Lending to LNG

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Australia wants to take over from Qatar as the world’s biggest producer of liquefied natural gas (LNG). If that happens, it would mean a $200 billion expansion of the fossil fuel industry and an increase in greenhouse gas emissions that rivals that of the Galilee coal basin being opened up.

Far from being a ‘safe’ option, LNG has an enormous emissions profile across its lifecycle, and these huge new projects will require supply from dangerous unconventional sources such as coal seam gas.

Top lenders to LNG in Australia 2008-2016

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In September 2015 Fairfax reported that six new Australian LNG projects, worth a combined $200 billion, are unlikely to even break even when they come online. Australian LNG is generally supplied to Asia in long-term contracts, with prices linked to global oil prices. With oil sitting at around US$50 a barrel, down from US$105 a year ago, the outlook is grim for the glut of Australian projects, which are some of the most expensive in the world.

The International Energy Agency warned that, even if oil prices were to recover to US$60 a barrel, Australia’s LNG industry will struggle to turn a profit. And even that is based on an oil recovery that may never eventuate as the world moves to decarbonise.

So what does this mean for the projects that are about to come online? With so much capital having been sunk into projects, the six that are nearing completion will go ahead in order to generate some cash flow and recover some of their massive costs. However, the IEA doesn’t expect either of Woodside Petroleum’s proposed Browse or Sunrise ventures to proceed past the current planning stage, nor will ExxonMobil and BHP’s Scarborough project off the coast of WA. The global authority on energy projections also doubts that any expansion of Australia’s current LNG project will be warranted in the foreseeable future. Hopefully, strong international action to cut greenhouse gas emissions will ensure that the sector never sees any expansion.

The projects that are already too far gone to pull the pin on include three located in Queensland’s Gladstone Harbour – Santos’ $26 billion GLNG, Origin’s $24 billion APLNG and BG Group’s QCLNG project (which is likely to be operated by Shell if the two companies finalise their expected merger). The other well-advanced projects include two massive Chevron-owned projects Gorgon and Wheatstone, which worth around US$54 billion and US$29 billion respectively. Japanese-owned Ichtys, off the NT coast, is likely to come online in 2017 at a final cost of around US$34 billion.

The staggering amounts of money that have been stumped up for these poorly thought out projects, and the hard time their proponents will have making their repayments will hopefully serve as a strong warning against institutions pouring money into dangerous new fossil fuel ‘investments’.

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Liquefied Natural Gas, or LNG, is the liquid state of Natural Gas (predominantly methane), refrigerated to -162ºC. In Australia it’s primary sources are offshore or through coal seam gas inland. In 2012, Australia exported 19 million tonnes of it. By 2020 exports could increase to 100 million tonnes annually and at peak operation, the industry would produce 162.8 million tonnes per year, making Australia the world’s biggest exporters of LNG.

Credit: Lock the Gate Alliance

Credit: Lock the Gate Alliance

Concerns surrounding fugitive emissions (uncontrolled releases of methane, a potent greenhouse gas) have some viewing unconventional gas as potentially as greenhouse intensive as coal. But this is before we consider the fact that LNG needs to be compressed – a massively energy intensive process – and then pumped onto ships and sent around the world.

Drilling, fracking, piping and refrigerating LNG would increase Australia’s emissions by 47 million tonnes of carbon dioxide equivalent (mt CO2-e) per annum by 2020. This part of the LNG supply chain alone would cancel out Australia’s 5% emissions reduction target twice over.

Market Forces has identified $43 billion in loans to LNG projects between 2008 and 2014, the leading lenders to the industry are in the tables and graphic below. New Australian LNG will be the most expensive produced in the world, and subject to a host of financial risks such as exchange rate hikes, inclement weather, labour costs and political demands.

Emissions ComparisonWe have already seen projected costs of Australia’s LNG sector soar. In comparison with the initial price tag, cost blowouts average higher than 30% in LNG projects.

With new Australian LNG being the most expensive, it will also be the first to be unviable in the event of a depreciation in LNG prices. This makes them most vulnerable to price risk, delays, exchange rate risk, legal and political risks, and may force proponents to renegotiate sales contracts.

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