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Australia Discovers Massive Reserves of Shale Gas but Caveat Emptor

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Liquified Natural Gas, or LNG, is the most significant trend in the international energy industry. The effect of shale production has already had massive effects on energy price in the United States and as the technology and infrastructure required to liquify and export the gas becomes prevalent those changes will be spread across Australia and the globe.

Australia Discovers Massive Reserves of Shale Gas but Caveat Emptor

Australia is one of the countries betting on shale gas as it faces a slowdown in Chinese economic activity that is sure to effect the country’s major industries, which revolve around the exportation of commodities to the Asian giant. A couple of new reports suggest that the LNG situation in Australia is more complicated than previously expected, despite the large shale reserves recently discovered in the country.

Pacific natural gas will beat Australia

Australia is betting on demand for its LNG products from China and Japan, two key markets with high energy demands, but Canada and the United States will certainly compete for this market with their own LNG offerings. According to a Deutsche Bank report on LNG demand worldwide, key customers in Japan and China are likely to source 40% of their LNG from Australia by 2018. After that, however, the situation does not favor the South Pacific country.

Once that level has been reached, the Deutshce Bank analysis, which takes its information from the recent Wood McKenzie Seminars, suggests that those customers will no longer seek to contract with Australia as LNG sources from East Africa and North America become more competitive.

The biggest worry for Australian LNG producers will be the predicted competitive advantage of Pacific Natural Gas, or PNG, sources. This means that although Australia is likely to do well in the LNG market over the medium term, the business may be overrun by cheaper gas from sources in Papua New Guinea among other sources.

Commodity prices will hurt Australia

A second report form Deutsche Bank AG (NYSE:DB) (ETR:DBK) suggests that world commodity prices are likely to enter into soft pricing for the rest of the decade, with demand in China falling as its economy begins to slow down. The “super-cycle” of high commodity prices that has been a major factor in the world economy over the last ten years is coming to an end, and Australia is bound to suffer.

Australia is a massive exporter of coal, so the increase in its natural gas industry will take away from its coal production, and the eventual bit coming from Pacific Basin gas will take a bite out of LNG demand. The change in energy demand in Asia over the next decade, coupled with the changes in demand for base metals caused by the slow down in the Chinese economy, means that Australia is going to have a tough time in the years ahead.

Australia is in the midst of massive changes in its economic structure. The latest information suggests that competition in the LNG field will be so intense that prices are likely to fall, and the economic benefits of the natural gas industry are likely to be felt in consumer countries rather than producers, leaving Australia on the wrong side of the transaction.

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