Australia strictly controls natural gas exports to Chinese companies to sniff business opportunities

Image source: Australian Industry Dptm

Core Tip: The Australian government predicts that China's natural gas consumption will increase by 65% ​​to 330 billion cubic meters between 2016 and 2022. "China will be the single largest contributor to the growth of LNG demand." This huge emerging market, coupled with the so-called gas shortage on the East Coast, has made the Australian natural gas industry more attractive to strategic investors.

ACB News "Australian Finance Online" May 11th In the past two years, exports to countries such as Japan and South Korea have tripled the spot price of Australian wholesale natural gas, and concerns about this situation have intensified. In view of this, the Australian government announced on April 27 that it will introduce a natural gas export restriction policy to protect domestic natural gas supply in order to achieve the priority of meeting the demand for natural gas in the domestic market.

Natural gas prices "overhang"

Australian government will strictly control natural gas exports

Australian Prime Minister Turnbull said it would put Australia's domestic demand, Australian business, Australian jobs and the interests of Australian families first. This is the basic action that needs to be taken to protect the national interest.

In Turnbull's view, Australia is about to become the world's largest exporter of liquid natural gas. However, domestic supply shortages and the demand for natural gas from Australian businesses, households and industries are not met. This is unacceptable and incomprehensible. This is “absurd”. .

Australian Resource Minister MAT tCA navan uses an analogy to illustrate the irreplaceability of natural gas: there is a shortage of chicken in the supermarket, which can be exchanged for beef; but the shortage of natural gas required for Australian industry cannot be replaced by other resources. Natural gas is like bread and milk for the Australian industry, and its development requires adequate natural gas, which is not expensive.

Australian Industry Ministry's latest resource and energy quarterly report pointed out that Australia's LNG export volume increased by nearly 50% in FY 2015-16, and it is expected to double in the next three years as more capacity is put on the line. Supported by price increases, LNG will replace metallurgical coal as the second largest export item by 2017-18. At the same time, if left unchecked, domestic natural gas prices in Australia will also rise sharply.

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The current situation is exactly the opposite, and the market imbalance is obvious. If the supply is sufficient, the market is balanced, the wholesale price of natural gas and the export price should not be wide disparity, and there is no reason for the domestic wholesale price to be too high.

To this end, the government introduced Australia's domestic natural gas safety mechanism. The mechanism authorizes the government to implement export controls on related companies when domestic gas supply is insufficient, ensuring that potential demand in the domestic market is prioritized. Liquid natural gas export enterprises that deliberately reduce domestic supply will be ordered to restrict exports. “The Australian government will still encourage liquid natural gas exports, but at the expense of Australia’s overall interests.”

Adjust the price difference

Balance the interests of residents and industrial users

Turnbull pointed out that the shortage of domestic natural gas supply caused the domestic price of natural gas to be significantly higher than the export price. In response to a reporter's question, he pointed out that the lack of natural gas supply in the domestic market, led to natural gas wholesale customers and industrial customers (such as Incitec) had to pay more than 20 Australian dollars / joule to buy natural gas, which is obviously higher than the export price. The domestic natural gas wholesale price should be basically the same as the export price, and should not be higher than 10 Australian dollars / joule.

He added that this does not mean that the price of domestically used natural gas will be halved after policy changes, because natural gas companies have to pay for the cost of establishing and maintaining the entire pipeline distribution network and other costs.

Ensuring sufficient domestic supply will inevitably put downward pressure on the retail price of natural gas. A reporter asked if he hoped the move would lower the price of natural gas. Turnbull gave a positive answer. He also pointed out that this move has the greatest impact on industrial users who purchase large quantities of natural gas.

Australian Industry Minister Arthur Sinodinos also put forward his own views: “If natural gas supply is sufficient in the short term, domestic natural gas prices will be under pressure, and relatively cheap natural gas will be available to all industries in Australia. At the same time, natural gas export companies must understand that They have the responsibility to assist the development of domestic industries. Without domestic industries, these enterprises will not have the motivation to develop export resources. The two complement each other and cannot be neglected."

The government has not asked natural gas exporters to respond explicitly to this policy, so they have a lot of room to find solutions, such as doing natural gas swaps or adjusting portfolios in the spot market.

