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The Mining Boom Is Dead: Long Live King Gas

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Pacific Money

The Mining Boom Is Dead: Long Live King Gas

With the mining boom declared over, Australia turns to LNG. But is the local industry competitive enough?

The mining boom may have been declared officially dead, but the gas surge continues. That was the message at APPEA 2013, Australia’s biggest oil and gas industry gathering held this week in Brisbane.

It was a reassuring theme for the 3,000 delegates from 30 countries at the conference in the Queensland state capital, with Australia still set to become the world’s biggest exporter of liquefied natural gas (LNG) by 2018.

The promising outlook came amid a continued slide in the global resource and energy industry which has seen sharemarket values plummet, mines shut and job losses spread from miners to engineers.

Gold, copper and iron ore prices are in “bear market” territory, while the coal industry has been dealt a hammer blow by high costs and low prices. Citigroup has warned of the “death bells” ringing for the commodities supercycle, hit by a continued slowdown in China, European austerity and the impact of the U.S. shale gas revolution.

A$150 billion projects shelved

Australia’s Bureau of Resources and Energy Economics (BREE) has announced the end of the resource boom, estimating that A$150 billion ($145 billion) worth of high value projects have been delayed or cancelled since April 2012, with A$29 billion in cost blowouts threatening established projects.

The bureau expects the current A$350 billion worth of committed and potential projects to sink to A$25 billion in 2018, barely half the level of 2003 when the boom commenced.

Recent project cancellations have ranged from coal to copper and iron ore mines, but also multi-billion dollar gas projects in Western Australia and the Timor Sea.

Warning of the challenge to remain cost competitive, APPEA chief executive David Byers said in a statement: “Australia’s attractiveness as a place to invest is under enormous pressure and unless we can work with the next Australian Parliament to rectify this, our next A$100 billion worth of LNG projects, may be built elsewhere.”

He added that “the cost associated with delivering Australian LNG into key markets is now substantially higher than for projects in East Africa or North America. Higher taxes, lower labour productivity and red/green tape faced by local projects must be addressed.

“It’s not that long ago that the United States was seen as a potential customer for Australian LNG, yet this notion has quickly evaporated amid a shale revolution that continues to lift the U.S. economy.”

The cost of new LNG projects in Australia has been estimated at around 20 to 30 percent higher than comparable projects overseas.

Nevertheless, APPEA estimates that A$200 billion is currently being invested in oil and gas projects in Australia, including seven of the world’s 12 major LNG projects currently under construction. By 2025, the construction and operation of such projects is expected to add another A$260 billion to Australia’s gross domestic project.

Golden age?

The golden age of gas may still lie ahead after coal won the first decade of the 21st century, accounting for 45 percent of energy demand growth, according to the International Energy Agency (IEA).

The IEA’s chief economist Fatih Birol told the APPEA conference that global energy demand would swell by more than a third in the period through to 2035, “underpinned by rising living standards in China, India and the Middle East”.

However, he noted that while gas could help “decarbonize” the energy system, it would not ensure greenhouse emissions remained within desired limits. Gas-fired power plants produce half the emissions of equivalent coal-fired power stations, but fossil fuels such as coal and gas are still expected to account for a significant amount of future energy demand.

“More than two-thirds of current fossil fuel reserves cannot be consumed before 2050 unless CCS [carbon capture and storage] is widely deployed,” should global warming be kept within a 2 degree Celsius increase, he said.

Royal Dutch Shell chief executive Peter Voser told the conference that demand for LNG would “double in this decade alone,” but Australia faced growing competition from North America, Asia and East Africa.

According to The Australian, two major LNG supply deals with South Korea worth A$60 billion have already been shelved, with Asian buyers pushing for cheaper pricing. Japan accounts for nearly 40 percent of global LNG imports, and has reportedly joined forces with the European Union to push for prices linked to “supply and demand” rather than oil-linked prices.

With the next wave of LNG projects seen under threat, Australia’s gas industry faces a tough challenge in ensuring the boom endures.