In recent years, Australia has been a major growth area for offshore gas production and a key driver of offshore CAPEX. However, the prospects for Australian gas projects that have yet to be sanctioned are looking increasingly uncertain due to weaker LNG prices and cost overruns at existing projects. The outlook for Australian offshore projects may also be complicated by the recent Australian general election.

Gas Powered

Historically, the majority of offshore oil and gas production in Australia has been produced from Southern Australia, particularly from the Gippsland Basin. However, E&P activity in recent years has moved offshore North West Australia, where the emphasis is on large, deepwater gas projects. As a result, Australian offshore gas production increased with a robust CAGR of 7.9% from 2010 to 2015, reaching 5.88bn cfd last year and making Australia the fifth largest offshore natural gas producer globally.

Ample Supplies

This trend is expected to continue with the start-up of Phase One of the Gorgon gas project earlier in the year, increasing Australia’s 2016 estimated offshore gas production to 6.44bn cfd. This is probably just the beginning as Australia is projected to become an even bigger offshore gas producer. The country currently accounts for 10 projects that are undergoing EPC or Installation & Commissioning. Foremost amongst these are gas mega-projects such as Chevron’s Wheatstone, Shell’s Prelude and Inpex’s Ichthys LNG developments, which are scheduled to start-up in 2017. This is anticipated to accelerate Australia’s projected offshore gas production to 9.10bn cfd in 2017, before levelling off at 10.9bn cfd in 2020.

Moreover, onshore projects like Gladstone LNG and Australia Pacific LNG, which are now online, have begun to ramp up production. This is likely to lead to a rapid growth in available supply, arguably pressuring market fundamentals and so weakening spot LNG prices. Consequently, the combination of low spot prices, abundant supply and the development of associated gas reserves off Australia could hit the commercial prospects of many potential gas projects off Australia. Additionally, spot gas purchases could also gain favour against term contracts, possibly pressuring gas project feasibility.

Taking On Water

Currently, 41 projects representing an estimated $158bn in CAPEX have not entered EPC and 97% of the reserves from these projects are gas. Given the current challenging outlook for gas project economics, these projects might not receive an FID as operators could delay sanctioning until conditions improve, possibly abandoning some projects altogether. The situation could be exacerbated by Australia’s general election, which (at the time of writing) looks likely to produce a hung parliament, muddying energy policy waters and possibly putting a domestic gas reservation policy on future projects on the political agenda. That being said, the drive for environmentally friendly fuels could boost gas demand and improve the viability of gas projects in the longer term.

Political issues aside though, oversupply and low gas prices are key. Due to these factors, the near term investment outlook is very uncertain. However, with a project backlog of $158bn, offshore Australia still retains massive long term potential.

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