Australian LNG projects: the next stranded assets?

For years, Australia has harboured dreams of being a big player in the liquefied natural gas (LNG) industry. Former Energy and Resources Minister (and now, conveniently, Chairman of the Australian Petroleum Production & Exploration Association Advisory Committee) Martin Ferguson was hell bent on the idea that we would become the “Saudi Arabia of the gas world” – so much so that his 2012 Energy White Paper said that by 2020 Australia could rival Qatar as the world’s biggest LNG exporter.

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Curtis Island. Three LNG plants under construction in this World Heritage Site have attracted almost $20 billion in loans between them

Oil and gas companies have made great strides towards realising this dream, building a series of massive LNG export plants in the Northern Territory, Western Australia and Queensland in recent years. So you can imagine their reaction to a new Carbon Tracker report that found no new investment in Australian LNG projects should be made in the next ten years, leaving US$68 billion in Australian planned projects on the shelf.

As the world moves to decarbonise, it’s not just coal that faces becoming stranded. Lower LNG demand has the potential to derail several high-cost Australian proposals, including Browse LNG, the Sunrise floating platform and the expansion of the Gorgon project.

This is serious news for a few reasons. First but definitely not foremost, Australia seems to specialise in high-cost LNG projects. We are home to the Ichthys project in Darwin, which was made possible thanks to the world’s largest ever project financing deal. Other investments in places like Curtis Island have seen tens of billions of dollars more sunk into LNG export plants. In fact, a total of seven new Australian LNG projects, worth a combined $193 billion, are due to come online over the next two years.

Before going on, we should take a moment to acknowledge the fact that $193 billion is a gargantuan sum of money. Done that? Right, let’s continue.

In launching the report, Carbon Tracker’s James Leaton said: “The current oversupply of LNG means there is already a pipeline of projects waiting to come on stream. It is not clear whether these will be needed and generate value for shareholders.”

Chilling words for the likes of Origin, Santos, INPEX and others who have either just finished, or about to finish the construction of LNG plants that cost tens of billions of dollars. Saddled with massive debts and currently struggling to lock in sales contracts, these projects were facing massive financial risks even before the release of Carbon Tracker’s dire demand projections.

Both Santos and Origin Energy have had their credit ratings downgraded in the past six months, largely due to their huge exposure to high-cost Australian LNG projects.

Of course, LNG projects like Gladstone LNG, Australia Pacific LNG and Ichthys don’t just get built by the companies proposing them. It takes billions of dollars of debt. And that’s where the banks come in.

Here are the biggest lenders to LNG in Australia since 2008. The standout is clearly the Japan Bank for International Cooperation, whose $5.4 billion loan to the Ichthys project overwhelms anything else. But looking down the list and the importance of commercial banks, especially Australia’s “big four” becomes clear.

Top 10 Lenders LNG

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So if we’re going to talk about the financial risks of being exposed to highly capital-intensive, undersubscribed LNG plants with a deflated oil price to the owners’ shareholders, let’s also think about the risks being taken by banks that have also loaned billions of dollars of our money to these potentially stranded assets.

And then there’s the other reason why this is big news. The reason we said the cost was not the foremost reason we should be concerned is because of the environmental impacts of LNG.

Having the name “gas” in its title affords LNG the PR benefit of calling itself a low-carbon alternative to coal. But this claim is usually made by looking only at one part of the gas supply chain: burning it in power stations. To get to that point, the gas has to be extracted – in Australia’s case that usually means from unconventional methods such as fracking – piped, cooled to minus 160 degrees Celsius, transported a quarter of the way around the world, decompressed, transported again to the power station and then burned.

All of those points of the supply chain add major carbon impacts to LNG. Take, for example, fugitive methane emissions from fracking. Carbon Tracker notes that fugitive emissions must remain below 3% for gas to maintain a climate benefit over coal as an energy source, but then cites a median fugitive emissions rate of 2.9% for unconventional gas. Seems that we’re already on par with coal’s climate impact.

And then there is the huge energy drain to liquefy the gas. The Ichthys project needs the equivalent of a small-to-medium sized power plant (about 800 Megawatts, for the technically inclined) just to extract, transport and compress the gas ready for export. This, too, fails to be included in the gas industry’s claims about gas being a cleaner energy source.

And let’s not forget that along the Australian LNG supply chain you’ll also meet farmers who have had their land degraded by gas extraction and fishing communities whose livelihoods have been destroyed by dredging for LNG processing plants in places like Curtis Island.

Australian companies and their investors need to think differently about the future of LNG. Not only are we at risk of building a series of new, multi-billion dollar stranded assets, we may already have done.

And for what outcome? Some of the most expensive and environmentally damaging fossil fuel resources going around.

We need to make sure that investments in LNG projects stop right now. Customers of the big four banks can take action today to put their bank “on notice” over fossil fuel lending. And anyone with a superannuation account can check out Super Switch to see if their retirement savings are invested in companies trying to expand the LNG sector while the rest of the world moves to cut carbon emissions.

We all need to be part of the shift to a low-carbon future.