The extraordinary growth in Australia’s liquefied natural gas (LNG) industry, the main cause of recent rises in national greenhouse gas emissions, has stalled indefinitely, with decisions on more than $80bn of investments delayed due to a collapsed oil price sunk by coronavirus and a geopolitical price war.
The price of Brent crude oil is less than half what it was in early January, having fallen again on Friday despite the Opec oil cartel and its allies reaching a supply deal to stop Saudi Arabia and Russia flooding the world with more oil than it can use. The Asian spot price for LNG, which is linked to the oil benchmark, is down about two-thirds in six months.
The unprecedented crash had already prompted oil and gas giants to defer investment decisions on projects including Woodside’s massive Burrup Hub expansion off the Western Australian coast and Santos’ $7bn Barossa project 300km north of Darwin. A decision on the first parts of the Burrup Hub expansion, including a $17bn development of the Scarborough gas field, has been pushed to 2021.
Calls on Barossa and the largest section of the proposed Burrup Hub, a $30bn development of the untapped Browse gas field involving Woodside, Shell and BP, have been deferred to an unnamed date. In inland gas exploration, Origin Energy has paused exploration drilling for its unconventional gas project in Northern Territory’s Beetaloo Basin.
Analysts said while prices were expected to rebound, the pace and scale of recovery were near impossible to forecast and may not reach the level required to justify new LNG investments for years, if at all. Climate activists said an extended delay was likely to make major new investments harder to justify as markets increasingly valued clean energy over fossil fuels.
Peter Coleman, Woodside’s chief executive, told The Weekend Australian the industry was facing the worse situation he had seen and indicated the company’s projects were not guaranteed to go ahead. “I would suggest if we’re still sitting here in 12 months in the oil and gas industry in this difficult pricing situation then we’re going to have a fundamentally different industry and a fundamentally different view of how to create value,” he said.
David Low, a senior analyst with consultants Wood Mackenzie, said its assessment remained that Scarborough and Barossa projects would be sanctioned next year, but both projects still had challenges to overcome related to ownership structure, and could have their timelines pushed out.
“If oil prices are slow to recover, operators could opt to further delay discretionary spend and remain focused on strengthening their balance sheets. This will likely mean further delays for the Australian projects,” Low told The Guardian.
Australia produces little oil, but its LNG industry has expanded dramatically since 2012 as developments have kicked off across the top end. It passed Qatar to become the world’s biggest exporter last year, with revenue reaching $51bn, placing it second to iron ore among the country’s resource and energy exports.
Skyrocketing LNG production has added significantly to the country’s heat-trapping greenhouse gas pollution. Its emissions in Australia (not counting those from burning the gas after it is shipped overseas) were up 16.9% in the year to September, all but cancelling out falls in emissions from electricity generation and agriculture as national emissions dipped just 0.4%.
The Conservation Council of Western Australia estimated the Burrup Hub expansion alone could add nearly 20m tonnes to the country’s annual emissions, about 3.7% of the national total, if it were to go ahead in full. It could result in a further 80m tonnes a year when the gas was burned overseas.
The fall in the oil price is yet to fully hit existing Australian gas projects as it takes about three months for changes in the crude benchmark to affect LNG contracts, but hundreds of oil and gas workers have been laid off or stood down as companies slashed planned investment this year.
The oil price initially plummeted as Opec leader Saudi Arabia and Russia flooded the market, in part to undermine the US shale industry. Combined with the significant reduction in demand due to Covid-19 economic shutdown, it sent oil prices to their lowest level in 18 years. On Friday, the Saudi-led group known as Opec+ agreed to reduce oil supply by 10% to little immediate effect.
Tom Swann, a senior researcher with the Australia Institute think tank, said a further complicating issue facing the oil and gas industry was the rising electrification of transport, which could lead to some investors rushing to get reserves out of the ground while there was a market to sell it into.
“Those three trends together [the pandemic, the geopolitical price war and electrification] just mean there is chronic uncertainty in the industry, and that’s reflected in these companies share prices and investment decisions,” he said.
He said future of the industry would depend in significant part on governments. “They could double down and try to pump prime more oil and gas, or we could seen investment in electric vehicles and charging stations,” Swann said.
Tim Buckley, from the Institute for Energy Economics and Financial Analysis, said whatever happened the price plunge meant Australia’s LNG industry was unlikely to ever again top $50bn in LNG exports. He said it would increasingly struggle to compete with renewable energy with a far lower marginal cost.
Piers Verstegen, from the Conservation Council of WA, said the delays should be seen as an opportunity for companies to pause and pivot from carbon-intensive projects to clean industries, such as green hydrogen, which Woodside has indicated it sees as part of its future.
“This gives everyone some breathing space,” he said. “They have been locked into a head on collision course with the global climate. This is their opportunity to change course.”