The Rise and Fall of Australian LNG

Expensive regulatory burdens and prolonged underinvestment take their toll on Australian LNG, opening the door for new supplies to meet Asia's rising demand

Mobius Energy Shots

Australia’s rapid LNG supply growth helped it become a top-3 global exporter of super-chilled fuel. Expensive regulatory policies and prolonged underinvestment, however, will likely invite a similarly swift fall. Australia’s investment dollars are changing course, heading for non-petroleum mining opportunities to counteract China’s dominance over new energy supply chains. Meanwhile, Australia’s exit creates an opportunity for U.S. and Qatari LNG to compete for Asia’s world-leading demand outlook.

On This Energy Shots

The Rise and Fall of Australian LNG

A wave of investment in oil and gas exploration and extraction in the early 2010s expanded Australian liquefied natural gas exports from fewer than 3 bcfd to over 10 bcfd, making Australia a top-3 global supplier of super-chilled gas.

Australia’s proximity to Asia’s world-leading natural gas demand growth provided an immediate competitive advantage over counterparts like Qatar and the United States, with over 80% of Australian LNG exports sailing to buyers in just three markets: Japan, China, and South Korea.

China’s average annual natural gas demand growth rate of 13.4% since 2003, Japan’s rapid nuclear plant closures, and regional coal-to-gas generation diversification added tailwinds to Australia’s LNG export revenue. From 2013 to 2022, Australian LNG export revenues grew from under AUD$20 billion to AUD$90 billion, approximately 94% of which resulted from sales to Japan, China, Taiwan, and South Korea.

Regulatory Policies Take Their Toll on Investment

Australia’s competitive advantage in Asia’s gas market faltered with the introduction of the Safeguard Mechanism in 2016. This policy sets legislated limits on greenhouse gas emissions from Australia’s largest industrial facilities. These “baselines” gradually decline (typically by 4.9%/yr) in accordance with Australia’s emission reduction targets of 43% below 2005 levels by 2030 and net zero by 2050.

The Safeguard Mechanism applies to facilities emitting more than 100,000 metric tons of carbon dioxide equivalent (CO2e) per year, forcing facilities to purchase carbon offset credits for $50.74/metric ton CO2e.

Additional regulatory hurdles from Australia’s Domestic Gas Security Mechanism in 2022, which grants federal authority to limit gas exports for domestic consumption and apply a price cap of $8.45/mmBTU, combined to disincentivize new investments in Australian oil and gas extraction.

As shown below, this expenditure fell by approximately 97% from 2013’s peak of $57.9 billion to under $2 billion in 2023.

Australia’s Office of the Chief Economist has acknowledged the follow-on risks from underinvestment in recent quarterly reports:

“Gas exploration has been persistently low for the last five years and there is a risk that the current pipeline of gas projects under development becomes insufficient to offset declining reserves. Several projects are likely to start running short of reserves in the next 5-10 years, including the large North West Shelf project in Western Australia... falling reserves will affect a wider array of projects over time, and higher domestic gas use (driven by the closure of domestic coal plants) could put pressure on supply.”

Indeed, Australian LNG exports are expected to extend their steady decline to 10.24 bcfd by 2026, with more accelerated declines through the early 2030s.

Transitioning from Traditional to New Energies

Burdensome regulatory costs and underinvestment in oil and gas contrast against Australia’s increased focus on critical minerals for the ‘new energy’ transition.

As shown below, the decline in oil and gas extraction expenditure since 2013 coincides with modest but steady growth in Australia’s metal mining expenditure.

In 2022 and 2023, investment in base metal and other mineral extraction exceeded investments in oil and gas extraction, emphasizing Australia’s plans to counteract China’s historical dominance over critical mineral supplies.

Australia is currently the world’s fifth-largest nickel producer, eighth-largest copper producer, third-largest lithium producer, third-largest cobalt producer, and fourth-largest rare earth producer.

The Opportunity to Meet Asian Natural Gas Demand

For natural gas industry stakeholders, Australia’s prolonged underinvestment in oil and gas exploration and expensive extraction costs indicate a shifting paradigm in the Asia-Pacific gas market.

As a result of the current investment climate, we anticipate the decline in Australian LNG exports will materially accelerate by 2030.

Three suppliers are positioned to offset Australia’s diminished role in Asia.

Russia’s political inroads into China are a long-term trend to monitor. However, Asia’s near-term demand growth will likely turn to new LNG export capacity in the United States (150 MTPA/19.74 bcfd by 2030) and Qatar (142 MTPA/18.68 bcfd by 2030).

Asia’s Demand Outlook

Our 10th percentile (P10) growth scenario results in Asia-Pacific demand of approximately 100 bcfd by 2030 from 90.5 bcfd in 2023. Our P50 and P90 scenarios result in Asia-Pacific demand of 137.1 bcfd and 159.6 bcfd by 2030, respectively.

Several developing trends could change Asia’s demand trajectory, including:

  • Data center deployment and AI/ML adoption

  • Supply chain emissions policies (EU/U.S.) and coal-fired generation retirements

  • New power generation technologies/strategies, including co-firing coal and ammonia

WWMD: What Would Mobius Do?

Mobius was founded in 2002 by a cadre of risk management and commodity trading experts. We don’t just help you cover your downside exposure from lurking risks. Our analysts and strategy experts also help you identify (and take advantage of) lurking opportunities in global commodity markets.

We serve you, and you alone, as unconflicted allies.