The regulation will be implemented on July 1, 2017, after which the government will fully negotiate with large companies in the natural gas industry.

Domestic market presents business opportunities

Overseas investment giants plan ahead

The news has come out, and there has been an uproar in the industry, and large-scale natural gas exporters in Australia have made feedback. Relevant companies have different responses to Australia's domestic gas safety mechanisms. Companies that make huge profits on LNG exports have significant resentment, while others have seen opportunities.

This week, PetroChina and Royal Shell's Australian joint venture Arrow Energy (ASX:AOE) announced that it will start engineering and design research, doubling the capacity of the Tipton coalbed methane field in Queensland, which is expected to increase domestic supply and ease Australian East Coast Energy Crisis.

Company president Qian Mingyang said the project involves upgrading existing facilities with the goal of increasing capacity to 80 TJ/day. “This project will promote the further development of the Arrow resource base and increase the supply of natural gas in the market”. The industry speculates that the investment cost is either A$500 million, and Exxon Mobil also announced new investments in the Bass Strait last weekend.

Some media analysts said that the Tipton expansion plan will depend on whether it can get support from nearby gas export companies, they control critical infrastructure. The natural gas companies around the Tipton project include Shell's QGC and Origin and ConocoPhillips Australia's joint venture APLNG, which are Australia's current major natural gas exporters.

Qian said that it is important to push the company's large amount of natural gas storage to the East Coast market. "We look forward to reaching an agreement to bring most of the gas we hold to the market later this year."

Santos looks forward to domestic supply-side changes

Chinese shareholder strategy increase in popularity

Santos (ASX:STO) responded to the government's proposed domestic gas safety mechanism, saying that as an Australian company, Santos has consistently supported the promotion of domestic industry at a reasonable price. Santos will provide more natural gas to the domestic market and promises to exceed the volume of liquid natural gas exports. It also said it will work closely with governments and joint ventures to ensure maximum benefits for shareholders.

Of course, shareholders must include two recent high-profile Chinese investors, Hony Capital and Xinao Group. The two Chinese companies have recently bought a shareholding at a premium, and last week increased their stake in STO to 15.1%.

Santos, Australia's leading energy group, is in a difficult position, and its performance has fallen sharply due to the collapse of crude oil prices – from $100 per barrel at the end of 2014 to $30 at the beginning of 2016. The two major Chinese shareholders have objections to Santos' development direction; since the end of 2016, Hony Capital continued to buy shares in the company, and the Xinao Group had sent a letter to seek a seat on the board.

Last week, Santos Board Chairman Peter Coates said at the annual meeting that the board is happy to give Chinese shareholders a seat on the board and said they "have no malice" against the company.

Santos has liquefied natural gas projects in Babu Guinea, Darwin and Gristom, and its GLNG project is one of the three largest LNG projects in Australia. After years of retreat, the company has built a low-cost structure, and the average price has dropped to $34 a barrel. Today, when oil prices rise, the prospects are bright. At the end of last year, the company raised a total of 1.24 billion Australian dollars from the market, and the future development funds were guaranteed.

When talking about the East Coast gas shortage, Peter Coates said that Australia does not lack natural gas, but needs the government to support the orderly development of storage and increase supply to meet the needs of the East Coast market.

He stressed that export orders are the backbone to support the survival of existing LNG projects, and it is not realistic to completely stop exports. What companies and governments need to do is to negotiate and solve problems and find remedies.

The change in Santos’ attitude towards Chinese shareholders and the increase in capital injections by Hony and the New Austrian Group seem to indicate the opening of a new round of investment boom in Australia’s energy sector. According to the latest disclosures from the Australian Foreign Investment Commission, in 2015-16, the Australian manufacturing/electricity/natural gas sector attracted a total of A$10 billion in foreign investment, second only to real estate.

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The Australian government predicts that China's natural gas consumption is expected to grow tremendously. In 2016-2022, China will account for one-third of the global demand for natural gas, and consumption will increase by 65% ​​to 330 billion cubic meters. “China will be the single biggest contributor to the growth of LNG demand,” said Mark Lukeli, chief economist at the Australian Industry Department.

This huge emerging market, coupled with the so-called gas shortage on the East Coast, has made the Australian natural gas industry more attractive to strategic investors.

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