Share prices are crumbling, buyers are scrambling, and industry is raging after a shocking turnaround from the world’s largest exporting nation for liquefied natural gas (LNG) yesterday.

Australia.

As I wrote last week, political controversy has been swirling around the Aussie LNG industry in recent days. With natgas consumers across the continent complaining about rising domestic prices — coming as producers are shipping increasing volumes of gas abroad as LNG.

And yesterday, the Australian government did something about it.

Prime Minister Malcom Turnbull announced on public radio Thursday morning that his government will take the right to restrict LNG exports. As he explained, “It is unacceptable for Australia to become the world’s largest exporter of liquefied natural gas but not have enough domestic supply for Australian households and businesses.”

The export restrictions will reportedly come in the form of a “gas security mechanism” to be enacted as of July 1. Under these rules, the federal government will have the right to block exports during times of high demand and rising prices at home.

Few details were given beyond this — such as how producers might be compensated for lost revenue and broken contract commitments due to export restrictions. With big producers like Santos and Origin Energy saying they will meet with officials to discuss.

But the reaction from investors and industry was decidedly negative. With share prices of producers falling as much as 7.5% on the announcement — and oil and gas executives calling the new policy “unprecedented”, raising “sovereign risk”.

The problem isn’t going to be easily solved. As the chart below shows, domestic natgas prices have been rising notably since mid-2016 — coinciding with the start-up of major LNG export projects.

Australia
Natgas prices in Sydney have doubled over the last year (dark red line) – Source: Financial Times
Australia

That makes large-scale exports a tough sell to the Australian public. But also poses a big burden to LNG exporters — who have spent an estimated $200 billion building facilities across the country.

The outcome here will have a major effect on global LNG flows, profits for producers, and new project activity. If exports are pulled back, global prices will rise and we could see renewed interest in other natgas nations positioned to supply to key markets in Asia.

But if Aussie exports continue, the natgas price here is likely to remain at world-leading levels — making this a hotspot for new exploration and development. Watch for further details on the gas security mechanism from the government, and for responses from industry.

Here’s to pipes to nowhere,

Dave Forest

Article by Pierce Points