are reducing growth in demand. AEMO is forecasting the same thing to happen locally, with higher prices to reduce east coast demand by around 200 PJ by 2020. Unlike oil, gas has numerous substitutes, making demand extremely sensitive to price.

One interesting question is whether and how the fall in oil prices and LNG prices may affect the east coast gas market, particularly prices. The east coast is now connected to international markets so it is inconceivable that lower international prices would have no impact on the domestic market. In the report we suggest some ways in which this might happen.

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