China Purchase of Oil LNG from Russia Worries Australian Producers

Plenty happening this month in the Australian oil and gas industry… The West Australian newspaper reported on June 24 that Russia and China inked a new deal whereby China will buy US$292 billion of liquefied natural gas (LNG) from Russian suppliers. This is causing concern from West Australian producers, because China is Australia’s largest trading partner. Currently Japan is Australia´s largest buyer of LNG but China is expected to take over the number one spot soon as the country looks for cleaner sources of industry to alleviate pollution in the cities. This sale has also created concern for the Australian government which is counting on increased natural gas production to boost revenue to the government.

Industry executives and APPEA (The Australian Petroleum Production and Exploration Associated) say this is a wake-up call for the industry. They says costs must decrease and investment increase. The APPEA in particular says the new environmental regulations proposed by the Parliament will drive up costs and it conflicts directly with agreements made last year betwen industry and regulators to reduce duplication of environmental regulations. They complain that these regulations will do nothing to improve the environment but will burdening the companies with additional paper work. Another problem for the producers is that the US dollar, the currency of international commerce, has fallen 70% against the Australian dollar since 2008 thus making Australian exports more expensive in dollar terms.

The U.S. Energy Information Administration says Australian was the third largest LNG exporter in 2012. They say the Australian government published the Energy White Paper in 2012. The document outlines policy and goals. It calls for increased infrastructure, increase investments from abroad, and improving efficiency in drilling operations. The document says that the industry is plagued with high operations costs including the cost of labor.

Increase investments from abroad are on the way. The New York times reported on May 1 that Shell oil is “betting its future” on natural gas. Shell owns 24% of the Australian energy company Woodside. That same week, Shell announced they would build a floating LNG plant for Woodside’s US$45 billion offshore natural gas projects—this way barges can ferry the final liquefied product to storage facilities ashore without having to transport raw natural gas. Besides these investments, there are new exploration and drilling projects underway in Queensland, NW Australian, and the Timor Sea.

In sum, the new deal between China and Russia will further pressure Australian producers to get a handle on costs, make increased investments in production, and keep regulatory pressure off the industry to ensure profitability.

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